covenant not to compete

A covenant not to compete, also called a "noncompete agreement" or "non-compete clause" - 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 typically includes divulging trade secrets / 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 an employment contract, a non-compete clause usually limits the employee’s ability to use the resources from the current employer to benefit a future employer.

• For example, a non-compete clause can prevent a consultant from bringing her current clients to a new consulting firm.
• Alternatively, a noncompete clause could prevent that consultant from joining a new consulting firm for a specified period of time after she stops working for her initial company.

In a sale of business contract, a covenant not to compete prevents the party selling their business from creating a second business which would compete with the one sold for a specified period of time.

The legality of non-compete agreements differs from state to state.

In the majority of states, noncompete clauses are allowed so long as the scope of the restrictions are reasonable.

• Reasonable covenants not to compete are permitted in Wisconsin on freedom of contract grounds so long as consideration is exchanged.
• While the exact definition of a “reasonable” restriction is unclear, some courts have concluded that non-compete clauses barring parties from participating in similar, but not identical, industries are too broad to be considered reasonable.
• In Karpinski v. Ingrasci, the court concluded that a dentist could use a non-compete agreement to temporarily bar a former employee from the field of dentistry but not from the field of oral surgery.
• Additionally, courts tend not to uphold non-compete agreements that bar former employees from obtaining new employment entirely as these clauses act more like penalties to dissuade employees from quitting.

In a minority of states, non-compete agreements are almost entirely prohibited.

• California law bars covenants not to compete in nearly all circumstances.
• In Edwards v. Arthur Anderson, the California Supreme Court determined that the law should be read strictly, and not only void the “unreasonable” noncompete clause, but all noncompete clauses other than those explicitly allowed in the code.

[Last updated in July of 2022 by the Wex Definitions Team]