What is a Non-Competition Agreement

A non-competition agreement restricts an employee from working as a direct rival to their employer for a certain time and in a specific geographical area. The purpose of non-competition agreements is to prevent an ex-employee from exploiting resources, knowledge and/or leads that were gained while working for and using the resources of a previous employer. A non-competition agreement may also be known as a "non-compete clause," a "covenant not to compete," or simply a "non-compete." In the United Kingdom, a non-competition agreement is called a "restraint of trade clause."

Breaking Down Non-Competition Agreement

The likelihood that authorities will enforce a non-competition agreement can vary depending on state laws and whether the courts feel that the restriction is reasonable. For example, a one-year restriction for a salesperson may be considered reasonable, as there is the threat that the salesperson may use leads gained from his or her old job. However, a one-year restriction for an engineer working in a high-tech field may be unreasonable, because the fast-paced nature of the field could render the out-of-work engineer's knowledge obsolete. 

Non-Competition Agreement: In Practice

When an individual accepts a job offer at an employer they are often asked to sign a non-competition agreement during the onboarding process that places certain limits on who they are allowed to work for, where they are allowed to work, or when they may start their own business for a certain period or time following a termination or resignation.

Each state has different tests for and definitions of what is reasonable in a non-competition clause and what restrictions are enforceable and for how long. For example, California courts have chosen not to enforce contracts that curtail worker mobility. The state's stance is unusual (only Montana, Oklahoma and North Dakota treat non-competition agreements similarly) but it may contribute to faster pace of innovation such as in Silicon Valley. In limited circumstances an out-of-state non-competition agreement may be enforceable in California. Other states, such as Massachusetts and Florida, strictly enforce non-competition agreements if they are found to be reasonable.

Most developed countries also enforce their own version of non-competition and non-solicitation agreements, where courts stipulate that they are not longer than reasonable, appropriate in business and geographic scope.

Non-Competition Agreement Usage

Non-competition agreements have become increasingly prevalent in recent years as employers attempt to protect valuable trade secrets by locking down employees as the workforce becomes increasingly mobile. One estimate puts the share of American workers who are bound by a non-competition agreement at about 20%. In a sense, non-competition agreements are an extension of non-disclosure agreements or confidentiality agreements, adding a layer on top of those agreements to further protect an employer's trade secrets. Trade secrets protected by non-competition agreements may cover anything from technology to sandwiches. Such privileged knowledge may also extend to marketing plans, new product launches, client lists, or manufacturing methods or business practices.