How do you review the non-compete clause in contracts?
As the examples below illustrate, non-compete clauses are sometimes found in sections of an agreement that are clearly labelled as “Non-Compete”, “Non-Competition”, etc., in which case they will be relatively easy to find. In other cases, however, such as example 7 below, they may be included in a more general “Restrictive Covenants” section; or, as is the case with example 5 below, they may not be clearly labelled at all.
After locating all the non-compete language in each agreement, key things to focus on when reviewing these provisions include:
- Who is restricted and in what capacity. The class of restricted persons will, of course, include the grantor. However, the clause may also prohibit the grantor’s subsidiaries, affiliates, directors, officers, agents, etc. from engaging in competitive activity. Often, the clause will make this clear, including through the use of defined terms such as “Affiliates” or “Related Parties”. Be sure to check the definition(s) of any such defined term(s) to ensure that the full class of persons covered by the non-compete clause is ascertained. Furthermore, the clause may also state the capacities in which a grantor is prohibited from engaging in competitive activity. This is particularly common in the employment context. As examples 7 and 8 below illustrate, not only is the employee (the grantor) prohibited from competing as an employee, but also as a shareholder, partner, joint venturer, agent, broker, and so on. The list of restricted capacities can be quite extensive, and it’s important to consider the implications of such broad ranging restrictions (including whether they are reasonable).
- What is prohibited. As the examples below illustrate, the list of prohibited activities can range from concise to extensive and typically restricts (i) the grantor’s participation in certain trades, businesses or other commercial activities and/or (ii) its unauthorized use of the beneficiary’s property (including things like customer lists, trade secrets, etc.). It really depends on the nature of the agreement and the protection that the beneficiary hopes to secure through the clause. But no matter how extensive the prohibitions are, consider whether the language used is specific and detailed. All else equal, vague, ambiguous or overly broad restrictions are more likely to be considered unreasonable. Be sure as well to check the meaning of any defined terms - such as “Business”, “Products” or “Services” - used to describe these restricted activities to ascertain the full scope of the prohibition. Finally, although non-solicitation clauses are a distinct type of restrictive covenant, some contracts may include non-solicitation language in the non-compete clause - see, for instance, examples 3 and 6 below. Examples 7 and 12 also include non-solicitation language, but the section heading in each of those examples makes it clear that the section addresses more than just the covenant not to compete.
- Exceptions. In addition to determining what is not allowed under the non-compete clause, it is important to note whether there are any exceptions to these rules. Example 4 below, for instance, allows the Consultant to engage in certain marketing, promotional and business activities that would otherwise be prohibited by the wording of that clause. Similarly, examples 8 and 14 below each contain exceptions that permit the employee (the grantor) to own shares of publicly traded companies, provided those investments are below a specified ownership threshold (and the employee satisfies certain other conditions).
- Duration. Most non-compete clauses have limited duration. In commercial agreements, the grantor’s covenant not to compete will generally apply for the entire term of the agreement and may survive for a number of months or years thereafter (see, for instance, examples 2, 4 and 15 below). Non-compete clauses in employment agreements often remain valid for up to one year (and typically no more than two years) following the termination of employment. Some agreements may also state that the clause applies during the period of employment (see example 8 below); though, depending on the jurisdiction, applicable law may already prohibit employees from competing with their employers while employed by them, in which case such a statement may be redundant. In purchase agreements, the clause will typically remain in force for a specified period following the closing date of the transaction (or alternatively the effective date of the agreement).
- Geographic restrictions. Non-compete clauses may also restrict the grantor’s ability to engage in competitive activity in a particular geographic area. Like other aspects of the non-compete clause, it is important to consider the specificity and reasonableness of any such geographic restriction. Employment agreements, in particular, typically cannot be overly broad in this respect, though employers may have more latitude with executive employees. Example 7 below, for instance, essentially prohibits that Executive from engaging in competitive activity in any region in which the Bank or its affiliates have branch operations, which could be any number of countries around the world. Also, be sure to check defined terms like “Service Area” or “Restricted Territory” used to indicate the particular region(s) where competitive activity is prohibited (see examples 1 and 11 below) to confirm the extent of the geographic limitation.
As with the review of any contractual provision, it’s also important to be aware of other provisions that may affect the interpretation of non-compete clauses. Defined terms, for example, were mentioned in points 1, 2 and 5 above. The term clause (and also the renewal clause) provides important information about the term of the agreement, which may be relevant to the duration of a non-compete clause. Finally, as mentioned above, enforceability is an issue that regularly affects non-compete clauses. The enforceability of these clauses typically depends on both the facts and circumstances of each case as well as applicable law. The governing law section states which jurisdiction’s laws apply to the agreement, and that information can help parties evaluate potential issues with the enforceability of a given non-compete clause.
Software that uses AI to identify and extract non-compete clauses (as well as other terms that may affect their interpretation) can accelerate the work of finding these provisions and enable a more comprehensive review than can otherwise be done manually.
Examples of the non-compete clause
Below are some examples of non-compete clauses from different kinds of agreements. While these examples do not necessarily cover the full range of non-compete clauses one may encounter, they are meant to illustrate the degree to which these provisions can vary from contract to contract.
Example 1: From a Management Agreement
3.6 NON-COMPETITION. Neither Manager nor any of its Related Parties may offer Company Products and Services outside of the Service Area without the prior written approval of Company.
Within the Service Area, Manager may offer, market or promote telecommunications products or services only under the following brands:
(a) Products or services with the Brands;
(b) Other products and services approved under section 3.2;
(c) Products or services with Manager’s brand; or
(d) Products or services with the brands of Manager’s Related Parties;
except no brand of a significant competitor of Company or its Related Parties in the telecommunications business may be used by Manager on these products and services. Within the Service Area, if a Related Party or Manager offers a product or service of a significant competitor of Company or its Related Parties in the telecommunications business or of Manager, then Manager will not allow that Related Party of Manager to offer any Company Products or Services.
If Manager or any of its Related Parties has licenses to provide broadband personal communication services outside the Service Area, neither manager nor such Related Party may utilize the spectrum to offer Company Products and Services without prior written consent from Company. Additionally, when Manager’s customers from inside the Service Area travel or roam to other geographic areas, Manager will route the customers’ calls, both Program Requirements, without regard to any wireless networks operated by Manager or its Related Parties. For example, Manager will program the preferred roaming list for handsets sold in the Service Area to match the Company preferred roaming list.
Example 2: From a Manufacturing and Supply Agreement
Non-Competition. During the term of this Agreement and for a period of three (3) years thereafter, Manufacturer agrees that it shall not supply any third party directly or indirectly Products or Catalyst or any derivative thereof which Manufacturer knows such third party is using, selling, or distributing for ophthalmic applications.
Example 3: From a Cooperation Agreement
ARTICLE 9. NON-COMPETITION
The Parties shall not, and shall procure that their respective directors, officers, and Affiliates shall not, directly or indirectly:
from the date of this Agreement and for a term of three years from the termination or expiration thereof, engage in or make any investment in any business in competition with OpCo or its Affiliates within the People’s Republic of China; and
from the date of this Agreement and for a term of three years from the termination or expiration thereof, whether on its own behalf or jointly with or on behalf of any other person in connection with any business substantially similar to, the same as or in direct competition with the business of OpCo or its Affiliates: (x) canvas, solicit or attempt to entice away any person who has at any time during the period of twelve months prior to the termination or expiration of this Agreement been a client of OpCo or its Affiliates, or (y) do anything which may or is calculated to harm the goodwill of OpCo or its Affiliates.
The provisions of Articles 9(a)(i), 9(a)(ii)(x) and 9(a)(ii)(y) are separate and severable and shall be enforceable accordingly.
Example 4: From a Consulting Agreement
- NON-COMPETITION. As a material consideration and inducement to the Company to enter into this Agreement, the Consultant hereby covenants and agrees that, unless the Company and its successors and assigns shall cease to engage in the Business or unless the Company gives its prior written consent, during the Term of this Agreement and for a period of six (6) months thereafter, the Consultant shall not directly or indirectly:
(a) promote any television marketing concept substantially identical to that of the Company or 5th Avenue. The Company agrees and acknowledges that the present activities of Consultant in selling, marketing and/or promoting products and services on television (including, without limitation, Value Vision, USA, Home Shopping Channel Canada, QVC London and Germany), her speaking engagements and TV commercials (e.g., Pizza Hut, Milk and Cotton) are NOT substantially identical to the Company’s 5th Avenue Channel concept, and that future activities that are substantially the same as such present activities would also not be considered to be substantially identical to the Company’s 5th Avenue Channel concept. It is understood that the Consultant’s agreements hereunder are not intended, in any way, to conflict with her business licensing agreements or other marketing efforts, including other television marketing efforts such as those described in this paragraph, or to prohibit her from endorsing, in television commercials or otherwise, any specific high-end or luxury products.
(b) enter into, operate, own, manage or consult with (either individually or through any corporation, firm or organization in which she shall have an interest as an owner, operator, partner or major shareholder) any other business or venture on the Internet which competes with The 5th Avenue Channel’s Internet business.
(c) become a spokesperson for any other Internet site which might offer luxury or premium brand products or services.
Notwithstanding the above, the Consultant shall not be precluded from conducting business on her own Website (or the website of another party), or in her individual name, where she or the other website markets and sells her own lines of cosmetics, jewelry, clothing and related products and accessories, and products licensed by her. Additionally, the Consultant shall not be precluded from operating the business of promoting her new magazine or magazines, books or other publications.
Example 5: From a Manufacturing and Supply Agreement
3.6 During the Term, Supplier shall not, directly or indirectly, design, manufacture or market (1) any Supplier-branded products competitive with products marketed by Company or any of its Affiliates, or (2) any products that are competitive with the Products furnished hereunder; provided, however, nothing herein is intended to bar Supplier from:
(i) manufacturing and selling such competitive products to third parties (who are not Affiliates of Supplier) pursuant to such third parties’ designs, even though such third parties may be in competition with Company; and
(ii) establishing a design capability, independent of Supplier’s manufacturing function used to produce Products for sale to Company hereunder and, subject to Article 34, designing such competitive products for third parties who will own such designs and who are not Affiliates of Supplier, provided that Supplier, to the extent Supplier is not barred from doing so, gives Company the first right of refusal to produce such design. If Company rejects the offer to create such design and Supplier creates such design, Supplier shall also have the right to manufacture for and sell to the third party a product to such design pursuant to Sub-article 3.6(i) above.
Example 6: From a Shareholders Agreement
3.1 Non-Competition. Each of the Shareholders (each of whom in this subsection is called a ‘covenantor’) covenants with each of the others and separately with the Company (whether alone or jointly with any other person, firm or company, and whether directly or indirectly, and whether as shareholder, participator, partner, promoter, director, officer, agent, manager, employee or consultant of, in or to any other person, firm or company except as a holder of not more than 5% of shares of a publicly traded company) that it shall not (and, where the covenantor is a company, will procure that non of its officers or directors shall) at any time while the covenantor is the holder of any shares in the Company and for a period of one year after the date on which the covenantor ceases to be a shareholder in the Company (the “Relevant Period”):
3.2 Each of sub sections (a) to (c) of clause 3.1 shall be deemed to constitute a separate agreement and shall be construed independently of the others;
3.3 The restrictions contained in section 3.1 are considered reasonable by the parties but in the event any such restriction shall be found void but would be valid if some part thereof were deleted or the period or area of application reduced such restriction shall apply with such modification as may be necessary to make it valid and effective.
Example 7: From an Employment Agreement
- Restrictive Covenants. In order to induce Employer to enter into this Agreement, Executive hereby agrees as follows:…
(b) For a period of twenty-four (24) months after the effective date of termination of Executive’s employment hereunder for reasons other than those set forth in Sections 5(b) and 6(a) of this Agreement, Executive shall not, directly or indirectly, provide banking or bank-related services to, or solicit the banking or bank-related business of, any customer of Employer at the time of such provision of services or solicitation which Executive served either alone or with others while employed by Employer within the geographic region or regions in which retail, full-service branches of Bank or any affiliate of Bank are located, or assist any actual or potential competitor of Employer to provide banking or bank-related services to, or solicit the banking or bank-related business of, any such customer in any such area, and Executive shall not, directly or indirectly, as principal, agent, or trustee, or through the agency of any corporation, partnership, trade association, agent or agency, engage in any banking or bank-related business or venture which competes with the business of Employer as conducted during Executive’s employment by Employer within such area; provided, however, that Executive may own not more than five percent of the voting securities of any entity providing banking or bank-related services within such area if the voting securities of such entity are traded on a national securities exchange or quoted on a national interdealer quotation system.
Example 8: From an Employment Agreement
- Non-Competition: I agree that as long as I am in the employ of the Company and for a period of twelve (12) months after termination of employment, for any reason, I will not, directly or indirectly, either alone or jointly with others or as an employee, agent, consultant owner, partner, joint venturer, stockholder, broker, principal, corporate officer, director, licensor or in any other capacity or as an employee of any person, firm or company, anywhere in the world, engage in, become financially interested in, be employed by or have any connection with any business or venture that is engaged in any activities involving (i) products or services competing with the Company’s products or services, or with such of the Company’s Affiliates products and services which relate to the Company’s Business, as they shall be at the time of termination of my employment, or (ii) information, processes, technology or equipment which competes with information, processes, technology or equipment in which the Company has a proprietary interest, or in which any of the Company’s Affiliates then has a proprietary interest and which are related to the Company’s Business. The foregoing shall not apply to (i) holdings of securities of any company the shares of which are publicly traded on an internationally recognized stock exchange, which do not exceed 1% of the issued share capital of such public company, so long as I have no active role in such public company as a director, officer, employee, consultant (including as an independent consultant) or otherwise, or (ii) de minimis non-commercial activities.
Example 9: From a Shareholders Agreement
SECTION 4.02. NONCOMPETITION. This Section 4.02 applies to each employee of the Company or any subsidiary of the Company who owns Shares, whether directly or indirectly, in the Company who is a Specified Shareholder of the Company or is the beneficial owner of interests in a Specified Shareholder of the Company (or a Subsidiary Holder thereof) and is not bound by a non-competition restriction contained in a consulting or employment agreement between such employee and the Company or any of its subsidiaries (each, a “MANAGEMENT EMPLOYEE”); PROVIDED, HOWEVER, that this Section 4.02 shall not apply to any Management Employee that is an Affiliate of AAH (including for this purpose any member of the Board of Directors who was an AAH Nominee). Each Management Employee shall agree in writing (or if a party to this Agreement, hereby agrees) that following any termination of his employment by the Company or a subsidiary thereof “for cause” or his voluntary resignation from such employment (a) he shall not compete, directly or indirectly (including as an employee, proprietor, owner, partner, shareholder, member, joint venturer or agent of, or as a consultant to, any person or entity which competes), with the retail motor vehicle business of the Company or any of its subsidiaries within 50 miles of any motor vehicle dealership owned by the Company or any of its subsidiaries where such Management Employee worked during the year prior to the termination of his employment and (b) he shall not violate Section 4.03 (with respect to each Management Employee, a “NON-COMPETE COVENANT”). A Management Employee’s Non-Compete Covenant shall become effective on the date that such Management Employee’s employment by the Company or a subsidiary thereof terminates and shall terminate on the first anniversary of such date. The Company shall not be obligated to provide any Specified Shareholders with the benefit of any of the Company’s obligations under Section 4.01 or Article V unless each Management Employee that is a direct or indirect beneficial owner of such Specified Shareholder has provided the Company with such written agreement in a form reasonably satisfactory to the Company.
Example 10: From a License and Supply Agreement
XX. NON-COMPETITION CLAUSE. During the term of this Agreement, Marketer is not allowed to purchase, distribute, market and/or sell any product which is a topical vitamin D3 or any analog thereof or a fixed combination of vitamin D3 or any analog thereof with a corticosteroid with indications that directly compete with the indications approved for the Product, except the Combination Product.
Example 11: From an Asset Purchase Agreement
Section 6.4. Non-Competition.
(a) Until three (3) years after the Closing Date (the “Three Year Non-Compete Period”), neither the Sellers nor the Restricted Sellers shall, and neither the Sellers nor the Restricted Sellers shall permit their respective Affiliates to, directly or indirectly, own, manage, control, participate in, consult with, render services for, or in any manner engage in or represent any business within any Restricted Territory that is competitive with the business of the Purchaser and its Affiliates, including in particular, the Business conducted by Sellers and purchased from Sellers hereunder (the “Restricted Business”) or any product of the Restricted Business. As used in this Agreement, “Restricted Territory” means any portion of the United States.
(b) Nothing herein shall prohibit the Sellers from being a passive owner of not more than one percent (1.0%) of the outstanding stock of any class of a corporation which is publicly traded, so long as the Sellers have no active participation in the business of such corporation.
(c) The Restricted Sellers understand that the foregoing restrictions may limit the their ability to earn a livelihood in a business similar to the Business, but nevertheless believe that each Restricted Seller has received and will receive sufficient consideration and other benefits as provided hereunder to clearly justify such restrictions which, in any event (given each Restricted Seller’s education, skills and ability), the Restricted Sellers do not believe would prevent them from otherwise earning a living. Each Restricted Seller has carefully considered the nature and extent of the restrictions placed upon him, her or it by this Agreement, and hereby acknowledges and agrees that the same are reasonable in time, scope and territory, do not confer a benefit upon the Purchaser or any of its Affiliates disproportionate to the detriment of the Restricted Sellers, are reasonable and necessary for the protection of the Purchaser and its Affiliates and are an essential inducement to the Purchaser to consummate the transactions contemplated by this Agreement.
(d) If, at the time of enforcement of this Section 6.4, a court or arbitrator holds that the restrictions stated herein are unreasonable under the circumstances then existing, the Parties agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area determined to be reasonable under the circumstances by such court or arbitrator, as applicable.
(e) The Sellers and each Restricted Seller covenants and agrees that the Sellers and such Restricted Seller will not seek to challenge the enforceability of the covenants contained in this Section 6.4 against the Purchaser or Parent, nor will any of them assert as a defense to any action seeking enforcement of the provisions contained in this Section 6.4 (including an action seeking injunctive relief) that such provisions are not enforceable due to lack of sufficient consideration received by the Restricted Sellers. The Parties hereto agree and acknowledge that money damages would be an inadequate remedy for any breach of this Section 6.4. Therefore, in the event of a breach or threatened breach by the Restricted Sellers of this Section 6.4, the Purchaser or its successors or assigns may, in addition to other rights and remedies existing in their favor, apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce, or prevent any violations of, the provisions of this Section 6.4 (without posting a bond or other security).
Example 12: From an Employment Agreement
5.2 Non-Compete; Non-Diversion. In consideration for this Agreement to employ Executive and other valuable consideration provided hereunder, Executive agrees and covenants that during the term of employment and for a period of twelve (12) months after the Termination Date, Executive shall not, directly or indirectly, for himself or any third party, or alone or as a member of a partnership or limited liability company, or as an officer, director, shareholder, member or otherwise, engage in the following acts:
(i) divert or attempt to divert any existing business of the Company provided that after the Termination Date this shall not prevent normal competitive sales for a non-Listed Company (as defined below);
(ii) solicit, induce or entice, or seek to solicit, induce or entice, or otherwise interfere with the Company’s business relationship with, any customer of the Company, provided that after the Termination Date this shall not prevent normal competitive sales activities for a non-Listed Company;
(iii) (A) during the term of employment, render any services (whether as an independent contractor or otherwise) on behalf of any company or line of business that competes anywhere in the United States with the Company (a “Competing Business”), and (B) for a period of twelve months after the Termination Date, render any services other than legal services (whether as an independent contractor or otherwise) on behalf of any Listed Company (as defined below);
(iv) own or control any interest in (except as a passive investor of less than two percent (2%) of the capital stock or publicly traded notes or debentures of a publicly held company), or become an officer, director, partner, member, or joint venturer of, any Competing Business, provided that after the Termination Date this shall only apply to the Listed Companies;
(v) advance credit or lend money to any third party for the purpose of establishing or operating any Competing Business, provided that after the Termination Date this shall only apply to the Listed Companies; or
(vi) with respect to any substantially full time independent contractor of the Company, employee of the Company or individual who was, at any time during the three months prior to the Termination Date, an employee of the Company: (A) hire or retain, or attempt to hire or retain, such individual to provide services for any third party; or (B) encourage, induce, solicit or attempt to solicit, divert, cause or attempt to cause, such individual to (1) terminate and/or leave his or her employment, (2) accept employment with any person or entity other than the Company, or (3) terminate his or her relationship with the Company or devote less than his or her full time efforts to the Company.
Example 13: From an Asset Purchase Agreement
5.7. NON-COMPETITION. As a result of the transactions contemplated hereunder, neither Seller nor its Affiliates will have any rights to sell or license the Intellectual Property. Furthermore, as an additional consideration for the Purchase Price, Seller and its Affiliates agree that for two (2) years from the Effective Date, neither Seller nor its Affiliates will develop a semiconductor that is directly competitive to the VOIP Technology as defined in the Intellectual Property description.
Example 14: From an Employment Agreement
5.1 Non-Compete. Executive agrees that, during the Employment Term and for a period of one year following a termination of employment other than following a Change in Control (as defined in the Severance Agreement), he will not, directly or indirectly, engage in any business or activity competitive with the business activities of the Company. The foregoing shall not apply to passive investments by Executive of up to 5% of the outstanding stock of any publicly traded company or to service by Executive on boards of directors of companies as permitted under this Agreement, regardless of whether such company competes with the Company.
Example 15: From a Distribution Agreement
The Distributor will not, after the term of this agreement has terminated and for two years following the termination of this Agreement, be engaged in, be connected with, invest in, loan money to or hold shares in any business or any corporation which carries on a business which is competitive with the business carried on by Manufacturer (or its assignee) in the Territory at the date of this Agreement and at the date of termination of this Agreement.