What Is a Covenant Not to Compete?

For any business and corporate environment, a covenant not to compete (also known as a non-compete agreement) is an agreement signed between a company or entrepreneur and an employee, in which the employee agrees not to work for current or future competitors or start a similar business. In other words, it prevents someone from using the skills or knowledge acquired while employed by one company in the same industry for another company.

Who Is Subject to a Covenant Not to Compete?

Typically, these agreements are made between employees and their employers, as well as between independent contractors and their clients. This type of agreement is most commonly used for roles such as sales, marketing, software development, engineering, HR, accounting, and management.

Benefits of a Covenant Not to Compete

A covenant not to compete helps guarantee that a company is protecting its sensitive information, trade secrets, customer relationships, and other valuable assets. By requiring employees to sign a non-compete agreement, a business can protect itself from valuable information and knowledge being shared with a competitor or its confidential client lists being given to a competitor.

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Example of a Modern Covenant Not to Compete

Let’s take the example of an employee hired as a software engineer at a company. The employer might require the employee to sign a non-compete agreement, which states that the employee will not use any proprietary information or code belonging to the company in the future, nor will they work on any competing projects for two years after the termination of their employment.

Enforcing a Covenant Not to Compete

For a covenant not to compete to be legally enforceable, it must include reasonable limits on the duration, geographical scope, and type of activities prohibited. Companies should also ensure that the agreement is signed before the employee is hired, that the employee understands the agreement and has not been coerced into signing it, and that the agreement is necessary to protect legitimate interests of the company. of course, it is always a good idea to hire an attorney who specializes in this area to review the agreement.

Related Legal Concepts

Understanding covenants not to compete requires familiarity with broader covenant principles and related employment restrictions. These agreements share similarities with restrictive covenants in that both limit certain activities, though non-competes specifically target employment relationships. The implied covenant of good faith and fair dealing also plays a role in how courts interpret and enforce these agreements, ensuring that both parties act reasonably in their contractual obligations.

The Bottom Line

Covenants not to compete serve as important tools for businesses to protect their legitimate interests, but they must be carefully crafted with reasonable limitations to be enforceable. Courts scrutinize these agreements closely, balancing employer protection needs against employee rights to work and earn a living. For guidance specific to your situation, always consult a qualified, licensed attorney.