Contract Tip - The Non-Compete Clause

Non-compete clauses (also known as covenants not to compete) are typically found in employment contracts as well as contracts for the sale of a business. In a non-compete clause, one party (usually the employee in an employment contract or the seller in a sale of business contract) agrees not to work for a competitor or start a competing business against the other party (usually the employer or the buyer of the business).

A non-compete clause is enforceable only if it is reasonable. It must be reasonable in terms of time, geography, and business need.

● Time: The reasonableness of a particular time restriction will vary depending on the industry and the business. One year or less is usually considered reasonable, while time restrictions greater than five years are likely to be unreasonable.

● Geography: As with time, a reasonable geographic area can vary from case to case. Limitations in a certain metro area are usually considered reasonable. A nationwide geographic limitations is usually unreasonable unless the business is truly nationwide. A non-compete clause that fails to include a geographic restriction is likely to be invalidated, regardless of whether the omission was intentional or by mistake.

● Business need: The non-compete clause must be reasonable in terms of the scope of the restricted activity (i.e. it must be limited to the same or similar job functions). The non-compete clause must be necessary to protect a legitimate business interest without being unduly burdensome to the other party's ability to earn a living.