When is a covenant not to compete warranted?

By | May 13, 2008

You’ve had a partner or employee for years who has learned every secret of your business. You find that they now wish to move on and work in another organization or develop another business of their own, or you’ve recently bought a business and you are now worried the former owner will set up shop down the block. How do you prevent these people from directly competing with your business so that you lose clients, profits or both?

An agreement not to compete will protect you from the former partner or employee, or former owner, directly competing and causing your business to falter. This type of agreement is also called a restrictive covenant. It clearly states that the person leaving the business will not engage in the same or similar business, or at times even the same occupation, for a period of time in a certain geographic area. In most instances, these agreements help protect the recent buyer of a business from the possibility that the seller will set up another similar business in the same general area, or that the former employer or partner will sign up with a direct competitor. However, the agreement must be reasonable, both in the amount of time it is binding and the geographic area it covers. It must be noted, though, that competition is completely legal, and you may not unduly shackle the employment opportunities of the seller or former employee, or deny them the right to make a living. If the non-compete agreement is too restrictive, a court will have the power to rewrite it with fewer restrictions, or overturn it altogether. Therefore, being mindful of each person’s individual rights when drafting these agreements is essential, but they are often necessary to prevent business failure.

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