The ‘Non-Competition’ Covenant

Non-competition provisions appear in several different types of agreements, including employment agreements, consulting agreements and acquisition agreements, among others. Most attorneys and clients recognize that the basic issues to negotiate are the scope, territory and duration of the non-compete.

What I think is often overlooked is the practical reality that the very existence of the non-compete can greatly harm a client’s interests. There are at least two reasons for this.

  • First, in case of any question about whether a particular activity would violate the non-compete, the client may need to steer clear of the activity because he or she cannot accept the risk of undertaking the activity. Note that the issue may not be tested until the allegedly competitive activity has proven successful, and both the recipient and the maker of the non-compete have a lot to win or lose (respectively).
  • Second, the existence of a non-compete must be disclosed to any subsequent contracting party. That new party may hesitate to enter into a contract with someone who is subject to a non-compete that might apply, for fear of being charged with ‘tortious interference with contract’ or some such claim. In that way, even if the client would prevail in a court case interpreting the non-compete, he or she has suffered in practice because of the chilling effect of the threat.

Obviously, non-competes are required by contracting parties in many circumstances, so avoiding one altogether typically is not realistic (though that doesn’t mean I wouldn’t try). At a minimum, however, clients giving a non-compete should insist on defining the scope as narrowly and clearly as possible. The proper mindset is to assume that only things clearly outside the non-compete are okay, as opposed to thinking that only things clearly inside the non-compete will be prohibited (in court the reverse may be true, but in practice the fear is as big a problem as the ultimate conclusion). It is generally not advisable to rely on the fact that ‘both parties really know what it means’ or that an overly broad non-compete will not be enforceable. By the time it comes to that, the damage will already have been done.