A non-compete agreement is a legally binding contract between two parties where one agrees not to directly compete with the other. Competition can mean designing, developing, or publishing any content for another company that they wrote under contract with you. It can also mean simply going to work for a competitor in the same role, where that employee has the potential to share industry knowledge that should remain confidential.
Protecting intellectual property is a priority for any company. Non-compete agreements can prevent the loss of this property, but only if they aren’t so restrictive as to deter people from working for you and are enforceable.
Read on to learn more about what these agreements include, their usefulness, and resources that can be helpful in writing yours.
Please note: This article is not official legal advice. I highly recommend contacting an attorney if you are considering implementing a non-compete agreement of your own.
Pros of Using a Non-Compete Agreement
- Eliminate conflicting products in the marketplace. It’s a highly-competitive world out there. If you prohibit writers, developers, and designers from sharing your intellectual property with others, this obviously gives you a leg up. This applies to brick-and-mortar companies that sell physical products as much as it does to web-based and e-commerce companies that sell subscriptions or support applications.
- Keep your trade secrets a secret. Even if an equivalent product or service is introduced to the market, a non-compete agreement prevents the sharing of all of the details, formulas, and methods that make yours unique.
- Retain top talent. Existing employees must be provided something as a trade-off for agreeing to this contract like increased compensation. These initiatives may cost you upfront, but investing in employees can build loyalty. Alternatively, if you hire freelance workers, and they are subcontractors, a non-compete agreement can prevent them from going directly to your clients to ask for work while they are still working for you, or for a time period after.
Cons of Using a Non-Compete Agreement
- It can push top talent out the door. Forcing a non-compete agreement on someone who has already started working for you could make them feel as if you don’t trust them. Desired candidates may turn down your offer if they feel the terms of the agreement will prevent them from thriving in your industry.
- Your agreement may not hold up when it needs to. If you have a non-compete agreement in place that is too restrictive or too vague, it may not hold up in court. You must be sure it is enforceable so that the pros outweigh the cons.
- The costs to enforce an agreement can be very high. Litigating an agreement can be expensive in terms of time spent sourcing information, alongside attorney and court fees. Court mandates can also slow or halt development or work with other clients while cases are being heard. Most importantly you could run the risk of having to make proprietary information public to prove your case.
Which Employees Should Sign a Non-Compete Agreement?
Companies dictate what work is done, and the company owns that work when it is complete. This puts you in the perfect position to ask regular employees, particularly those with access to proprietary or sensitive information, to sign a non-compete agreement.
Freelancers should have extra consideration. Asking them to sign a non-compete agreement could remove their ability to market themselves to other clients. This can put an unreasonable restriction on their livelihood and make the agreement unenforceable. Also, if they can only work for you, they can argue that this arrangement effectively reclassifies them as an employee of your company and are therefore entitled to rights, benefits, paid time off, etc.
What Should I Include in a Non-Compete Agreement?
Here are some key considerations to ensure your agreement is comprehensive and enforceable:
- Effective Date: The date the agreement becomes effective.
- Reason: State clearly why the hired party should be restricted in their actions.
- Time Limit: Set a reasonable time frame based on your industry and interest in your property.
- Employee Consideration: Provide existing employees a benefit in consideration of agreeing to this contract. For new employees, the point of consideration is getting the job. Given existing employees something in return for what they could lose. A higher salary, new job responsibilities, a promotion, or other benefits are all options. The actual dollar value of this offering is not the main concern; what is important is that the employee sees it as a real benefit in exchange for signing the agreement
- Negotiability: You will likely get pushback on some or all of the requirements of the agreement. Prioritize and determine ahead of time which parts of the contract you’re willing to negotiate on and which ones you are not.
Consequences of a Broken Agreement
- Compromised content. This is the biggest concern of a breach in a non-compete agreement. Tracking down the source of the shared content should be easy. Removing it from circulation could be difficult if the other party will not comply.
- Awkwardness in client relations. Freelancers who solicit work directly from one of your clients make your working relationship with that client awkward. If that freelancer bad-mouths you to the client, that can erode trust. A conversation about the writer’s approach and the terms of their agreement should clear things up.
- You’ll probably need a lawyer. If your attempts to resolve these issues on your own do not work or if the writer contests the terms of the agreement, an attorney can help by issuing a cease and desist order, mediating a settlement out of court, or filing a lawsuit.
Other Considerations and Resources
As you formulate a plan to protect your intellectual property, keep in mind some states don’t allow or do not enforce non-compete agreements, so check if yours does before you go to the trouble of writing one. Also, you may not really need a non-compete agreement. A non-disclosure or confidentiality agreement may be enough to protect you.
If you decide that a non-compete agreement is needed, review this article to avoid some common mistakes employers make when writing theirs.
For help starting to write your agreement for an employee or freelance contractor, or write a release from a non-compete agreement, these tips and templates can help.
If a non-disclosure agreement is more appropriate, consider using this template.
And, of course, always seek qualified legal counsel when working with any type of contract.
Have you used a non-compete agreement in the past, or do you have one in place now? What was your experience? Share your thoughts with us in the comments!
Thanks for the pointers of basically, dos and don’ts. One thing, though – agreements and contracts are different although it is very common practices that we use interchangeably. You can search on the internet as there are many differences.
Any agreement you enter into cannot override basic legal rights that protect everyone has under law. I was once offered a very lucrative position and I had signed a contract requiring me to give 3 weeks notice. The job I was in wasn’t paid very well at all but at the time it suited my purpose. The company tried to hold me to my 3 month notice however short of chaining me to my desk it wasn’t very enforceable.
Likewise if an agreement includes something as broad as programming, outside intellectual property that belongs to a company specifically, which would stop you functioning as a programmer; then that’s not enforceable. You provide your skills and services for that company, you’re not their slave.
I’ve found that many of the clauses in the contracts that were placed in front of me as a freelancer were plagiarised from other contracts of major companies downloaded overtime from the internet. They were not really enforceable and probably not even drafted by lawyers working for the company presenting the contract. Startups regularly do this sort of thing because they usually run on limited resources. Many NDAs are pretty much a guide and difficult to enforce.
I’m not fond of non-compete agreements, and certainly not for ordinary employees or contractors. (They can be reasonable in special circumstances, though. I sold a small software company for a modest amount of money. It was totally reasonable that the buyer stipulated that I could not compete with them for two years…)
I think the article minimizes the con’s of a non-compete. Lawsuits take a terrible toll on management’s attention. Where is time best spent: improving a product? Or suing an employee? (It doesn’t even sound good, does it?)
On the other hand, non-disclosure agreements DO make sense. That document should set out what the company believes is proprietary: source code, certain practices, customer lists, financials, etc. Thanks for the thought-provoking article!