Last Updated May 29, 2024
What is a Non-Compete Agreement?
A Non-Compete Agreement (NCA) is a contract where one party agrees not to compete against the other.
When two parties exchange sensitive business information, one party could exploit that information to gain an unfair competitive advantage. A Non-Compete Agreement can help deter and limit this kind of competition.
Generally, Non-Compete Agreements must be limited by certain boundaries or parameters, such as time, geographical area, or industry.
Non-Compete Agreements are also known as:
- Covenant not to compete
- Restrictive covenant
Why should I use a Non-Compete Agreement?
The primary purpose of Non-Compete Agreements is to prohibit unfair competition. When you share sensitive information with another party, a Non-Compete Agreement deters them from using it to their or another competitor’s advantage.
In addition to preventing unfair competition, a Non-Compete Agreement can also help you:
- Protect confidential information. The agreement includes a confidentiality clause to protect everything from trade secrets to customer lists.
- Get legal recourse. If the other party begins competing against you unfairly, you can rely on the contract to seek injunctive relief to stop the behavior.
When should I use a Non-Compete Agreement?
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.
Are Non-Compete Agreements enforceable?
Yes, Non-Compete Agreements can be enforceable in the United States, depending on their exact terms and your jurisdiction.
As we’ve covered above, the Federal Trade Commission's ruling will hinder the enforceability of employee Non-Compete Agreements across the United States. Any employee non-competes implemented after the ruling’s effective date will not be enforceable. Existing non-compete clauses will only be enforceable against senior executives.
Outside of the employment context, to make your Non-Compete Agreement more likely to be legally valid, you should:
- Make sure the restrictions are reasonable. The scope and duration of the restrictions should be fair and reasonable.
- Consider the industry. Businesses in fields where tight competition and trade secrets are the norm are more likely to need Non-Compete Agreements.
- Offer consideration. In exchange for signing the contract, the other party could receive an increased payment or some other perk.
- Avoid ambiguity. Be specific about what activities are prohibited, as broad clauses are less likely to hold up in court.
- Make sure the agreement is necessary. If there is no exchange of sensitive information, a Non-Compete Agreement might be unnecessary.
A court will likely throw out a Non-Compete Agreement that harms local commerce. Similarly, if the agreement isn’t limited to a reasonable scope of time or geographical area, it might be scaled down to what the court considers reasonable.
How to create a Non-Compete Agreement
To create your Non-Compete Agreement, you can use LawDepot’s template. Simply fill out our quick and easy questionnaire, and your document will be ready within minutes.
- Choose the circumstances of the agreement (employment/service, purchase/sale, or invention).
- Select the state where you want the agreement to be in effect.
- Add information about the parties involved.
- Describe the terms of the Non-Compete Agreement, such as the length and area of the restriction.
- If necessary, you can include a non-solicitation clause.
- Add a confidentiality clause.
- Create any additional clauses you want to add.
- Have the agreement signed by both parties. Having a witness present isn’t necessary, but it can reduce the risk of a later dispute.
Non-Disclosure Agreements versus Non-Compete Agreements
Both Non-Disclosure Agreements and Non-Compete Agreements seek to prohibit the misuse of confidential information.
If one party has shared confidential information for a specific purpose, the other party can’t use it for anything but that purpose. Attempting to misuse the information for other purposes will result in a breach of the agreement, which could lead to a court case.
One potential misuse of confidential information would be to compete against the business of the disclosing party.
For this reason, many Confidentiality Agreements include a non-compete clause expressly prohibiting this conduct. If a Non-Disclosure Agreement is created with the main purpose of prohibiting competition, it may be called a Non-Compete Agreement instead.