Non-competition obligations: Overview, definition, and example
What are non-competition obligations?
Non-competition obligations refer to legal clauses or requirements within contracts that restrict one party (usually an employee, contractor, or business partner) from engaging in activities that directly compete with another party (often the employer or business partner) for a specified period and within a defined geographic area. These obligations are designed to prevent the individual or entity from using confidential information, skills, or resources gained during the course of their relationship to harm the interests of the other party by starting or joining a competing business.
In employment contracts, non-competition clauses (also called non-compete agreements) are often used to protect a company's trade secrets, client relationships, and other proprietary information by limiting the ability of former employees or contractors to work for competitors after their employment ends.
Why are non-competition obligations important?
Non-competition obligations are important because they help businesses protect their intellectual property, trade secrets, customer relationships, and competitive advantage. They ensure that former employees or contractors cannot use the knowledge and experience gained during their tenure to directly compete against the business.
For employers, non-competition obligations help safeguard sensitive information and business strategies that could otherwise be used by a competitor. For employees or contractors, understanding the terms of a non-compete agreement helps them know the limitations on their professional activities after their engagement with a business ends.
However, non-competition obligations must be reasonable in terms of time, geography, and scope to be enforceable in many jurisdictions. Overly restrictive non-compete clauses may be deemed unenforceable, especially if they limit an individual's right to work.
Understanding non-competition obligations through an example
Imagine you are an employee at a software development company, and as part of your employment contract, you sign a non-competition agreement. This clause states that if you leave the company, you are prohibited from working for any competing software development company within a 50-mile radius for one year.
After two years, you decide to leave the company and take a job at a competing firm. Because of the non-competition obligations in your original contract, you are legally restricted from working for the competitor within the specified time and geographic limitations. If you do, your former employer may pursue legal action for breach of the non-compete agreement.
In another scenario, a business owner might enter into a partnership with another company, and the partnership agreement includes non-competition obligations. This clause ensures that if the partnership ends, neither party can immediately start a competing business in the same market, thus protecting their business interests.
Example of a non-competition obligations clause
Here’s an example of what a non-competition obligations clause might look like in an employment or business contract:
“The Employee agrees that during the term of employment and for a period of [insert time period] following the termination of employment, whether voluntary or involuntary, they will not engage in any business or employment that competes with the Employer within [insert geographic area]. The Employee acknowledges that this restriction is reasonable and necessary to protect the Employer’s trade secrets, client relationships, and other proprietary interests.”
Conclusion
Non-competition obligations are crucial for businesses to protect their sensitive information, client relationships, and competitive edge. For employees and contractors, it is essential to understand the scope, duration, and geographic limitations of any non-compete clauses before signing an agreement. While these obligations help prevent unfair competition, they must be reasonable and not overly restrictive to be enforceable. By clearly defining the terms of non-competition obligations, both businesses and individuals can ensure that their interests are protected and their professional futures are clearly understood.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.