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What is a non-compete agreement?

August 5, 2013

           Over the years, I’ve had several people ask me questions about non-compete agreements. Generally speaking, it is a contract limiting an employee from competing with his employer if the employee were to leave the company for any number of reasons.  These agreements protect a business by restricting the other party from performing similar work for a specific period of time within a certain geographical area.  There are two additional types of agreements which intersect with a non-compete agreement: a non-disclosure agreement (confidentiality agreement) and a non-solicitation agreement.  Oftentimes, all three agreements – that is, the non-compete, non-disclosure, and non-solicitation, are wrapped up into one agreement, which informally referred to as a non-compete.

            For instance, imagine that the owner of a brewery (let’s call it Old Brewery) hires an assistant brewer, spends time and money to train the assistant, teaches him the craft of brewing, and shares with him recipes and special brewing techniques.  After years of investing in the assistant brewer, the owner promotes the assistant to brewmaster.  A couple of months later, the newly promoted brewmaster learns of a new brewery opening up in town (let’s call it New Brewery).  The next week, at a brewing competition, the brewmaster meets the owners of New Brewery.  Knowing the brewmaster’s reputation as an outstanding brewer, New Brewery offers to hire the brewmaster and pay him double the salary.  Needing the money, the brewmaster leaves Old Brewery to work for New Brewery.

            Well, as you can imagine, this does not please the owner of Old Brewery.  The owner ticked off that he spent so much time and money training the brewmaster only to have him leave to compete against Old Brewery – this is where a non-compete would have helped Old Brewery.  Further, the owner is also worried that the brewmaster might share some of the recipes and special brewing techniques with New Brewery – this is where a non-disclosure agreement would have helped Old Brewery.

            Now, replace the brewmaster in the hypo for the top salesperson at Old Brewery.  Consider that Old Brewery, again, spent a lot of time and money training the salesperson.  As a result of that investment, the salesperson became great at selling and developing relationships with customers.  New Brewery knows about these well-developed relationships, and offers to hire the salesperson at double the pay.  So, the salesperson moves on over to New Brewery and starts selling its products by using the relationships he built while at Old Brewery – this is where a non-solicitation agreement would have helped Old Brewery.

            Could the owner of Old Brewery have done anything differently to prevent this type of situation from occurring?  Had the owner required his former employee to enter into a non-compete agreement (along with some other agreements like non-solicitation and non-disclosure), this situation may not have arisen.

            Listen, the point here is not to deny the brewmaster or the salesperson his right to make a living.  Rather, the point is to protect the investment a business makes in its employees.  Entering into these types of agreements at the outset of an employer-employee relationship helps both parties to have a clear understanding of each other’s expectations.

           If you want to further discuss issues involving non-compete agreements, give me a shout.

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