Industry-specific knowledge and your relationships with clients are often some of the most valuable assets for your business.
So what happens to your business’s confidential information, trade secrets and clients when your relationship with an employee, contractor or third party ends?
A Non-Compete Agreement is a contract that is used to protect a business from competition with individuals or companies who have had access to that business’s confidential information which could give them a competitive edge in the market.
What Is A Non-Compete Agreement?
A Non-Compete Agreement is usually formed between a business and another party who has received that business’s confidential information.
That third party can be anyone who the business previously had a contractual relationship with — including employees, contractors, business partners, franchisees and manufacturers.
Confidential information covers information that could be used to compete with the business — including intellectual property generally, insider knowledge of the relevant market, trade secrets, client lists, and business practices and strategies.
What Is Covered In The Agreement?
A Non-Compete Agreement will usually include clauses relating to one or more of the following:
- Geographical restrictions: this limits the geographical region in which the restricted party can conduct business in a particular industry or field of work.
- Time restrictions: this provides a time limitation on how long the non-compete clause operates, so that the restricted party cannot conduct business in a particular industry or field of work for a set period of time.
- Activity or services restrictions: this limits the type of business activities the restricted party can take part in.
- Non-solicitation clause: this protects your business relationships with your clients, as it stops the restricted party from contacting your clients and diverting work from your business to theirs. Non-solicitation clauses can also apply to employees, stopping the restricted party from poaching your current employees.
Clauses of this nature are often inserted into a contract that covers a broader scope of topics as opposed to a stand-alone Non-Compete Agreement, such as an Employment Agreement or Contractor Agreement.
Are There Any Issues With Enforceability Of Non-Compete Agreements?
As Non-Compete Agreements and non-compete clauses may limit a party’s ability to take on employment opportunities and generate income, issues often arise when trying to enforce agreements of this sort.
If a dispute about a Non-Compete Agreement goes to court, the court will consider if the Non-Compete Agreement is reasonable in protecting the business’ legitimate business interests.
For example, if the geographical reach of the non-compete clause is too broad, or the time period that the non-compete clause operates is too long, or the activities or services that is covered in the non-compete clause is too general, the clause may not be enforceable and therefore considered void.
A court can strike out part of a clause or agreement that it considers unreasonable, and retain the remainder of the clause that it considers reasonable.
For this reason, the restraint period in a non-compete clause is often “cascading”, which means that it will provide several alternative periods in the same clause. A cascading clause would read something like, “the restraint period is 12 months, or if that duration is held to be invalid or unenforceable, 6 months”.
Non-Compete Agreements and non-compete clauses may be an important mechanism to protect your business from competition using your valuable confidential business information. However, they can be complex and there are several factors when considering if the non-compete clause is reasonable.
We’d recommend obtaining legal advice on Non-Compete Agreements and non-compete clauses to ensure that they are enforceable and can achieve the desired restriction to protect your confidential business information.
If you need help getting a Non-Compete Agreement in place, we’re here to help!
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