Non-Compete Agreement – Definition

Cite this article as:"Non-Compete Agreement – Definition," in The Business Professor, updated December 14, 2018, last accessed October 20, 2020, https://thebusinessprofessor.com/lesson/non-compete-agreement-defined/.

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Non-Compete Agreement Definition

A Non-Compete Agreement is an agreement signed between an employer and its employees. This agreement restricts the employees from taking up jobs or starting businesses that involve work of similar nature (generally in the same field as the employer). This agreement is also called the ‘covenant not to compete’ or a ‘restrictive covenant’.

A Little More on What is a Non-Compete Agreements

This clause applies only when an employee resigns from a company or the authority terminates him or her from the job. This agreement mentions a specific time period (usually three years) within which the employee is not permitted to get involved in a similar kind of work for another company. It may also mention a specified geographical area where the employee cannot work in that specific time period.

The employers ask their employees to sign this contract in order to ensure the employees do not use the knowledge and information gained from working in the company to start a business or work in a competitive company. These information and knowledge include trade secrets, business practices, marketing plans, upcoming products, and client list among others. The employee may use all this information for gaining a competitive advantage over the former employer. The non-compete agreement intends to limit that scope.

This agreement is enforceable even when there are no possibilities of a trade secret disclosure. If an employee signs the non-compete agreement while entering a job, he or she needs to adhere to its clauses after leaving the company.

A non-compete agreement is different from the non-disclosure agreement. Non-disclosure agreement does not restrict someone from taking up any jobs, it only ensures the employee does not use any confidential or sensitive information in another company. An NDA prevents the employee from revealing information which is considered confidential and sensitive.

The non-compete agreement simply prevents the employees from taking up a job in a rival company within a specific time period. A non-compete agreement limits the scope of finding a new job for the employees. It may prove to be a hindrance for them in search of a job with their skill set and expertise.

In the U.S. the enforcement and recognition of the non-compete agreement fall under the state jurisdiction. The rule varies widely from one state to another. Recently, the rules regarding the non-compete agreement have been debated and amended in many states. The legislature of the state of California does not recognize the non-compete agreements except for a few specific cases. Utah has passed a resolution that states a non-compete agreement can be valid only for a year. Hawaii made it illegal for the high-tech companies to insist their employees to sign a non-compete agreement.

Most of the states in the U.S mandate that the duration mentioned in the agreement should not be too long, also the geographical scope needs to be reasonable. In general, the state legislatures try to ensure that this agreement does not prevent an employee from getting a new job.

References for Non-Compete Agreement

A Little More on What is a Non-Compete Agreement

Revisiting the Inevitability Doctrine: When Can a Former Employee Who Never Signed a NonCompete Agreement Nor Threatened to Use or Disclose Trade Secrets …, Weinstein, L. I. (1997). Am. J. Trial Advoc., 21, 211.

Beyond the Route 128 Paradigm: Emerging Legal Alternatives to the NonCompete Agreement and Their Potential Effect on Developing High-Technology Markets, Carey, K. L. (2001). J. Small & Emerging Bus. L., 5, 135.

Postpetition Payments to a Debtor under a¬†NonCompete Agreement¬†Typically are Deemed Property of the Estate and Subject to Creditors’ Claims, Kleinberg, H. B. (2002). Banking LJ,¬†119, 282.

Non-Compete Agreement Was Not Violated When Employee Went to Work for Business That Did Not Compete in a Material Way, McCarter, W. D. (2005). J. Mo. B., 61, 5.

The Protection of Trade Secrets under the Noncompete Agreement: Collation and Research about 74 Judicial Documents from Non-compete Cases, Peng, Z. H. U. (2013). Journal of Southwest University of Political Science and Law, 3, 006.

How to Enhance Information Management by NonCompete Agreement in China, Wei, Q., Yan, D., & Gao, J. (2015). In LISS 2014 (pp. 657-661). Springer, Berlin, Heidelberg. One of the most critical assets of a company is the business information especially the trade secrets. Therefore this requires special protection. Although Chinese labor laws gave enterprises a legal instrument, the non-compete agreement, to stop previous employers from leaking such information and therefore been malevolent competition. The pros and cons of the present legal framework are analyzed in this article, for a non-compete agreement in China. It also enhances some good practices to aid the management of information through non-compete agreement.

Non-Compete Agreements Made after an At-Will Employee Has Commenced Employment: Toward a Good Faith Standard for the Afterthought Agreement, Garrison, M. J., & Wendt, J. T. (2013). U. St. Thomas JL & Pub. Pol’y,¬†8, 148.

The Influencing Factor and its Agreement of the Effectiveness of Noncompete Agreement, Zhang-lin, W. A. N. G. (2011). Journal of Fujian Administration Institute, 3, 017.

Non-compete agreement in the health care profession upheld., Corrigan Jr, W. M., & Chatman, D. M. (2007). Missouri medicine, 104(5), 398.

The firm strikes back:¬†noncompete agreements¬†and the mobility of technical professionals, Marx, M. (2011). American Sociological Review,¬†76(5), 695-712. The mode by which firms shape the labor market and career paths is explored in this study.¬† The employee non-compete agreements are used. Work sociology has overlooked non-competes although information shows that almost half of technical professionals in the United States are told to sign those contracts. Firms also use non-compete, scaring loss of investment in talents and trade secrets, to ‚Äėstrike back‚Äô against technical professionals, with increased mobility and following the reduction of internal labor markets.

Regional disadvantage? Employee¬†noncompete agreements¬†and brain drain, Marx, M., Singh, J., & Fleming, L. (2015). Research Policy,¬†44(2), 394-404. Documentation has been doing about the local impact of employees non-compete agreements by a growing body of research. Although, their influence on interstate migration patterns has not to be explored. In trying to exploit a reversal of inadvertent policy in Michigan as a natural experiment, it is discovered that non-compete agreement is the reason for a ‚Äėbrain drain‚Äô of knowledge workers away from a state that enforces those contracts to states where they are not enforced.

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