Non-Compete Clause and Non-Disclosure Agreements – What are they? Why are they used?

This article explains why companies use non-compete clauses and non-disclosure agreements and the reasonable terms and conditions surrounding them.

Most businesses feel they have a special product or service to offer. Every company wants to protect whatever advantage they have to succeed in the marketplace. Non-disclosure agreements and non-compete clauses are two legal tools used in business to protect company interests. 

Non-Disclosure Agreements

Non-disclosure agreements are used in a variety of businesses and fields. Companies use them to protect their intellectual property and maintain their competitive advantage in the marketplace. Everyone from one time manufacturing plant visitors to mainline employees and executives can be required to sign non-disclosure agreement forms. Those signing these forms agree not to share the trade secrets, processes, strategies, inventions, and other competitive advantages of the company. There can be severe legal penalties for individuals who fail to comply with non-disclosure agreements and share confidential information.

Non-Compete Clauses

Non-compete clauses are documents employees sign regarding their behavior when they leave a company. Companies use non-compete clauses to ensure that employees do not work for direct competitors. They do not want former employees to share strategies, inventions, ideas, or processes with their direct competitors. This undermines the company’s competitive advantage and could have massive financial ramifications. Effective non-compete clauses must be industry specific and for a specified amount of time.

Limitations

A non-compete clause must be reasonable to be enforceable. Imagine that two partners own a taco shop. They have an irreconcilable disagreement and one partner decides to leave the taco business. It would be unreasonable to expect that the leaving partner could never work in a restaurant again. A reasonable expectation and non-compete clause would be that the leaving partner could not open a taco shop and be in direct competition in the same market for one year from the departure date.

Another example is if a software developer wants to leave a company and is expected to sign a non-compete clause that doesn’t allow him to ever write code again. This is unreasonable in fair trade and business dealings court. The software developer has a unique skill set and it is unreasonable to expect them to never use that skill set or write code again. A non-compete clause that prohibits employment for a direct competitor is reasonable. The non-compete clause should not take away someone’s ability to earn a living and make money for the rest of their life. It would be fine if this developer moved from a company writing insurance software to an unrelated industry writing software for a personal fitness company. Non-compete clauses should not be punitive tools because companies do not like employees leaving for other opportunities.

Some states are moving away from enforcing non-compete clauses. California looks to be moving in that direction and other states could follow after. For this reason, non-compete clauses could become more complex in the future.

Likely Expectations

The higher a person is in the company, the more likely they are to be required to sign a non-disclosure agreement and non-compete clause when leaving a company. Executives will likely have additional forms to sign when they leave a job. Non-compete clauses and non-disclosure agreements can also be expected when a partner is bought out by another. It is expected that these employees will not talk about company customers or clients, trade secrets, inventions, strategic plans and other intellectual property. The expectation that employees leaving on their own should not discuss trade secrets and strategies with competitors is reasonable and likely to be upheld in court.

Conclusion

Non-disclosure agreements and non-compete clauses are good business tools to protect intellectual property and business interests. They require preparation and a clear process to follow. For help preparing your contracts or for advice on non-disclosure and non-compete clause issues, contact our business attorneys today.

DISCLAIMER- This website talks about various business topics and various legal situations. The statements given by the host or guests or author do not constitute legal advice given to any individual or business. The host and/or guests are giving their personal opinion based on their personal and professional experience. Examples given are given broadly as examples with names removed for privacy. If you do have questions about your business or legal situation, please reach out and email info@businesslegalmanagement.com to discus your business or legal situation.