What is a Non-Compete Agreement?
If you operate a business, an essential part of success is ensuring that your industry-specific knowledge, information and assets are securely protected.
A Non-Compete Agreement can be an effective mechanism to ensure the security of your confidential business information, as well your relationships with ongoing clients and customers.
Non-Compete Agreements are formed between a business and anyone that may have had access to confidential information of that business, whether an employee, contractor or third party. Non-Compete Agreements are primarily a tool used for a business to ensure that anyone who may have had access to the business’ confidential information, cannot use this information in a way that is disadvantageous to the business.
For example, a non-compete agreement may prevent an employee from leaving a business to later go on and start their own business that operates in the same market as their previous employer. Or it may prevent a party from soliciting clients or other employees from their former employer.
Non-Compete Agreements can simply be added into a standard employment contract, and must be signed as a prerequisite to beginning employment with a business.
These forms of agreements may come into effect when the unlawful use or disclosure of a business’ confidential information may result in harm to the business.
What Do They Cover?
Non-Compete Agreements aim to cover a business’ legitimate interests. Business interests that a party may seek to protect within a non-compete agreement include:
- Intellectual property rights
- Information that relates to trade secrets
- Client lists
- Financial information
Ensuring protection of these interests enables a business to be free from unlawful or unfair competition.
Are They Enforceable?
These types of agreements will only be enforceable if they are viewed as being reasonable in protecting the legitimate business interests of the party seeking protection.
In order to determine whether an agreement is enforceable, reference may be given to clauses that cover:
- Geographical restrictions
- Clauses that identify the physical region of which the non-compete agreement applies
- Time-frame of the restriction
- The period of time that the restrictions apply – i.e. 6 months
- Activities that are restricted
- Limits the activities that the restricted party may undertake
- Prevents the restricted party from communicating with clients of their former business, with the aim of directing them to their business. This helps protecting ongoing relationships with clients
- This may also relate to non-solicitation of your current employees
To determine whether the agreement is valid and thus enforceable, a Court will conduct a balancing act, weighing up the impact of the restrictions against the interests being protected.
If for example, a clause in a non-compete agreement prevents a former employee from working in a similar industry, anywhere in the world, i.e. preventing a person from making a living, this would likely be considered unreasonable and thus may not be enforceable. Having specific and clearly defined clauses will aid in having the agreement viewed as enforceable.
A Court may consider the clauses of an agreement, and render invalid any clauses that are considered unreasonable, whilst leaving intact the remaining clauses that are viewed as reasonable.
To Sum Up
An effective tool in protecting your legitimate business interests is by entering into a non-compete agreement. Yet they can be complicated to enforce. Receiving advice on these agreements is highly recommended.
If you would like to speak with one of our commercial lawyers on the topic, feel free to contact us at 1300 997 337.