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Non-Competition Clause Defined
Non-competition clauses, also known as non-compete agreements, set boundaries and conditions on a former employee’s ability to work for a competitor upon resignation or termination. A non-competition clause can limit the geographic location and specific competitors, but they are not legal in every state.
Learn more about non-competition clauses by reading this page.
Non-Competition Clause Explained
Although a non-competition clause discourages unfair competition, each agreement should contain specific guidelines, including:
- Parties agreeing not to compete
- Length of enforceability
- Non-solicitation clauses
- Non-recruitment clauses
- Reason for prohibition
- Geographic reach
- Competitor names
Non-Competition Clauses & COVID-19
COVID-19 may qualify as a reason to get out of a non-competition clause and effectively avoid a breach of contract claim.
Purpose of Non-Competition Clause
The purpose of non-competition clauses is to protect companies from former employees taking competitive advantages to competitors. It’s not only an intellectual property tool, but it also retains vital employees.
Non-Competition Clause Examples
Non-competition clause examples include:
- Example 1: Preventing former employees from using trade secrets
- Example 2: Stopping contractors from competing with you
- Example 3: Former partners limiting the geographical reach
- Example 4: Extra protection in business contracts
- Example 5: Retaining employees with a non-compete
Non-Competition Clause Samples
Sample 1 – Employment Agreement
Non-competition with the Company. The parties acknowledge: (A) that Executive’s services under this Agreement require special expertise and talent in the provision of Competitive Services and that Executive will have substantial contacts with customers, suppliers, advertisers and vendors of the Company; (B) that pursuant to this Agreement, Executive will be placed in a position of trust and responsibility and he will have access to a substantial amount of Confidential Information and Trade Secrets and that the Company is placing him in such position and giving him access to such information in reliance upon his agreement not to compete with the Company during the Restricted Period; (C) that due to his management duties, Executive will be the repository of a substantial portion of the goodwill of the Company and would have an unfair advantage in competing with the Company; (D) that due to Executive’s special experience and talent, the loss of Executive’s services to the Company under this Agreement cannot reasonably or adequately be compensated solely by damages in an action at law; (E) that Executive is capable of competing with the Company; and (F) that Executive is capable of obtaining gainful, lucrative and desirable employment that does not violate the restrictions contained in this Agreement. In consideration of the compensation and benefits being paid and to be paid by the Company to Executive hereunder, Executive hereby agrees that, during the Restricted Period, Executive will not, without prior written consent of the Company, directly or indirectly seek or obtain a Competitive Position in the Restricted Territory; provided, however, that the provisions of this Agreement shall not be deemed to prohibit the ownership by Executive of any securities of the Company or its affiliated entities or not more than five percent (5%) of any class of securities of any corporation having a class of securities registered pursuant to the Securities Exchange Act of 1934, as amended.
Security Exchange Commission - Edgar Database, EX-10.2 2 dex102.htm EMPLOYMENT AGREEMENT, Viewed March 31, 2021, < https://www.sec.gov/Archives/edgar/data/1123360/000119312510228084/dex102.htm >.
Sample 2 – Employment Agreement
1. Executive acknowledges and recognizes the highly competitive nature of the businesses of the Company and its affiliates and accordingly agrees as follows:
(i) During the Executive’s employment with the Company and for a period of two years following the date Executive ceases to be employed by the Company and its affiliates, Executive will not:
(A) engage in any Competitive Activity (as defined in Section 8(b)); or
(B) induce or attempt to induce customers, business relations or accounts of the Company or any of its affiliates to relinquish their contracts or relationships with the Company or any its affiliates; or
(C) solicit, entice, assist or induce other employees, agents or independent contractors to leave the employ of the Company or any of its affiliates or to terminate their engagements with the Company and/or any of its affiliates or assist any competitors of the Company or any of its affiliates in securing the services of such employees, agents or independent contractors.
Definitions. For purposes of this Agreement, “Competitive Activity” means Executive’s participation, without the written consent of any one of the Chief Executive Officer, or Chief Operating Officer (except where Executive holds any of such positions, in which case the Board shall be required to provide such written consent), if any, of the Company, in the management of any business enterprise if such enterprise engages in substantial and direct competition with the Company or any of its affiliates and such enterprise’s sales of any product or service competitive with any product or service of the Company or any of its affiliates amounted to 5% of such enterprise’s net sales for its most recently completed fiscal year and if the Company’s net sales of said product or service amounted to 5% of, as applicable, the Company’s or its affiliate’s net sales for its most recently completed fiscal year. “Competitive Activity” will not include (i) the mere ownership of 5% or more of securities in any such enterprise and the exercise of rights appurtenant thereto or (ii) participation in the management of any such enterprise other than in connection with the competitive operations of such enterprise.
Security Exchange Commission - Edgar Database, EX-10.25 5 dex1025.htm EMPLOYMENT AGREEMENT, Viewed March 31, 2021, < https://www.sec.gov/Archives/edgar/data/1320461/000119312509068966/dex1025.htm >.
Sample 3 – Employment Agreement
Non-Competition. In consideration of the compensation provided to the Executive by the Company hereunder, the adequacy of which is hereby acknowledged by the parties hereto, the Executive agree that during the Term and for a period of one year following the termination of the Employment for whatever reason, the Executive shall not engage in Competition (as defined below) with the Group. For purposes of this Agreement, “Competition” by the Executive shall mean the Executive’s engaging in, or otherwise directly or indirectly being employed by or acting as a consultant or lender to, or being a director, officer, employee, principal, agent, stockholder, member, owner or partner of, or permitting the Executive’s name to be used in connection with the activities of, any other business or organization which competes, directly or indirectly, with the Group in the Business; provided, however, it shall not be a violation of this Section 11(a) for the Executive to become the registered or beneficial owner of up to five percent (5%) of any class of the capital stock of a corporation in Competition with the Group that is registered under the U.S. Securities Exchange Act of 1934, as amended, provided that the Executive does not otherwise participate in the business of such corporation.
For purposes of this Agreement, “Business” means social networking services, online games or social commerce services and any other business which the Group engages in, or is preparing to become engaged in, during the Term.
Security Exchange Commission - Edgar Database, EX-10.6 19 dex106.htm FORM OF EMPLOYMENT AGREEMENT, Viewed March 31, 2021, < https://www.sec.gov/Archives/edgar/data/1509223/000119312511099693/dex106.htm >.
Common Contracts with Non-Competition Clauses
Common contracts with non-competition clauses include:
- Severance agreements
- Employment contracts
- Termination agreements
- Resignation agreements
- Services contracts
You can use a non-competition clause when you want to protect your business from unfair competition by former employees.
Non-Competition Clause FAQs
Non-competition clauses are challenging. Here are the answers to non-competition clause FAQs:
Are non-competition clauses legal?
Non-competition agreements by state vary. They are not legal in every state.
For example, California’s non-competition agreements are illegal. In Florida, they are enforceable as long as they are a reasonable duration and reach.
Find out more about the legality of non-competition clauses by seeing this article.
Can I go to work for a competitor if I signed a non-competition agreement?
You can’t work for a competitor if you signed a non-competition agreement. However, exceptions may apply to your specific situation.
How can I get out of a non-compete?
You can get out of a non-compete by:
- Fulfilling the terms and conditions
- Renegotiating the non-competition clause
- Disputing the non-compete
For more non-competition clause FAQs, check out this article.
Once you get out of a non-compete, you could be required to sign a less restrictive one. Employment lawyers can help you determine your available legal options.
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