Non-Compete Clauses in Employment and Buy-Sell Agreements
As a business owner, protecting your best interests and the longevity of your business is often on the forefront of your mind. This may translate into a variety of actions ranging from planning and security to contracts that secure your business’ inner workings. To secure their business secrets and protect clients and customers, business owners often use non-compete clauses in agreements with employees and contractors or in their buy-sell agreements. In either event, the goal of the non-compete clause is to ensure that the obligated party cannot use confidential company information obtained during his/her employment or form a business that competes with one that he/she has just sold. While both of these options for non-compete agreements have similar end goals, they each have different specifics and legal implications.
Employee non-compete agreements typically seek to ensure that those working with or for a business won’t perform the same work, solicit the same clients or customers and/or create a competing business during and for a period of time after working for their current employer. There are several important things to consider when using these agreements not the least of which is the protection of confidential business and client information. For business owners, use of a non-compete can create a safety net that discourages employees from sharing trade secrets, business practices, or even taking clients or customers on their own or on a competitor’s behalf.
Non-compete clauses in business buy-sell agreements are commonly used to ensure that the party selling a business doesn’t immediately become a direct competitor of the buyer of the business. They usually will bar the seller from forming a similar enterprise within specific parameters such as geographic limitations, the inclusion of certain products or services and/or soliciting clients or customers of the business that was sold. Ultimately, the party selling their business is meant to agree so that they cannot simply recreate the business they just sold.
The enforceability of these agreements must be carefully considered in light of the specific circumstances leading to their adoption, especially since they may very well be scrutinized in a court setting. Not surprisingly, courts typically do not look kindly upon non-compete agreements that hinder a former employee or contractor’s ability to find work and ultimately prevent them from making a living. Thus, employee/contractor non-competes should be as narrowly drafted as possible while giving the employer the protection to which it is legally entitled. These clauses have the best chance of enforcement when they are tailored to the particular activity that is prohibited and limited in geographic scope, time and coverage of clients or customers. These limitations help establish a legitimate basis for the restrictions and illustrate that the terms are fair and reasonable to both parties.
Non-compete clauses in buy-sell agreements are generally easier to enforce because the buyer and seller have (presumably) entered into an arms-length transaction where the buyer has a more critical need for protection and the seller receives significant value for his/her agreement not to compete.
If you need assistance in drafting or reviewing non-compete agreements for employees or business purchase/sale transactions, feel free to give me a call! Having a business attorney at your side can help ensure that your interests are protected and that all relevant legalities are carefully considered.
The information presented here is for general educational purposes only. It does not constitute legal advice and does not create an attorney-client relationship.