Generally when we think about non-compete agreements, we think of contracts that companies have employees sign, promising that the employee won’t steal confidential information or directly compete with the company for a certain length of time after leaving.
However, non-compete agreements can also be enforced between two businesses, generally when:
- one company has purchased another company, or
- when companies go into business together as part of a joint venture
When one business purchases another business
If you were going to buy a business, you wouldn’t want the seller to turn around and open up a competing business in across the street, right? A non-compete agreement is one way to prevent that from happening.
For example, if the owner of a bakery decides to purchase the ice cream shop next door, the bakery owners might ask the ice cream shop sellers to enter a non-compete contract agreeing not to open another ice cream store within a certain distance of the bakery/ice cream shop location.
When businesses enter a joint venture together
Joint ventures occur frequently, and they are defined as when two or more businesses combine resources to start a business undertaking together. The joint venture may require trade secrets or other confidential information to be shared between the businesses, and a non-compete agreement can protect that property.
For example, if the owners of the bakery and the owners of the ice cream shop decide to start a separate food truck business together, they might enter a non-compete agreement that protects both business’ trade secrets.
Therefore, the bakery owners, who may have access to the ice cream store’s recipes, promise to not use the recipes to make and sell ice cream at their bakery.
Are non-compete agreements between business always valid?
Typically, non-compete agreements entered by businesses are enforceable so long as they are reasonable. That means…
- they can’t give one party complete dominance over the market, and
- they can’t be broader than necessary to achieve the purpose of the agreement
One way to find out if a non-compete agreement between businesses is likely to be enforced is by meeting with an experienced business litigation lawyer, who can look over the contract and give you his best advice.