Non-Compete Agreements

A Covenant Not to Compete is an agreement that restrains or prevents a business or individual from engaging in a particular activity. These Covenants are usually not favored by the courts, and as such, are looked at through skeptical eyes. Covenants Not to Compete are often used in two primary areas, the first being in Employment Agreements and the second being in the purchase/sale of a business.

An Employer might want an Employee to sign a Covenant Not to Compete where the Employer is engaged in the business of sales, had certain trade secrets or deals with sensitive information. You can imagine the scenario where Salesman A joins Company B, starts working off of Company Bs customer lists, and then decides to leave for a new job. Inevitably, he will attempt to take the Company Bs client list with him. Such is the need for a Covenant Not to Compete. If properly drafted and executed, the Covenant Not to Compete will prevent Salesman A from taking the client list with him, and in most circumstances, will prevent Salesman A from even working for another company that sells product similar to Company B.

Covenants Not to Compete can also be essential to the purchase of a business. Imagine the scenario where Rookie Financial Advisor purchases an existing Financial Practice from Veteran. Rookie would want to ensure that Veteran did not just simply move down the street a block and open a new financial planning office that would compete with Rookie for business.

Covenants Not to Compete follow the general rules of basic Contract Law, namely that there must be an Offer, Acceptance and Consideration for the Covenant. The Offer would be evidenced by the Covenant, the Acceptance would be evidenced by the Employees signature and the Consideration would be evidenced by the Employer giving something of value to the Employee. If the Covenant is offered at the inception of employment, the Consideration would be the actual obtaining of the job. If the Covenant is offered after the Employee is hired, some additional inducement or consideration must be offered to the Employee, or the Covenant may be found to be invalid.

Courts have also found that Covenants Not to Compete must be equitable in both distance and duration. What that means is that the length (time frame) of the Covenant and the distance that it applies to must be fair. For instance, in the above financial planning scenario, the Covenant Not to Compete might prevent Veteran from working for or opening a financial practice in the same county or in the same half of the state as the financial practice that was sold, and the limitation may apply for a period of perhaps two years. In Pennsylvania, where I practice law, such a Covenant might be found to be fair. A Covenant that sets forth that Veteran could not work again in the Financial Planning field anywhere in the United States for the rest of his life would likely be found to be invalid.

Greg Artim is an Attorney based in Pittsburgh Pennsylvania. For more information on related legal issues, please visit his website at http://www.gregartim.com or visit his Pennsylvania Lemon Law website at http://www.ihatethislemon.com