A non-competition agreement, most commonly referred to as a “non-compete,” is a contract under which a party agrees not to engage in a certain line of business for a specified period of time in a specific geographic region. Non-compete agreements are typically used in two contexts: in the employment setting and when a business is being sold.
If utilized by an employer, the employee (or independent contractor) agrees that he or she will not engage in the same business as their employer for a specified period of time after they leave the company (e.g., 1 year) anywhere within a specific geographic area (e.g., Phoenix, Arizona). Generally, the point of such an agreement is to give the employer a sufficient amount of time to locate and train a replacement, and get that person up and running to the point where the new employee can do what the ex-employee was doing.
Sale of Business
With the sale of a business, non-compete agreements are used to protect the investment that the buyer of the business is making. When a company is purchased, two of the most important assets being purchased are the customer base of the business and the company’s goodwill. If the seller of a business could simply turn around and form a competing company immediately after selling his or her current one, it could defeat the entire purpose of the sale by seriously impairing the ability of the new owner to succeed, as well as negatively affecting the value of the investment that was just made.
To be enforceable, a non-competition agreement must contain two key elements: a limited duration and limited geographic scope. Both of these elements must be “reasonable”. The question of what is “reasonable” depends on the nature of the business, the scope of the geographic area in which the company operates, and the context in which the agreement was given.
Non-compete agreements with employees, for example, tend to be scrutinized more carefully by courts, because they may (and often do) prevent someone from earning a living in their chosen field for a period of time. The duration and scope of the non-compete agreements with employees must, therefore, be reasonably tailored to only what is necessary to protect the employer’s interests. On the other hand, non-compete agreements that are created in connection with the sale of a business can typically be of longer duration and perhaps cover a wider geographic area. If, for example, the company legitimately does business in all 50 states, then a non-compete covering the entire country may in fact be considered reasonable.
Non-compete agreements can be and often are combined with non-solicitation and confidentiality agreements, under which the employee or seller agrees not to solicit the customers of the business they are leaving and not to use or disclose any proprietary information belonging to the business they are leaving. Sometimes such agreements can actually operate as a form of a non-compete, although with different requirements.
Need Help? Call Weinberger Law Today
If you think you might need a non-competition agreement or you are involved in a dispute over one, call us at 480-536-9991. We will conduct a thorough review of your situation and recommend the best course of action