Guidance

1. Consideration in Non-Competition Agreements

"One indispensable component of an enforceable non-competition clause is that there must be adequate consideration for the employee to enter into the agreement. For a new employee, that consideration can be the job itself."

"For new employees, the best practice is to include in the offer letter a statement indicating that a condition of employment is entering into a non-competition agreement, or an employment agreement that contains a non-competition clause."

"For current employees, however, continued employment or a token consideration will not be sufficient to support the imposition of a non-competition covenant.

Non-competition Agreements: Reasonable is Key, Bernstein-Burkley, P.C.

An analysis of consideration provisions in 69 Non-Competition Agreements filed on EDGAR shows the frequency of different type of consideration provisions. The collection was identified as standalone non-compete agreements, not specifically combined with employment or purchase agreements.

In the collection, 4% contain no mention of consideration; 38% handle consideration in the recitals stating that adequate consideration has been received under another agreement or for continued employment; and 58% include a specific consideration provision.

Recitals (38%)

NOW, THEREFORE, in consideration of the foregoing, the mutual promises hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto promise and agree as follows:

OR

WHEREAS, in consideration of entering into the [______] Agreement, as well as continued employment, the parties have agreed to enter into this Agreement.

Specific Consideration Provisions (58%)

(a) Acknowledgement Clause (12%)

Example: "[Party] expressly acknowledges that the covenants of this Agreement are supported by good and adequate consideration, and that such covenants are reasonable and necessary to protect the legitimate business interests of the [Company] in connection with the Acquisition."

(a) Additional Consideration (13%)

Examples of additional consideration may include cash payments, equity awards, and purchase of residences at fair market value.

(a) Additional Token Consideration (3%)

Example: "NOW, THEREFORE, in order to facilitate the consummation of the transactions contemplated by the Purchase Agreement, in consideration of the sum of Ten Dollars ($10.00) and in consideration of the premises and the covenants hereinafter set forth, the receipt and sufficiency of which is hereby acknowledged, the parties hereto acknowledge, agree and covenant as follows;"

(a) Compensation under Incentive Plan (3%)

Example: "I am entering into this Non-Competition Agreement in conjunction with my participation in the [Company] Performance Share Plan and that this provides adequate and significant consideration for my willingness to enter into this Non-Competition Agreement."

(a) Material Inducement (12%)

Example: "This Agreement is a material inducement to Parent s entering into the Merger Agreement, and Parent has relied upon this Agreement in consummating the Merger and the other transactions contemplated under the Merger Agreement."

(a) Offer of Employment (4%)

Example: "NOW, THEREFORE, in consideration of employment by the company and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:"

(a) Severance Payments (10%)

Severance payment provisions may detail post-employment payments and benefits, or offer additional or increased benefit package.

About

  • Clause Taxonomy: Exchange
  • Organization: Public
  • Updated: 09/21/2017
  • Rating

Overview

A Consideration clause specifies the value given in return for a bargain.

Consideration is required for each party benefiting from, and bound by, a contract. In most agreements, the consideration is the bargain or exchange: an exchange of service for salary and benefits, an exchange of property for installments payments, or transfer of property rights for cash. In some cases, especially where a party gives up some right or interest, the consideration is expressly stated as an acknowledgement of the receipt of value.