What Is a Non-Compete Agreement?

A Non-Compete Agreement is a written contract in which one party agrees not to engage in certain competitive activities for a defined period of time after a business relationship ends.

Depending on the circumstances, the agreement may restrict:

• Working for a direct competitor
• Starting a competing business
• Soliciting customers
• Recruiting employees
• Using confidential business information
• Operating within certain geographic areas

A Non-Compete Agreement commonly includes:

• Names of the parties
• Business relationship
• Scope of restricted activities
• Geographic limitations
• Time restrictions
• Protected business interests
• Exceptions
• Remedies for breach
• Governing law
• Signature requirements

Non-Compete Agreements are commonly used for:

• Employment contracts
• Executive employment
• Independent contractor relationships
• Business sales
• Franchise agreements
• Partnership agreements
• Consulting services
• Technology companies
• Professional service businesses

A properly drafted agreement helps define reasonable restrictions while protecting legitimate business interests.

Why a Non-Compete Agreement Is Important

Businesses often invest significant time and resources in developing customer relationships, confidential information, proprietary processes, and competitive advantages.

Without appropriate contractual protections, former employees or business partners may use sensitive information to compete directly.

A Non-Compete Agreement helps:

• Protect confidential business information
• Safeguard customer relationships
• Protect trade secrets
• Preserve competitive advantages
• Reduce unfair competition
• Clarify post-relationship obligations
• Create written evidence of agreed restrictions

A carefully drafted agreement balances business protection with reasonable limitations on future activities.

Before You Start Creating a Non-Compete Agreement

Before preparing the agreement, the parties should identify the legitimate business interests requiring protection.

Important information may include:

• Legal names of the parties
• Business information
• Employment or business relationship
• Restricted activities
• Geographic area
• Restriction period
• Protected confidential information
• Applicable legal requirements

Because non-compete laws vary widely by jurisdiction, reviewing applicable state or local law is an important step before drafting the agreement.

Step-by-Step Guide to Creating a Non-Compete Agreement

Step 1. Identify the Parties

The agreement should clearly identify everyone involved.

Protected Business

Include:

• Full legal name
• Business name
• Business address
• Contact information

Restricted Party

Include:

• Full legal name
• Address
• Position or relationship
• Contact information

Proper identification ensures the agreement clearly defines who is bound by its terms.

Step 2. Describe the Business Relationship

The agreement should explain why the parties are entering into the Non-Compete Agreement.

Common relationships include:

• Employment
• Independent contractor services
• Sale of a business
• Partnership
• Consulting arrangement

Clearly identifying the relationship provides context for the restrictions.

Step 3. Identify the Legitimate Business Interests

A Non-Compete Agreement should clearly explain what business interests are being protected.

Examples include:

• Trade secrets
• Confidential business information
• Customer relationships
• Vendor relationships
• Pricing strategies
• Proprietary software
• Business methods
• Marketing strategies
• Specialized training

Clearly identifying protected interests helps support the purpose of the agreement.

Step 4. Define Restricted Competitive Activities

The agreement should clearly explain which competitive activities are restricted.

Examples include:

• Operating a competing business
• Working for direct competitors
• Selling competing products
• Providing competing services
• Participating in competing ventures

Restrictions should be specific enough to clearly explain prohibited activities.

Step 5. Establish Geographic Limitations

Many Non-Compete Agreements include geographic restrictions.

Examples may include:

• Specific city
• County
• State
• Multi-state region
• Defined market area

The geographic scope should be reasonable in relation to the business interests being protected.

Step 6. Establish the Duration of the Restrictions

The agreement should specify how long the restrictions will remain in effect.

Common periods include:

• Six months
• One year
• Two years
• Longer periods where permitted by applicable law

The duration should be reasonable under the circumstances.

Step 7. Address Confidential Information

Although a Non-Compete Agreement differs from a Non-Disclosure Agreement, it often includes confidentiality provisions.

Protected information may include:

• Customer lists
• Financial information
• Business plans
• Trade secrets
• Technical data
• Marketing strategies

These provisions help reinforce the protection of sensitive information.

Step 8. Include Non-Solicitation Provisions (If Applicable)

Some agreements also restrict certain solicitation activities.

The agreement may prohibit:

• Soliciting customers
• Recruiting employees
• Encouraging clients to terminate relationships
• Interfering with business contracts

These provisions may be included if appropriate for the business relationship.

Step 9. Define Exceptions

The agreement should identify any activities that are not restricted.

Possible exceptions may include:

• Passive investments
• Existing business interests
• Activities specifically approved in writing
• Employment outside the restricted industry

Clearly identifying exceptions helps avoid misunderstandings.

Step 10. Explain Remedies for Breach

The agreement should explain potential consequences if the restrictions are violated.

Possible remedies include:

• Court orders preventing further violations
• Financial damages
• Recovery of legal costs where permitted
• Other remedies available under applicable law

These provisions help emphasize the seriousness of the contractual obligations.

Step 11. Include General Legal Provisions

A Non-Compete Agreement often includes standard contract provisions such as:

• Governing law
• Dispute resolution
• Entire agreement clause
• Amendment procedures
• Assignment restrictions
• Severability clause
• Waiver provisions

These provisions help explain how the agreement will operate if disputes arise.

Step 12. Review the Non-Compete Agreement Before Signing

Before signing, all parties should carefully review the agreement.

Important items to verify include:

• Correct party information
• Business relationship
• Restricted activities
• Geographic limitations
• Restriction period
• Protected business interests
• Legal provisions

A careful review helps ensure the agreement accurately reflects the parties’ intentions.

How to Sign a Non-Compete Agreement

A Non-Compete Agreement becomes effective after the required parties sign the document.

The agreement should include:

• Employer or business signature
• Employee or other party signature
• Date of signing

Depending on the circumstances, additional execution requirements may apply.

Keep Copies of the Signed Agreement

Both parties should keep copies of the completed agreement.

Copies may be useful for:

• Employment records
• Business documentation
• Future reference
• Compliance monitoring
• Resolving disputes

Maintaining organized records helps preserve contractual rights.

Common Mistakes to Avoid

When creating a Non-Compete Agreement, common mistakes include:

• Using overly broad restrictions
• Defining an unreasonable geographic area
• Selecting an excessive restriction period
• Failing to identify legitimate business interests
• Using vague language
• Ignoring state-specific laws
• Omitting confidentiality provisions
• Failing to obtain signatures

A carefully prepared agreement is more likely to provide clear expectations and comply with applicable legal requirements.

Frequently Asked Questions

What Is the Purpose of a Non-Compete Agreement?

Its primary purpose is to protect legitimate business interests by limiting certain competitive activities after a business relationship ends.

Are Non-Compete Agreements Enforceable?

Enforceability varies significantly depending on state and local law. Some jurisdictions restrict or prohibit certain non-compete agreements.

Who Can Sign a Non-Compete Agreement?

Employers, employees, independent contractors, business buyers, business sellers, consultants, and other parties may enter into Non-Compete Agreements where permitted by law.

What Is a Reasonable Non-Compete Period?

Reasonableness depends on the circumstances, industry, applicable law, and the business interests being protected.

Is a Non-Compete Agreement the Same as an NDA?

No. A Non-Disclosure Agreement protects confidential information, while a Non-Compete Agreement restricts certain competitive activities.

Can a Non-Compete Agreement Be Modified?

Yes. The parties may agree to modify the agreement in writing, subject to applicable legal requirements.

Conclusion

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