Non-Compete Clauses: Business Sales vs. Employment Agreements

Non-compete clauses are commonly found in various types of contracts, from employment agreements to business sale contracts. While the overarching goal of a non-compete clause is to protect business interests, the context and specifics can differ greatly between these two types of contracts.

Non-Compete Clauses in the Sale of a Business:

When selling a business, the buyer often wants to ensure that the seller will not start a competing business immediately after the sale. This is to protect the buyer’s investment and ensure that the acquired business retains its value.

Rationale:

• Protection of Investment: The buyer has paid a substantial amount for the business, which would be undermined if the seller started a rival business post-closing.
• Goodwill: Part of what the buyer is purchasing is the business’s goodwill. If the seller starts a competing business, it could divert customers and diminish this goodwill.

Duration and Scope:

The duration and geographic scope of non-competes in business sales are typically broader than in employment agreements. This is because the potential harm to the buyer can be more significant and the seller has received compensation for the sale.

Non-Compete Clauses in Employment Agreements:

Employers use non-compete clauses to protect sensitive information and maintain a competitive edge. They do not want employees, especially those privy to proprietary data or trade secrets, to leave and immediately start working for a competitor or start a competing business.

Rationale:

• Protection of Sensitive Information: An employee might have access to confidential information which could be valuable to competitors.
• Training and Development: Companies invest in training their employees. A non-compete ensures they don't lose this investment to direct competitors.

Duration and Scope:

Given that employees typically don’t receive substantial compensation like business sellers, non-competes in employment agreements are usually more restricted in duration and geographic scope. Courts also scrutinize these clauses closely to ensure they don’t unduly restrict an individual’s right to earn a living.

Distinctions:

• Compensation: In business sales, the seller receives significant compensation for their agreement not to compete, while employees usually don’t receive comparable compensation for their non-compete obligations.
• Scale: Non-competes in business sales often have a broader geographic scope and longer duration than those in employment agreements.
• Nature of Restriction: Business sale non-competes might restrict the seller from starting, owning, or being involved in a similar business. Employment non-competes might simply restrict working for a competitor. How competition is defined can be a significant negotiation point in either case.

Takeaway:

While non-compete clauses in both contexts aim to protect business interests, it is crucial to understand their unique purposes and distinctions. If you are considering including a non-compete in any agreement, it is advisable to consult with legal professionals to ensure your clause is fair, enforceable, and tailored to your needs.

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