Covenant Not to Compete

A term used in contract law, a “covenant not to compete” is an agreement in which an individual, usually an employee, agrees not to work for the other party’s competition in a specified geographical area for a specified length of time. Also referred to as a “non-compete clause,” or “non-compete agreement,” this type of legal agreement is commonly used in employment contracts and in contracts for the sale of a business. To explore this concept, consider the following covenant not to compete definition.

Definition of Covenant Not to Compete

Noun

  1. A promise made by an employee, or the seller of a business, not to compete in the same type of business in the same area for a certain time period.

Origin

Early 15th century English common law

Purpose of a Covenant Not to Compete

The purpose of a covenant not to compete is to protect a business interest by limiting competition. An employer hiring an employee that is a professional in a specialized field may seek to limit the ability of a competitor to hire that employee in the event he leaves the company. Alternatively, an individual seeking to purchase a business may use a non-compete clause to prevent the seller from opening a new, similar business in the same area for a specified length of time.

Covenant Not to Compete Form

While many companies hire attorneys to prepare their non-compete agreements, an individual or entity may find a covenant not to compete form that suits their needs online. Information that should be included on every covenant not to compete form includes:

  • The full names of each party to the agreement,
  • Date the agreement is made
  • The specifics of what business or activities are not to be in competition with the employer or business
  • What remedy will be available to either party in the event the agreement is breached

Legality of a Covenant Not to Compete

While most states recognize covenant not to compete agreements in some form, some states prohibit them except in specific limited circumstances. Non-compete clauses are commonly used in employment contracts for popular radio and TV personalities. This prevents, for example, a well-liked radio morning show personality, or TV anchor person from leaving their station and going directly to work for a competitor, taking their fans with them.

States that restrict the use of covenant not to compete agreements often look at the scope and function of such an agreement in determining whether it is enforceable. Important considerations in determining the legality of a covenant not to compete agreement include whether the clause is reasonably necessary to protect legitimate business interests, such as trade secrets, and whether the agreement unnecessarily restricts the employee’s ability to earn a living.

California and the Covenant Not to Compete

Laws established in California’s original 1872 Civil Code continue to reflect the state’s tough policy of protecting its business’ right to hire employees of their choosing. As such, non-compete agreements are void in California, except for a very few situations expressly defined by statute. California’s Court of Appeals has held that even non-compete agreements made in other states where it is legal are not enforceable in California. The issue of whether California is bound by the Full Faith and Credit Clause of the U .S. Constitution, which requires states to enforce equitable judgments from courts in other states, has yet to be challenged and decided.

Exceptions to California Law

There are a few situations in which California’s ban on non-compete agreements is set aside, in the interest of fair trade and commerce. These include:

  • The sale of a business in its entirety, or the goodwill of the business (the hard work and effort the owner has put into the business)
  • The dissolution of a limited liability company
  • The dissolution of a partnership

International Business Machines v Mark Papermaster

In 2008, IBM Vice President of Blade Development, Mark Papermaster, announced a career change as he moved to Apple as Senior Vice President of Devices Hardware Engineering. IMB file a lawsuit against Papermaster for violation of the non-compete clause of his employment agreement, and claiming he misappropriated trade secrets.

Papermaster had specifically stated, in his employment agreement with Apple, that he would not disclose trade secrets from his former employer. The judge found, however, that it was inevitable that Papermaster would use knowledge gained from his position at IBM in his new job, which would harm IBM by aiding a competitor, and issued a temporary injunction prohibiting Papermaster from working for Apple until the matter was settled.

The court had to weigh the hardship to Papermaster’s ability to gain such lofty employment against the potential for harm to IBM. In the end, the judge ruled that, because intellectual property and trade secrets are IBM’s most valuable asset, the potential for harm to IBM caused by disclosure outweighed the cost to Papermaster resulting from a delayed employment opportunity.

Related Legal Terms and Issues

  • Clause – A section of a legal document that relates to a particular point or issue.
  • Scope – Relevant range of authority or practice, or range of control through a contract.
  • Function – The purpose for which something is designed or exists.
  • Trade Secrets – Designs, practices, processes, commercial methods, techniques, or information that is not generally known by others, which gives a business an advantage over competitors.
  • Injunction – A court order preventing an individual or entity from beginning or continuing an action.

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