A covenant not to compete, also called a "nompete agreement" or "non compete clause," is an agreement where one party promises not to compete with the other party in a specified area for a certain period of time. A covenant not to compete can be found in an employment contract or a sale of business contract. In an employment contract, a noncompete clause usually limits the employee’s ability to use the resources from the current employer to benefit a future employer. For example, the noncompete clause can prevent the employee from bringing her current clients to her future work, or using business methods or trade secrets unique to her prior employer. In a sale of business contract, a covenant not to compete usually prevents the buyer of the business from doing the same type of business in a specified area for a certain period of time.
Different states have different attitudes toward a covenant not to compete:
In a majority of states, noncompete clauses are generally allowed, as long as the scope of the restrictions is reasonable. For example, in Wisconsin, covenant not to compete is within the freedom of contract. Wis. Stat. § 103.465 states that restrictive covenants in employment contracts are enforceable, if the restrictions imposed are reasonable, and the employee has consideration before signing the clause. In Selmer Co. v. Rinn, 328 Wis.2d 263, 281 (Ct.App. 2010), the Wisconsin court of appeals stated that “restrictive covenants are analyzed by examining the totality of the circumstances,” and “covenants not to compete are contracts, subject to common law contract principles.”
- A court may find a noncompete unreasonable if it restricts an employee from ever working in the similar line of business, as this restriction is rather broad. For a case that discusses this idea, see Karpinski v. Ingrasci. Here, a dentist agreed to a noncompete with his employer that was reasonable in duration and geography, but the court found the scope of the agreement too broad. While the former employee was unable to practice dentistry (his employer’s practice area), he was able to perform oral surgery.
- According this article, a minority of states, including California, Oregon, and Colorado, void almost all noncompete clauses. California law bars covenants not to compete in most situations: “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.” In Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, the California Supreme Court stated that the law should be read strictly, and not only void the “unreasonable” noncompete clause, but all noncompete clauses, except those allowed as exceptions in the code.
[Last updated in May of 2020 by the Wex Definitions Team]