Four Factors to Keep in Mind When Drafting a Non-Compete Agreement

By Parth Jain

Businesses invest a substantial amount of time, money, and resources into building their human capital. Those same employees, depending on their position within the organization, may also have unrestricted or limited access to sensitive trade secrets, confidential information about the business and its relations, among other things.

US laws recognize the legitimate risk that companies face in sharing their confidential and sensitive information, and so there are multiple legal avenues to protect these assets. One of the most popular and heavily debated of these legal protections is the non-compete agreement.

Despite their widespread popularity, non-compete agreements are often poorly drafted without much thought to enforcement. A poorly drafted clause may do more harm to business interests than not having one at all.

So, what should businesses consider when developing non-compete agreements? Below are four key factors.

1. Tailor the geographical and durational restrictions

A non-compete agreement can interfere with a person’s ability to earn a living, and it also inhibits competition. For this reason, non-competes are not favored by courts unless they are narrowly tailored to address legitimate concerns of a business and protect those specific interests. An overly broad, vague, or ambiguous non-compete agreement runs the risk of not being enforced. Similarly, the non-compete should be reasonable in its geographical and durational scope for it to be enforceable.

2. Tailor the non-compete to the specific employee and their role

Many businesses are guilty of using the same boilerplate non-compete agreement for a low-skill employee’s agreement as they do in a senior manager’s employment agreement. This is a sure-shot way for the non-compete agreement to be nullified. A non-compete needs to be tailored to ensure that it does not impede ordinary competition, but it protects the business from unfair competition from an employee.

The following are a few important criteria that companies should use to adapt a non-compete agreement to each employee:

• The employee’s role in that organization
• The level of specialized training received by the employee from the employer
• The nature of the sensitive information that the employee has access to
• The specific industry and business of the employer

3. Choose a governing law and jurisdiction

In general, it is crucial for every contract to spell out the law that would govern the contract and the place where any dispute arising from that contract will be heard and decided. In the context of a non-compete agreement, this becomes more important since enforcement varies based on jurisdiction. For example, certain states like California deem non-competes as unenforceable as a matter of public policy.

Moreover, a location which is inconvenient for the employee may create difficulties when the non-compete is under court scrutiny. It may be prudent to choose a law and jurisdiction which has a connection with the workplace of the employee, rather than the incorporation or headquarters of the employer corporation.

4. Consider alternatives or additions to a non-compete agreements

Businesses may not always need to use non-compete agreements. Several alternatives achieve similar results, such as covenants of non-solicitation of customers, non-solicitation of employees, and non-disclosure. These covenants can be used in place of or in conjunction with a non-compete. Generally, they do not face the same level of skepticism as non-competes. However, they still need careful drafting to ensure enforceability.

The non-compete agreement is an important tool in a company’s arsenal, and when used correctly, it can be effective in protecting a legitimate business interest. Businesses should be aware of the pitfalls in drafting an effective and enforceable non-compete agreement and should consider seeking the advice of an experienced attorney in navigating these challenges.

This article is intended for general informational purposes only. It does not constitute legal advice. Using this document or any other material provided by Chugh, LLP does not create an attorney-client relationship. All information should be independently verified before relied on or acted upon. Please speak to an experienced immigration attorney for case-specific questions.