Non-Compete Agreement: Protecting Your Business Interests

Non-compete agreements can protect your business from unfair competition, but they must be carefully drafted to be enforceable. This guide explains how to create effective non-compete agreements that comply with state laws.

What is a Non-Compete Agreement?

A non-compete agreement (also called a restrictive covenant) is a contract that restricts an employee or contractor from competing with their employer or client for a specified period and within a defined geographic area.

When Are Non-Competes Used?

Employment

• Protect trade secrets
• Prevent customer poaching
• Protect business relationships
• Safeguard confidential information

Business Sales

• Prevent sellers from competing
• Protect business value
• Ensure smooth transition

Independent Contractors

• Protect client relationships
• Prevent use of proprietary information
• Maintain competitive advantage

Enforceability Requirements

Reasonableness

Non-competes must be reasonable in:

• Geographic Scope: Limited to areas where business operates
• Time Duration: Typically 6 months to 2 years
• Scope of Activities: Limited to legitimate business interests

Legitimate Business Interest

Must protect:

• Trade secrets
• Confidential information
• Customer relationships
• Goodwill

Consideration

Employee must receive something of value (employment, promotion, severance, etc.).

State-Specific Laws

California

Non-competes are generally unenforceable for employees (with limited exceptions).

Other States

• Vary significantly in enforceability
• Some states restrict for lower-wage workers
• Some require specific consideration
• Check local laws

Essential Components

Parties

• Employer/Client
• Employee/Contractor

Restricted Activities

• Specific prohibited activities
• Industry restrictions
• Competitive activities

Geographic Scope

• Specific geographic area
• Reasonable limitations
• Based on business operations

Duration

• Time period of restriction
• Reasonable timeframe
• Consider industry standards

Consideration

• What employee receives
• Employment, promotion, severance
• Must be adequate

Exceptions

• Permitted activities
• Excluded situations
• Reasonable carve-outs

Best Practices

1. Be Reasonable: Overly broad restrictions are unenforceable
2. State-Specific: Comply with local laws
3. Clear Language: Define restrictions precisely
4. Adequate Consideration: Ensure proper consideration
5. Legal Review: Always have employment lawyers review

Common Mistakes

• Overly broad geographic scope
• Unreasonable time duration
• Prohibiting all competition
• Insufficient consideration
• Ignoring state restrictions

Using Our Template

Our free Non-Compete Agreement template provides a reasonable structure. However, non-competes are highly regulated and should always be reviewed by employment legal counsel, especially given state-specific variations.

Conclusion

Non-compete agreements can protect your business, but they must be carefully drafted to be enforceable. Use our template as a starting point and always consult with employment lawyers familiar with your state's laws.