Covenant not to compete is also known as Non-compete clause or compete for agreement. Itâ€™s an agreement between two parties wherein one party agrees not to compete for a specific period and in a similar geographical location. It is governed by American Contract law. An employer often inserts a non-compete clause in the terms and conditions of employment to prevent an employee from disclosing trade secrets or confidential information to the employer’s competitors. Employees are asked to sign this “covenant not to compete” as a prerequisite for working in an employerâ€™s firm. In most cases, employees do not have any issue with this agreement because an employer is ready to pay higher salaries or promotion considerations. Therefore, an employer should urge its employee to sign the confidentiality agreement to prevent leakage companyâ€™s trade secrets. In a very famous case that explains “covenants concept not to compete” wherein Supreme Court of Alaska held that employer/seller could not restrict for a limited period upon employee/buyer. The facts of Data Management, Inc v.A Greene (1988) case is as follows: Green (defendant), an employee of the Data management (plaintiff), had signed a “covenant not to compete for clause wherein defendant agrees not to compete with Data management (plaintiff) for five years after they terminate employment”. However, the employee started competing with the plaintiff in Alaska after their termination. The Court held that this type of non-compete clause is unenforceable because the covenant duration is unreasonable and arbitrary under the public policy doctrine. Furthermore, if five years duration is allowed, then these employees will not earn any money for their livelihood for a longer period, and it will impose an undue burden on states. Moreover, no government can provide social security benefits to so many layoff employees.
Non-Compete ClauseBetween Buyer &Seller
A non-compete clause plays a great role in protecting the goodwill of a seller. In sales of goods contract, where there are two parties, namely buyer and seller. A non-compete clause is intentionally inserted to restrain the buyers from initiating a similar kind of business. For example, seller (A) has a business of watch manufacturing and sales of the watch in Columbia district, and he also has a good reputation in the market. Buyer (B) is a usual customer of that seller. Now buyer (B) is also thinking of starting a business of watch selling. Seller (A) has agreed with the buyer that he cannot start a similar watch manufacturing business in the Columbia district for two years. This agreement is called a non-compete clause. The buyer is most often ready to sign this clause in exchange for certain benefits, like he might get an expensive watch in a lower price range, etc.
A Non-Compete Clause In Different States of the U.S.A.
It is highlighted that opinion of courts do varies concerning covenant not to compete. Some judges think this covenant should be following common law contract principles and must not be against public policy. For example, in a case, Karpinski v. Ingrasci, which the Appellate Division of the Supreme Court of New York heard in the year 1970, a dentist (an employee) was restrained by the employer (Hospital) from doing similar profession when he will leave this hospital. It means he is not allowed to carry his profession ever as a dentist. Supreme Court Justice Arthur E. Blauvelt held that this type of restriction is unreasonable. It is pertinent to note that some United States of America states disregard this “Covenant not to compete” clause in its entirety. For example, California law did not recognize non-compete clauses and considered them void unless a code explicitly enforced it.
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