There are two major reasons why people enter into non-compete agreements. First, an employer does not want the new employee to start a new business and take the existing customers or clients away. Second, the business owners do not want their partners to set apart and create their own businesses to compete. As such, a non-compete agreement is a contract between two or more people that prohibits 1) taking away the existing customers, trade secretes, or customer lists or 2) competition with the business these people are involved into.
Protecting the business’s trade secretes and customer lists
The First type of the non-compete agreements prohibits taking away of the existing customers. This one is rather simple: business owner does not want his or her partner or employee to use the opportunities created by the company for their personal benefit. Usually that personal benefit originates in creating a new business with similar services or goods for existing customers or dealing with the business that directly steers customers from the prior company. Such non-compete agreements have no geographical attachment but must have time duration.
The time duration of such non-compete agreement should be reasonable. What does reasonable mean? No one really knows. It just should be reasonable under the circumstances surrounding this particular business and type of services or goods sold by the company. For example, 3 years for business consulting company can be reasonable if the industry where the company sells the services is steady and balanced like hiring management or employees’ bond creation. The same time period may be unreasonable for companies that consult software-building businesses, as this industry constantly changes and evolves.
This type can also prevent the employee or partner from using the customer list or trade secret. The customer list relates back to soliciting existing customers. The reason to prohibit such use is the same. As to the trade secret, this restriction may have longer duration, because trade secrets can last a very long time, especially the unique ones.
Limiting the competition with other businesses
The second type of non-compete agreement prohibits creating of or participating in similar businesses that provide similar services or goods with reasonable location, time, and scope as well. Note, that this type includes geographical restrictions. This concept is very important to understand. The business that wants to restrict certain services or goods within unreasonable geographical location in fact attempts to monopolize the market. This type of behavior is not tolerated by the courts and gets stricken immediately.
As such, the geographical limitations should be reasonable. A seafood store in Miami cannot restrict opening of another store like that in the entire Miami-Dade county. However it will be likely reasonable to impose 1-2 mile radius non-compete restriction on the partner or employee of such business.
Also, the scope of prohibited acts should be reasonable. Again, what’s reasonable? Many factors can come into play. However, the scope should just make sense. A bank cannot prohibit its employee to provide accounting services after termination in the same area, even though the bank itself may be involved in such services. However, the bank can likely impose time limits on opening another bank within certain geographical radius around it.
These two types of non-compete agreements, if used correctly, provide excellent protections to the business owners. However, such non-compete agreements should be drafted with a great care not to overcome the uncertain boundaries of reasonableness. If the court determines that a business owner tried to use the non-compete agreement to obtain unfair benefit, such agreement will be squashed in its entirety.
Contact our law firm for the purpose of drafting an enforceable non-compete agreement for your growing business. We will provide you excellent mechanisms for your business protection.
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