A noncompetition agreement, also called a noncompete or a covenant not to compete, is an agreement where one party promises not to engage in conduct that would increase competition for the other party for a specific period of time. This conduct can include divulging trade secrets or privileged information obtained while working under that employer or entering employment with the employer’s direct business competitor. A covenant not to compete is often found in an employment contract or a sale of business contract.
In the majority of states, noncompetition agreements are allowed so long as the scope of the restrictions are reasonable. The exact definition of reasonable restrictions is usually left up to the courts.
For example, in Karpinski v. Ingrasci, the Court looked to temporal, geographical, and subject-matter restrictions to determine if a noncompetition agreement between dentists was reasonable. Ultimately, the Court concluded that the temporal (permanent) and geographical elements (a small area in upstate New York) were reasonable, but the subject-matter limitation was too broad as the agreement included oral surgery and dentistry, rather than just oral surgery.
Some states ban most noncompetition agreements as a matter of public policy. For example, California’s Business and Professional Code §16600 – Void Contracts states that “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” As a result, noncompetition agreements are void in the state as an unfair restraint on trade.
[Last updated in July of 2023 by the Wex Definitions Team]