Non-Compete Agreement

What Is a Non‑Compete Agreement?

A non‑compete agreement (also called a covenant not to compete or restrictive covenant) is a contract that limits an employee’s ability to work for or start a competing business after leaving an employer. Its purpose is to protect a company’s confidential information, trade secrets, customer relationships, and market position by restricting where, when, and in what capacity a former employee may work.

How They Work

• Typically signed at hiring (sometimes when promoted or given sensitive access).
• Spell out post‑employment restrictions: duration, geographic area, scope of prohibited activities, and what constitutes a competitor.
• May be enforced by injunctions or claims for damages if breached.
• Terms vary widely; overly broad restrictions are often pared down or invalidated by courts.

Key Components

• Duration: Commonly six months to one year; longer periods face greater legal scrutiny.
• Geographic scope: Specific regions, states, or markets where the employee cannot work for a competitor.
• Scope of work: Types of roles, services, or industries the employee is barred from.
• Definition of competitors: General industry descriptions or specific types of businesses.
• Remedies: Damages, injunctive relief, or other penalties for breach.
• Sometimes tied to compensation (e.g., garden‑leave pay) while restrictions apply.

Why Employers Use Them

• Protect trade secrets, proprietary processes, and client lists.
• Prevent departing employees from immediately aiding competitors.
• Reduce turnover and protect investments in employee training.
• Preserve market share and prevent loss of key customers or talent.

Common Industries

Non‑competes are common where employees have access to valuable confidential information or client relationships, such as:
– Financial services
– Corporate management
– Technology and software
– Manufacturing
– Media and broadcasting

Legal Landscape and Recent Federal Rule

• Enforcement and validity of non‑competes are governed primarily by state law; states differ widely in how they treat them.
• Some states broadly prohibit or refuse to enforce non‑competes (notably California; North Dakota and Oklahoma also do not enforce them).
• Other states limit duration or require reasonableness in scope and geography.
• In April 2024 the Federal Trade Commission (FTC) issued a rule effectively banning most non‑compete clauses for workers, aiming to increase job mobility and innovation. Under the rule:
• Existing non‑competes generally will not be enforceable for the majority of workers.
• New non‑competes cannot be imposed on any worker.
• There are limited carve‑outs and legal complexities, particularly regarding executives and existing agreements; state law and litigation affect implementation.

Non‑Compete vs Non‑Disclosure (NDA)

• Non‑competes restrict future employment or business activity.
• NDAs (non‑disclosure agreements) limit the disclosure and use of confidential information but do not bar someone from working for a competitor if they keep protected information confidential.
• Employers often use NDAs alongside or instead of non‑competes to protect sensitive information without restricting employment mobility.

Pros and Cons

Pros
– Helps protect trade secrets and customer relationships.
– Can justify investment in employee training and sensitive responsibilities.
– May reduce immediate turnover of key personnel.

Cons
– Limits employee bargaining power and mobility.
– Can prevent former employees from finding work in their field.
– Often applied to workers who lack access to trade secrets, imposing unnecessary constraints.
– Can stifle innovation and labor market competition.

Duration and Enforceability

• Typical lengths: 6–12 months; longer restrictions are harder to enforce.
• Courts evaluate reasonableness: necessary to protect a legitimate business interest and not unduly harm the worker or public.
• Some jurisdictions require consideration (additional compensation) for a non‑compete to be enforceable or require the employer to pay during the restricted period.

If You’re Subject to a Non‑Compete

• Read the agreement carefully: note duration, geography, and defined prohibited activities.
• Consider negotiation before signing—limit scope, shorten duration, or secure compensation (e.g., severance or garden leave).
• If already signed, options include:
• Negotiating a buyout or release.
• Asking the employer for a written waiver.
• Challenging enforceability in court (state law and facts matter).
• Taking a different role or industry outside the restricted scope.
• Consulting an employment attorney for advice tailored to your jurisdiction and situation.

Bottom Line

Non‑compete agreements are tools to protect business interests but can significantly restrict workers’ employment options. Legal treatment varies by state and has recently been reshaped by federal action aimed at curbing widespread use. Before signing—or if you are bound by—a non‑compete, get informed about applicable laws and seek legal advice to understand your rights and options.