Non-Compete Clause (NCC)

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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 (with labels DURATION_OF_RESTRICTION, POST-TERMINATION, TOLLING, which specifies the length of time the non-compete agreement remains in effect after the termination of the employee's tenure, ensuring the temporary nature of the restriction, such as:
        • The restrictions set forth in this Non-Compete Agreement shall commence on the date of termination of the Employee's employment with the Company for any reason and shall continue for a period of [Duration] thereafter.(DURATION_OF_RESTRICTION, POST-TERMINATION)1 In the event of a breach of this Non-Compete Agreement by the Employee, the [Duration] shall be extended by the length of time during which the Employee is in breach.(TOLLING)2
      • Scope of Activities Provision (with labels PROHIBITED_ACTIVITIES, COMPETITOR_DEFINITION, BUSINESS_DEFINITION), which delineates the specific types of work or business activities that are prohibited, clearly defining what constitutes competitive behavior, such as:
        • During the Non-Compete Period, the Employee shall not, directly or indirectly, engage in, be employed by, provide services to, or own any interest in any business that competes with the Business of the Company,(PROHIBITED_ACTIVITIES)1 which is defined as [Business Definition].(BUSINESS_DEFINITION)2 A "Competing Business" is defined as any person, firm, corporation, or other entity that engages in any business or activity that is substantially similar to or competitive with the Business of the Company.(COMPETITOR_DEFINITION)3
      • Geographic Limitation Provision (with labels GEOGRAPHIC_SCOPE, LOCATION_OF_BUSINESS, LOCATION_OF_CUSTOMERS), 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:
        • The geographic scope of this Non-Compete Agreement shall extend to [Geographic Scope],(GEOGRAPHIC_SCOPE)1 which the parties acknowledge and agree is a reasonable and necessary geographic area to protect the legitimate business interests of the Company,(REASONABLENESS_ACKNOWLEDGMENT)2 given the nature of the Business and the locations in which the Company conducts its operations and solicits or serves customers.(LOCATION_OF_BUSINESS, LOCATION_OF_CUSTOMERS)3
      • Enforceability Consideration Provision (with labels REASONABLENESS_OF_RESTRICTIONS, BLUE_PENCIL, SEVERABILITY), 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 parties agree that the restrictions contained in this Non-Compete Agreement are reasonable and necessary to protect the legitimate business interests of the Company, and do not impose a greater restraint than is necessary to protect such interests.(REASONABLENESS_OF_RESTRICTIONS)1 If any provision of this Non-Compete Agreement is found by a court of competent jurisdiction to be invalid or unenforceable, such provision shall be reformed by the court to the minimum extent necessary to make it valid and enforceable, or if such reformation is not possible, such provision shall be severed from this Non-Compete Agreement, and the remaining provisions shall remain in full force and effect.(BLUE_PENCIL, SEVERABILITY)2
      • Breach and Remedies Provision (with labels INJUNCTIVE_RELIEF, MONETARY_DAMAGES, ATTORNEYS_FEES), which outlines the consequences and legal remedies available in case of a breach of the non-compete agreement, including potential injunctive relief, monetary damages, and recovery of attorneys' fees, such as:
        • The Employee acknowledges that a breach of this Non-Compete Agreement may result in irreparable harm to the Company for which monetary damages would be inadequate.(IRREPARABLE_HARM)1 Accordingly, in addition to any other remedies available at law or in equity, the Company shall be entitled to seek injunctive relief to prevent or restrain any such breach, without the need to post a bond.(INJUNCTIVE_RELIEF)2 The Employee shall be liable for all monetary damages incurred by the Company as a result of any breach of this Non-Compete Agreement, including but not limited to lost profits and reasonable attorneys' fees.(MONETARY_DAMAGES, ATTORNEYS_FEES)3
    • ...
  • 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):
  • See: Employment Law, Contract Law, Trade Secret, Intellectual Property Right, Apprenticeship, Trade Secret.

References

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.[1][2] However, many non-compete clauses apply to low-wage workers or individuals who do not possess transferable trade secrets.[2]

      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.[2]

      Research shows that non-compete agreements make labor markets less competitive, reduce wages and reduce labor mobility. [1] 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.

  1. ↑ 1.0 1.1 Cite error: Invalid <ref> tag; no text was provided for refs named :0
  2. ↑ 2.0 2.1 2.2 Cite error: Invalid <ref> tag; no text was provided for refs named :1
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