Covenant Not To Compete Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Covenant Not To Compete, written in plain English, along with examples of how it is used.

What is Covenant Not To Compete?

It is a clause in a contract law accordig to which a trader or a person engaged in any kind of profession agrees not to get into competition agaist a paticular party or a specific geographical area.This helps in maintaining good working relation and avoiding unhealthy competition which affects the prices of goods.

History and Meaning of Covenant Not To Compete

A Covenant Not To Compete (also known as a non-compete clause) is an agreement in a contract where an employee agrees not to enter into or start a similar profession or trade in competition with their employer. This clause was first used in the United States in the late 19th century, with courts initially being reluctant to enforce it. However, by the early 20th century, courts became more accepting of these clauses and in many states, they are now enforceable with certain restrictions.

The purpose of a Covenant Not To Compete is to protect an employer's legitimate business interests in areas such as confidential information and trade secrets, as well as maintaining good relationships with customers. It is also intended to prevent employees from taking advantage of their employer's investment in training, resources, and goodwill, and using that knowledge to benefit a competitor.

Examples of Covenant Not To Compete

  1. A tech company asking their employees to sign a contract containing a non-compete clause, preventing them from working with a direct competitor for a certain period after leaving the company.
  2. A franchise business requiring its franchisees to sign a Covenant Not To Compete within their designated territory to protect the franchisor's business.
  3. A seller of an online store including a non-compete clause in the sale agreement, preventing them from starting a similar business in competition with the buyer.

Legal Terms Similar to Covenant Not To Compete

  1. Non-solicitation clauses: An agreement where an employee agrees not to solicit or interact with their former employer's clients or employees for a certain period after leaving the company.
  2. Non-disclosure agreements: A contract where an employee agrees not to disclose confidential information obtained during their employment with the company.
  3. Trade secret laws: Laws that protect confidential information about a company's trade secrets, such as formulas and designs, from being publicly disclosed.