Non-Compete Clause (NCC)

A Non-Compete Clause (NCC) is a contractual clause that restricts an legal entity from entering into or starting a [[____]] in competition against an [[____]].

• Context:
  • It can (often) be subject to legal scrutiny to ensure that they are fair and reasonable in scope, duration, and geographic area.
  • It can be enforced through legal action if breached, potentially leading to damages or injunctions against the party violating the clause.
  • It can be found in: Employment Agreements, [[____]], ...
  • It can (typically) contain Non-Complete Clause Provisions, such as:
    • Duration Provision, which specifies the length of time the non-compete agreement remains in effect after the termination of the employee's or director's tenure, ensuring the temporary nature of the restriction, such as:
      • "The restrictions set forth in this Non-Compete Agreement shall remain in effect for a period of two (2) years following the termination of the employee's tenure with the Company."
    • Scope of Activities Provision, which delineates the specific types of work or business activities that are prohibited, clearly defining what constitutes competitive behavior, such as:
      • "The Employee agrees not to engage in any capacity with a business that is in direct competition with the core services or products offered by the Company during the Non-Compete Period."
    • Geographic Limitation Provision, which sets forth the geographic areas where the restrictions apply, balancing protection of the company’s interests with the individual's right to work elsewhere, such as:
      • "This Non-Compete Agreement shall be enforceable within a geographic radius of 50 miles from the Company’s primary place of business."
    • Ownership Interest Provision, which allows for exceptions regarding passive ownership of a small percentage of publicly traded securities in a competing company, acknowledging that such investments do not pose the same risk as active involvement, such as:
      • "Notwithstanding the foregoing, the Employee may hold, as a passive investment, shares in a competing business, provided such shares do not exceed 1% of the total issued shares of that business."
    • Customization Flexibility Provision, which provides mechanisms for parties to tailor the agreement to address specific risks and needs, enhancing the relevance and enforceability of the non-compete clause, such as:
      • "Both parties agree that the specifics of the Non-Compete Clause, including duration and geographic scope, may be adjusted to address the unique aspects of the Employee’s role and the Company’s industry, subject to mutual agreement in writing."
    • Enforceability Consideration Provision, which includes terms that make the clause reasonable and enforceable under the law, often requiring that restrictions be limited in scope, duration, and geographic area, such as:
      • "The terms of this Non-Compete Agreement are designed to be fair and reasonable in scope, duration, and geography to protect the legitimate business interests of the Company while not unduly restricting the Employee’s ability to earn a livelihood."
    • Compensation and Leave Clause Provision, which outlines compensation or benefits to be provided to the restricted party during the non-compete period, recognizes the restrictions' economic impact, such as:
      • "In consideration for the Employee’s agreement to the Non-Compete terms, the Company agrees to provide a lump sum payment equivalent to six months of the Employee’s current base salary, payable upon the effective date of termination."
    • Confidentiality Obligation Provision, which emphasizes the unilateral obligation to protect trade secrets and confidential information, preventing their use in competitive ventures, such as:
      • "Employee acknowledges the obligation to maintain the confidentiality of the Company’s trade secrets and proprietary information, not to be disclosed or used in any competitive activities."
    • Statutory and Legal Framework Provision, which references the legal standards and statutory requirements governing non-compete agreements, ensuring the clause complies with applicable laws and regulations, such as:
      • "This Non-Compete Agreement is subject to and shall be interpreted in accordance with the laws of [State/Country], including all applicable statutes and regulations governing non-compete agreements within this jurisdiction."
    • Exception Clause Provision, which specifies conditions under which the non-compete agreement may not apply, such as in cases of undue hardship or if the employee is terminated without cause, such as:
      • "Exceptions to this Non-Compete Agreement may be granted in cases where the Employee’s termination is due to reasons beyond the Employee’s control and without cause, subject to review and written approval by the Company."
    • Breach and Remedies Provision, which outlines the consequences and legal remedies available in case of a breach of the non-compete agreement, including potential financial compensation or injunctive relief, such as:
      • "In the event of a breach of this Non-Compete Agreement by the Employee, the Company is entitled to seek all remedies available by law, including but not limited to injunctive relief and damages."
    • Review and Modification Provision, which allows for periodic review and potential modification of the non-compete agreement to reflect changes in the law, the industry, or the competitive landscape, such as:
      • "This Non-Compete Agreement shall be subject to review and potential modification every two years or in response to significant changes in the law or the industry, to ensure continued relevance and enforceability."
    • Severability Provision, which ensures that if one part of the non-compete agreement is found to be unenforceable, the remainder of the agreement still remains in effect, such as:
      • "If any provision of this Non-Compete Agreement is held to be invalid or unenforceable, the remainder of this Agreement shall remain in full force and effect."
    • Binding Effect Provision, which states that the non-compete agreement is binding on the parties and their successors, ensuring continuity of the agreement's provisions even in cases of merger, acquisition, or other organizational changes, such as:
      • "This Non-Compete Agreement is binding upon the parties hereto and their respective successors and assigns, ensuring its enforceability through organizational changes."
  • ...
• Example(s):
  • as found in a Non-Compete Agreement.
  • as found in a Employment Contract, to prevent employees from joining competitors or starting competing businesses immediately after their employment ends (to protect proprietary information or trade secrets), such as:
    • "Employee acknowledges that during the term of employment and for a period of twelve (12) months immediately following the termination of employment, for any reason, Employee shall not directly or indirectly engage in any business activity, or be employed by any business, in direct competition with the Company’s business operations, products, or services within any geographic area where the Company operates."
  • as found in a Business Sale Agreement, where the seller agrees not to start a new, competing business within a certain time frame and geographic area after the sale, such as:
    • "Seller hereby agrees that, for a period of three (3) years following the closing date of this sale, Seller will not engage in, or own any interest in, any business that competes with the sold business, within a radius of one hundred (100) miles from the location of the sold business."
  • as found in a Service Agreement or Consulting Contracts, where service providers are restricted from offering their services to direct competitors of the client during and after the termination of the agreement, such as:
    • "Consultant agrees that during the term of this agreement and for a period of one (1) year thereafter, Consultant will not provide consulting or other services to any business that competes directly with Client’s primary business operations, as defined in this agreement."
  • as found in a Partnership Agreement or an Exit Agreement, to prevent partners from leaving the partnership and immediately competing against the partnership, such as:
    • "Upon termination of the partnership for any reason, the departing partner agrees not to engage in or become associated with a competing business within a fifty (50) mile radius of the partnership’s primary place of business for a period of two (2) years."
  • as found in a Franchise Agreement to restrict franchisees from opening a similar business outside the franchise network within a certain period and geographic location, such as:
    • "Franchisee agrees that during the term of the franchise agreement and for a period of two (2) years following its termination or expiration, franchisee shall not directly or indirectly, within a one hundred (100) mile radius of the franchised territory, engage in a business similar to the franchised business."
  • as found in a Business Sale Agreement preventing the seller from starting a similar business (e.g., for three years), such as:
    • "The Seller agrees not to directly or indirectly engage in, or have any ownership interest in, any business that is similar to the business being sold under this agreement, within any area where the Company conducts business, for a period of three (3) years following the effective date of the sale."
  • ...
• Counter-Example(s):
  • A Confidentiality Agreement, which restricts the sharing of confidential information but does not restrict future employment opportunities.
  • A Non-Disclosure Agreement (NDA), which is specifically aimed at protecting sensitive information without necessarily restricting competition.
• See: Employment Law, Contract Law, Trade Secret, Intellectual Property Right, Apprenticeship, Trade Secret.

---

---

References

• https://www.lawinsider.com/clause/non-competition-clause
• https://www.lawinsider.com/clause/non-compete

2024

• (Wikipedia, 2024) ⇒ https://en.wikipedia.org/wiki/Non-compete_clause Retrieved:2024-2-28.
  • In contract law, a non-compete clause (often NCC), restrictive covenant, or covenant not to compete (CNC), is a clause under which one party (usually an employee) agrees not to enter into or start a similar profession or trade in competition against another party (usually the employer). In the labor market, these agreements prevent workers from freely moving across employers, and weaken the bargaining leverage of workers.

    Non-compete agreements are rooted in the medieval system of apprenticeship whereby an older master craftsman took on a younger apprentice, trained the apprentice, and in some cases entered into an agreement whereby the apprentice could not compete with the master after the apprenticeship. Modern uses of non-compete agreements are generally premised on preventing high-skilled workers from transferring trade secrets or a customer list from one firm to a competing firm, thus giving the competing firm a competitive advantage. However, many non-compete clauses apply to low-wage workers or individuals who do not possess transferable trade secrets.

    The extent to which non-compete clauses are legally allowed and enforced varies under different jurisdictions. Some localities and states ban non-compete clauses or highly restrict their applicability. In jurisdictions where non-compete agreements are legal, courts tend to evaluate whether a non-compete agreement covers a worker's move to a relevant industry and reasonable geographic area, as well as whether the former is still bound by the agreement over a reasonable time period. An employer bringing a lawsuit may also be asked to identify a protectable business interest that was harmed by the employee's move to a different firm.

    Research shows that non-compete agreements make labor markets less competitive, reduce wages and reduce labor mobility. While non-compete agreements may incentivize company investment into their workers and research, they may also reduce innovation and productivity by employees who may be forced to leave a sector when they leave a firm. The labor movement tends to advocate for restrictions on non-compete agreements while support for non-compete agreements is common among some employers and business associations.

---