What is a Covenant
Not To Compete?


A Covenant is a Promise

Covenants not to compete are usually found in employment contracts but may also be included in other agreements. These covenants generally help to prevent employees from using sensitive information to unfairly compete against a former employer.

Upon the sale of a business or a professional practice, the seller usually agrees not to compete with the new owner for a number of square miles over a specified period of time.

An Example

A lawsuit filed by a unit of American Express accused five former financial planners at the company of violating “noncompete” agreements. The suit, brought in federal court in Colorado, sought to prevent the former employees from pursuing American Express clients. The complaint alleges that the five planners left the company and wrongfully kept records, including client lists.

A lawyer representing the employees said they would vigorously oppose the suit and added: “We don’t believe, that under Colorado law, covenants not to compete can be enforced.”

The lawyer added, “more importantly, we don’t think it’s appropriate that an investment adviser of American Express’s ilk can claim a proprietary interest in a customer account.”

An American Express spokesman said that when advisers are hired, they “sign a contract that basically says if one decides to leave the firm, they won’t solicit [our] clients for additional business nor move client assets with them.”

When is a Promise a Promise?
i.e., enforceable in court

Covenants not to compete can sometimes be difficult to enforce. Once it is established that the basic requirements are met, the courts are not bound by any formula in determining the validity of a covenant. The court will look at all the facts of a particular situation and reach a decision based on what is reasonable under the circumstances.

A court will frown upon a covenant not to compete where a business owner does not give valid, independent consideration in exchange. A simple one-sided agreement “not to compete” will in all likelihood be found to be invalid and unenforceable. This means, for example, that you cannot require a current employee to enter into a covenant not to compete as a condition of continued employment.

Instead, the employer must provide something of value to induce his current employee to enter voluntarily into the covenant. Valuable consideration might include increased salary, a promotion, or additional benefits. You should be careful not to give a token or illusory fringe benefit, or simply "allow" the employee to keep his or her job.



Top of Page      


Shareholder Agreements

The Power of a Brand

What you should know
about disciplinary hearings.

Employment Agreements

Physician Resources


What Courts Look For
Before a court enforces this sort of agreement, it will generally look to see if the following basic conditions were met:

• The covenant is in a signed writing and forms part of a separate agreement.

• Both sides are bound by an exchange of valuable consideration.

• The covenant is reasonable as to its duration, geographic reach and scope of the activity restricted; and is

• not contrary to public policy.





What is a Trade Secret
A trade secret is any tool, data, formula, process, and any other bit of proprietary information that gives your business an advantage over its competitors. This includes your client, patient, supplier or mailing lists. In many states, it is a felony offense to take and use another’s trade secrets.

Our society values free and fair competition in the marketplace while making certain forms of unfair competition a crime. Unfair competition includes taking another’s trade secrets and causing harm to his business as a consequence. On October 16, 1998 Wal-Mart sued Amazon.com for allegedly hiring Wal-Mart’s employees in order to steal the set-up of its elaborate computer system.

To be fully protected, the business owner must make sure all employees with access to a trade secret know that it is one. After you are victimized, your case for trade secret protection will be much more difficult to establish if what you call trade secrets were not being treated like trade secrets all along. You should take the extra precaution of restricting access to sensitive information or clearly labeling it confidential.

Some simple steps you can take to protect your sensitive proprietary assets include:

• Posting a written policy on trade secrets;

• Having employees sign an acknowledgment of confidentiality;

• Signing an employment agreement that contains a covenant not to compete;

• Restricting access to sensitive information and

• Clearly labeling it confidential.

Copyright 1994-2006 Gary Gauthier, Esq.