One of the most important assets a business has is its client base. Businesses can protect their client bases by requiring employees to sign non-competition covenants. In the same way, purchasers of business enterprises can use non-competition covenants to protect their new purchases from competition by sellers.
A typical non-competition covenant establishes a specific period of time and specific geographical boundary within which an employee or seller may not engage in competing business after parting ways with the employer or purchaser. In addition, the covenant typically includes a provision setting forth certain information the parties agree to keep confidential. A well drafted confidentiality provision describes in sufficient detail the specific confidential information that is to be protected. Exceedingly general confidentiality agreements run the risk of not being enforced.
Non-competition covenants should be in writing and must be connected to a contract in order to be enforceable. Employment contracts and contracts for the sale of a business are two contracts commonly associated with a non-competition covenant. Courts strictly construe employment non-competition agreements, but are generally more lenient toward non-compete agreements connected with the purchase of a business.
Non-competition agreements are often enforced through injunction. Injunctive relief typically includes an order from the court that the employee or seller cease and desist from competitive activity. An injunction usually will not issue to the extent a breach of the covenant can be remedied by money damages. However, an injunction is appropriate if money damages would come too late to save the business, the cost of the lawsuit would damage the business, the breaching party is likely to become insolvent in the near future, or monetary damages would be extremely difficult to calculate.
A common challenge in drafting enforceable non-competition covenants is properly gauging the reasonableness of the restrictions so that they will be within enforceable limits. Temporal and geographic restrictions, in order to be enforceable, must be no greater than necessary to protect the employer’s legitimate business interests, must not be unduly harsh or oppressive, and must not be injurious to the public. If the scope of the covenant is broader than is reasonable, then the covenant may not be enforceable. The reasonableness of geographic scope usually depends upon where the employer or purchaser actually does business. For a nationwide business, for instance, a geographical restriction could include the entire country and still be enforceable. But for a very small business, the restriction might become unenforceable if it is larger than a few square miles.
Particular care is warranted in drafting a non-competition agreement involving medical professionals. Non-competition covenants can be unenforceable if they are injurious to the public, and some courts view any restriction on the public’s unfettered access to medical care with particular scrutiny.
Well drafted non-competition agreements are a worthwhile way for businesses to protect their client bases and their confidential information.« Back to news