WHAT YOU NEED TO KNOW TO PROTECT YOUR BUSINESS WITH A NON-COMPETE CONTRACT
November 17, 2011
You can’t afford to lose market share, clients or employees. No one can afford to have the core drivers of his or her business taken away by someone that you’ve invested time, money and energy into developing.
If you don’t have a comprehensive non-compete contract in place with your employees or business partners that protects your business, consider yourself at risk.
Non-compete contracts prohibit a third party from competing against your business after the relationship has been terminated. These types of contracts are based on three concepts: (a) competition being restricted during a certain period of time, (b) competition being restricted within a certain industry or business, and (c) competition being restricted within a certain geographic region.
As legal counsel for businesses primarily located in Raleigh and Durham, NC, I’m asked routinely by my clients to advise on non-compete contracts. The general consensus of my clients is that these types of contracts are “difficult to enforce” or “not enforceable.” Under North Carolina law, however, there are clear examples of courts enforcing non-compete contracts when drafted appropriately.
In addition, and this can’t be emphasized enough–non-compete contracts can serve as a significant practical deterrent for those that may consider competing with your business. Simply having a reasonable non-compete contract as part of your normal hiring process or company formation process, can send a clear message. You plan to protect the value that you’ve built over the years. You plan to protect your business from an employee or business partner that may be tempted to undercut your pricing and compete with you in the market.
You should work with your business attorney to outline a comprehensive scope of prohibited activities for these third parties. Such an outline may reveal that you need other documents in addition to a non-compete contract, such as a Non-Disclosure Agreement or a Non-Solicitation Agreement. These types of restrictions can usually be worked into one comprehensive agreement.
Finally, in order to have an enforceable non-compete contract, you must ensure that the party you are contracting with is receiving some form of consideration.
Consideration is a very simple concept that a lot of business owners and executives fail to understand at their peril. In a nutshell, the third party has to receive something of value in exchange for executing and delivering the non-competition agreement to you or your company.
Most of my clients incorporate a non-compete contract into their hiring process. In that situation, the third party is clearly receiving something of value. If you’ve missed that window, consider implementing a non-compete contract when bonuses and/or promotions are given.
Overall, spending relatively small amounts of money on non-compete contracts on the front end usually saves thousands of dollars (and in some cases, millions of dollars) in lost revenue and legal fees.