October 01, 2008
A Non-Competition Agreement, also known as a Covenant Not to Compete or an “NCA”, is a promise by an employee not to compete with his or her employer for a specified period of time within a particular geographical territory. A Non-Competition Agreement is a separate contract that usually accompanies and is executed simultaneously with an employment agreement.
A Non-Competition Agreement must be reasonable in order to be valid and enforceable. It is enforceable if the employer proves it has a legitimate business interest to protect by restricting its employees’ right to compete, if the restriction on the employee’s right to compete is no greater than that necessary to protect the employer’s business interest, and if the covenant is supported by consideration, meaning that the employee received something in exchange for it.
Important provisions that must be drafted into a Non-Competition Agreement address the following issues:
1. Confidential Trade Secrets. The employee must agree that all confidential trade secrets, which can include pricing information, sales materials, customer lists, and marketing plans, and all information relating to the contracts with customers, will not be disclosed or used in any manner for any reason or purpose, other than for the purpose of promoting the company’s business.
2. Non-Compete During Employment. During the term of the agreement, the employee should agree not to engage, either directly or indirectly, in owning, managing or in any other way acting on behalf of another company that sells or markets the same or similar products or services offered by the company or its affiliates.
3. Non-Compete Upon Termination of Employment. The employer must agree that for a specified period from the date of termination, and within a specified territorial scope, the employee will not directly or indirectly solicit or sell to any person on behalf of himself or another firm products or services offered by company. This time period and geographical territory must be reasonable in scope to achieve the company’s legitimate business interest.
4. Remedies. The agreement should contain a remedies provision whereby the employee must agree that he understands that a breach of the agreement could cause “irreparable injury” to the company and that monetary damage may not provide an adequate remedy. The company will thus want to reserve the right to seek equitable remedies such as injunctive relief.
General provisions addressing governing law, severability, and assignment should also be included. Most importantly, the agreement must spell out the length and geographical scope of the employee’s promise not to compete with his employer, and it is critical that these provisions be reasonable and necessary to achieve the employer’s legitimate business interest.
