An agreement to refrain from a particular trade, profession, or business is enforceable under certain circumstances. This type of agreement is known as a non-compete clause or a restrictive covenant. It is typically included in employment contracts and business sale agreements to prevent employees or sellers from competing with the company or business they are leaving.
Non-compete clauses serve several purposes. From an employer`s perspective, they protect the company`s trade secrets, customer relationships, and other confidential information. From a buyer`s perspective, they ensure that the seller does not set up a competing business that could harm the value of the business being sold.
However, non-compete clauses are not enforceable in all situations. Courts will typically only enforce them if they are reasonable in terms of time, geographic scope, and the type of activity being restricted.
Time: The duration of the non-compete clause should be limited. Courts have found that clauses lasting longer than two years are typically unreasonable.
Geographic Scope: The non-compete clause should only apply to the geographic area where the company or business operates. A clause that restricts a person from working in an entire state or nationwide is generally considered unreasonable.
Type of Activity: The non-compete clause should only restrict activities that are directly related to the company or business. For example, a clause that prohibits a former employee from working in any industry would typically be considered unreasonable.
In addition to these factors, the party seeking to enforce the non-compete clause must show that the restriction is necessary to protect a legitimate business interest. This may include protecting confidential information, trade secrets, customer relationships, or investments in training an employee.
Overall, non-compete clauses can be an effective way to protect a company`s interests. However, they must be carefully drafted to comply with state laws and avoid being overly restrictive. If you are considering including a non-compete clause in an agreement, it is essential to consult with legal counsel to ensure that it is enforceable.