Non-Competition


A Non-Competition clause restrict individuals and organizations from providing services or engaging in businesses in certain markets and geographies for a period of time. The clause protects businesses from the potential that knowledge gained by an employee or business partner will be used in the future to compete against the business. However, the enforceability of non-compete clauses varies from state to state.

Standard Clause

Non-Competition

(a) Restrictions. During the Restricted Period and within the Restricted Territory, Executive shall not, directly or indirectly, without the prior written consent of the Company engage in any Restricted Activity for or on behalf of any Restricted Business.

(b) Exceptions. It is not a breach of this Agreement for Executive to participate as a passive investor holding up to [PASSIVE INVESTMENT PERCENT] of the equity securities of an entity engaged in the Restricted Business, which securities are publicly traded.

Definitions

"Restricted Activity" means:

(i) Provision of Services: employment or provision of any services [or serving as an officer, director, partner, principal, employee, agent, representative, consultant or independent contractor or providing any assistance] to a Restricted Business;

(ii) Fiscal Interest: having any ownership interest in, or participating in the financing, operation, management or control of, any person, firm, corporation or business.

(iii) Business Interest: conducting any business [for the party's own account] with a Restricted Business.

"Restricted Business" means any [RESTRICTED BUSINESS].

"Restricted Period" means the period starting on the Effective Date of this Agreement and ending [RESTRICTED TERM] after termination of this Agreement.

"Restricted Territory" means [RESTRICTED TERRITORY].

Clause Elements

1.1 Restricted Activities

Described Generally

"Restricted Activities" means any competitive activity.

1.2 Restricted Business

Described by Nature of Business

"Restricted Business" means any company or organization involved in: [Nature of Business].

Described by Similarity

"Restricted Business" means any company or organization involved in a business similar to that of the Company.

Named Competitors

A "Competitor" shall mean (i) Bed Bath & Beyond, Inc., Home Place Inc.,J.C. Penney, Federated Department Stores, Mays, Target, Sears and K-Mart (and any successor or successors thereto); (ii) any home textiles or housewares store, specialty store or other retailer if either $25 million or 40% or more of its annual gross sales revenues (in either case, based on the most recent quarterly or annual financial statements available) are derived from the sale of home textiles, housewares or other goods or merchandise of the types sold in the Company's (or any Subsidiary's) stores; (iii) any corporation or other entity whether independent or owned, funded or controlled by any other entity, engaged or organized for the purpose of engaging, in whole or in part, in the sale of home textiles, housewares or other goods or merchandise of the types sold in the Company's (or any Subsidiary's) stores; (iv) any business that provides buying office services to any business or group of businesses referred to above, or (v) any business (in the U.S. or any country in which the Company or any Subsidiary operates a store or stores) which is in material competition with the Company or any Subsidiary or division thereof and in which Executive's functions would be substantially similar to Executive's functions with the Company.

1.3 Restricted Period

Stated Term

"Restricted Period" means the period starting on the Effective Date of this Agreement and ending [RESTRICTED TERM] after termination of this Agreement.

Variable Term, Depending on Severance

"Restricted Period" means the period starting on the Effective Date of this Agreement and ending [RESTRICTED TERM] after termination of this Agreement (in the event Employee does not receive severance compensation) or [RESTRICTED TERM] (in the event Employee does receive severance compensation.

1.4 Restricted Territory

Specified Area

"Restricted Territory" means [RESTRICTED TERRITORY].

Conduct of Business

"Restricted Territory" means any [country][state][county] in which the company conducts business or markets its products or services.

Optional Additional Clause Elements

Extension of Restricted Period. If, during any period within the Non-Competition Period, the Executive is not in compliance with the terms of this section, the Company shall be entitled to, among other remedies, compliance by the Executive with the terms of this section for an additional period equal to the period of such noncompliance. For purposes of this Agreement, the term "Non-Competition Period" shall also include this additional period.

Discussion

Enforceability

The enforceability of non-competition agreements are determined by state law. Generally, courts will apply the law of the state where the employee or business interest is located. As stated by George W. Keeley: "Non-competes have to be reasonable to be enforceable. Reasonableness is determined by the courts based on the specific facts in each case. Primary attention is given by the courts to:

  • the geographic scope of the non-compete,
  • the duration of the non-compete, and
  • the type of activity the ex-employee is precluded from engaging in."

Non-Compete Agreements: Are They Enforceable?

See, Enforcing Noncompetition Agreements, Robert M. Shea and Scott J. Connolly, June 2006.

Enforceability of Covenants Not To Compete in California, by Dan Woods and Tim Rusche White & Case, Los Angeles

Severability and Reformation

Many employment agreements include a severability clause that states that if any term is determined to be illegal or unenforceable, the remaining terms of the agreement remain valid and enforceable. Drafters should also consider reformation or blue-pencil language that permits the courts to reduce the non-competitive covenants to a reasonable and enforceable scope; as opposed to voiding the clause in its entirety. See, Severability.