A non-compete clause or NCC is a provision or clause in written contracts that obliges one party to agree not to compete against another party. It fundamentally bars an individual or organization from starting a profession or entering into a trade that would render it a competitor of the other participant of the agreement. Considered as one of the three restrictive covenants alongside non-disclosure and non-solicitation, a non-compete agreement can also be a separate document related to another contract.
Advantages of Non-Compete Clause: Arguments and Justifications
The purpose or objective of an NCC is to prevent an individual or organization from entering into competition with another individual or organization during or after the duration of their agreement. Based on the premise that another party might gain a competitive advantage by capitalizing on confidential information about another party, the clause essentially provides a layer of protection aimed at promoting the business or professional interest of the contractee.
Most employment contracts contain non-compete provisions by default. However, an NCC also often appears in other arrangements or deals such as service contracts, authority to sell, or vendor agreements, among others. Hence, contractees such as employers, clients, principals, or project owners primarily benefit from this clause.
The following are the specific advantages of NCCs:
1. Prevents Former Contractors from Competing: A legally binding non-compete agreement would keep former contractors such as employees, partners and associates, service providers, suppliers, or vendors from pursuing a profession or trade that could potentially harm the interest of the former contractee.
2. Retains Agreement and Business Continuation: In an employment contract, an NCC prevents valuable employees from leaving the organization to work with a competitor. When used in service contracts and vendor agreements, it compels contractors to act in good faith and remain true to the terms and conditions of their contracts.
3. Protects Trade Secrets and Other Information: Information gatekeeping is another advantage of a non-compete clause. Its functions as a specific measure in data and information security, especially in protecting trade secrets and proprietary information. An NCC complements non-disclosure clause or agreements.
Disadvantages and Limitations of Non-Compete Clause: Counterarguments
An NCC could be disadvantageous to contractors because it could limit their freedom to explore professional or trade opportunities outside the purview of their contractors. Hence, in some cases, it unfavorably affects partners and associates, service providers, suppliers, or vendors.
The concept is not absolute, and it might work against a contractor. Common arguments against non-compete clauses assert that it not only creates a negative impression among contractees but also puts contractors at considerable risk.
Below are the disadvantages and limitations of NCCs:
1. It Does Not Sit Well with Other People: The inclusion of an NCC or its addition in an existing agreement could deter individuals or organizations from working with a contractee. Essentially, its restrictive nature smears the prospect of entering in an employment contract or business-to-business agreement.
2. They Can Be Costly to Enforce: Resolving a breach in the contract requires utilizing resources for arbitration or court settlements. A non-compete issue is difficult to resolve in particular. Depending on the situation, an NCC case is not always winnable. Several courts do not like NCCs that are too restrictive.
3. Consideration of Key Limitations: Another disadvantage of a non-compete clause is its limitations. Most jurisdictions require details on the duration of the non-compete, as well as restrictions in the geographic scope and scope of the subject matter. Some laws limit the enforceability of NCCs. The clause should also remain true to the fundamental elements of an enforceable contract.
4. Possible Redundancy: A non-disclosure agreement might be sufficient already to protect the trade secrets and other confidential information owned by an individual or organization. Hence, considering the unappealing nature of NCCs, the inclusion of this clause is both pointless and perilous.