Restrictive agreements: Overview, definition, and example
What are restrictive agreements?
Restrictive agreements are contracts or clauses that limit the freedom of one party to act in certain ways, typically to protect the business interests of another party. These agreements impose restrictions on various actions, such as competing with the other party, soliciting their clients or employees, or disclosing proprietary information. Restrictive agreements are often used in business relationships, employment contracts, and sales of businesses to protect intellectual property, trade secrets, and customer relationships.
Common examples of restrictive agreements include non-compete agreements, nonsolicitation agreements, and confidentiality agreements, which are all designed to prevent a party from engaging in activities that could harm the other party's business interests after the contract ends.
Why are restrictive agreements important?
Restrictive agreements are important because they help businesses protect their valuable assets, such as customer lists, proprietary information, and the skills and knowledge of key employees. By limiting the ability of employees, contractors, or partners to work for competitors or solicit clients, these agreements reduce the risk of unfair competition and safeguard business continuity. For example, a company can protect its competitive edge by preventing former employees from using its trade secrets or client relationships to benefit a competitor.
For employees, understanding the terms of restrictive agreements is important because these clauses can impact their career opportunities after leaving a job. Properly drafted restrictive agreements balance the need for business protection with the individual’s right to earn a living and pursue professional growth.
Understanding restrictive agreements through an example
Imagine a company, Company A, that is concerned about a key employee, Employee B, leaving and starting a competing business with Company A's trade secrets and client list. Company A requires Employee B to sign a restrictive agreement as part of their employment contract, which includes a non-compete clause. This clause prevents Employee B from working for any competing businesses within a specific geographic area and for a certain period after leaving Company A.
In another example, Company C enters into a partnership with Company D, where Company D agrees not to solicit Company C's customers or employees for a certain number of years after the partnership ends. This restrictive agreement ensures that Company C retains its clients and workforce, even after the partnership dissolves.
An example of restrictive agreement clause
Here’s how a restrictive agreement clause might appear in an employment contract:
“The Employee agrees that for a period of 12 months following the termination of their employment with the Company, they will not directly or indirectly engage in any business that competes with the Company’s operations within a 50-mile radius of the Company’s primary place of business. Additionally, the Employee shall not solicit or hire any employees of the Company during this period.”
Conclusion
Restrictive agreements are legal tools used to protect business interests, prevent unfair competition, and preserve proprietary information. By imposing limitations on activities such as competition, solicitation, and disclosure, these agreements help companies maintain their competitive edge and safeguard their assets. However, it is important for both businesses and individuals to ensure that restrictive agreements are reasonable in scope, duration, and geography to be enforceable and to avoid undue hardship on the parties involved.
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.