Non-compete agreements/clauses are generally required when a business or substantially all of its assets are sold. Buyers require this generally to prevent the management and high-level employees of the seller from opening a new business in competition with the one that has just been sold. For obvious reasons, the buyer does not want the seller’s employees competing against the just-sold company by using their established relationships with customers, vendors, business partners, suppliers, etc. Non-compete agreements also prevent high-level — often called “essential” — employees from joining a competing company/firm (which can be just as damaging as essential employees starting a new company).
Generally, non-compete agreements are coupled with confidentiality agreements that prohibit essential employees from disclosing trade secrets, intellectual property information, and other confidential business data, processes, and methods.
Despite the fact that many States have laws making non-compete agreements illegal for “normal” employment relationships, all of the statutes have exceptions for when a business or its assets are sold.
There are several key components to non-compete agreements. The first and most important concern is what work or type of work is prohibited. A person cannot be contractually prohibited from all types of work. Thus, a valid non-compete can only prohibit a type of work that will be — or could be — in competition with the business that has just been sold. The specific language might include a type of work, a field, or an industry and might specifically identify procedures, techniques, and methods that might be in competition with the just-sold business.
Further, as noted, non-compete agreements will prohibit the signatory from joining competitors. Typically, the definition of “competitor” is very broad, including as many related jobs and industries as possible. The definition of “joining” will also be very broad to bar any type of relationship, including employment, consulting, independent contracting, etc. In addition, a list of business, companies, and/or firms are often presented.
Next, a non-compete must have a term period. It is not lawful for a person to be permanently barred by contract from working in his or her field, industry, or profession. Courts have voided non-compete agreements where the term is too long. Generally, two to three years is acceptable. Courts have considered that two-to-three years is sufficient for a newly acquired business to actualize the returns expected from the acquisition.
Fourth, a non-compete must be limited in geographic location, scope, and/or market channel. This CAN be nationwide or even global, but the larger the geographic scope of the non-compete, the more scrutiny that the non-compete will receive if the non-compete is tested in court. Further, there must be some relationship between the scope of the business and the scope of the non-compete. If the business primarily engages in selling products in Chicago, there is no reason to prohibit the signatory from working in New York or Los Angeles. There is also a linkage between the term and scope. A long-term might be compatible with a very narrow scope and vice versa.
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