Most commonly, Non-Compete Agreements are used in employment situations. Staff with access to confidential information about the business agree not to compete with their former employer for a set period after leaving.
However, in April 2024, the Federal Trade Commission announced a rule banning Non-Compete Agreements for workers. The final rule will become effective 120 days after it is publicized in the Federal Register.
Non-Compete Agreements will remain valid in other situations where parties exchange confidential information. These transactions include negotiating the sale of a business or disclosing intellectual property ahead of a patent application.
1. Employment or service
Non-Compete Agreements can help you manage employees and service providers with access to sensitive information or trade secrets.
By signing, workers agree not to compete with you for a set amount of time or within a specific geographical area. While they’re working for you, and after they leave, the agreement deters them from taking a job or starting a business where they can gain a competitive advantage against your company.
After the Federal Trade Commission ban comes into effect, only existing Non-Compete Agreements with senior executives will be enforceable.
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2. Purchase or sale
You can use a Non-Compete Agreement to protect your interests in commercial negotiations, like when buying or selling a business. In fact, the first document that a prospective buyer should sign in an acquisition process is a non-compete or Confidentiality Agreement.
When buying a business
After selling a business to you, the original owner could use their existing relationships with customers and vendors to open a new business of the same type in the area. This would take valuable market share away from you and defeat the purpose of buying the business.
Entering a Non-Compete Agreement as part of the business acquisition can protect you against unfair competition.
When selling a business
When negotiating the sale of a business, a buyer usually conducts due diligence and assesses the value of the business they intend to purchase. In these cases, the seller offers the prospective buyer access to sensitive business information, like financial records and customer lists.
A Non-Compete Agreement can help ensure the buyer doesn’t misuse this business information for competitive purposes.
3. Invention
Any time you share intellectual property with someone, you can use a Non-Compete Agreement to protect your interests. Suppose you have to share an invention with a potential investor or disclose details of your work to a collaborator. Access to sensitive information could allow them to compete unfairly with you.
By having a Non-Compete Agreement in place, you can keep the invention details confidential and prevent the other party from using their knowledge against you. If they share or use the information in any way, you can take legal action against them.