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Saturday, August 26, 2006

Snitch in time

A non-competition clause prevents an employee from revealing information on the company after he leaves.

By Riva Khristine Maala

A covenant against competition is a formal agreement where the employee promises his employer not to do similar work within a designated area for a specified period once he leaves the company. The employee normally signs the covenant before he is hired, and it's either a separate document or a paragraph in his employment contract. It's very similar to a non-disclosure agreement.

The reason for a company insisting on a covenant is that it spent years attracting customers, so it's important that they don't fall into the hands of competitors once any of its employees leaves for another company and is tempted to reveal sensitive information about it. No specific laws apply to non-competition agreements, but they're generally legal. And any party demanding one may establish convenient stipulations, terms, and conditions provided they don't go against the law, good morals and customs, and public order and policy.

Some people may find non-competition agreements particularly harsh since they stop any signatory from making a living in the field specified and for the time specified once he leaves. On the other hand, the potential damage that a disgruntled former employee can do-especially one with intimate knowledge of his former company's inner workings-may be incalculable; hence his former employer is entitled to as much protection as he is.

The use of a non-competition clause can sometimes be controversial, so to recommend it the agreement must be reasonable and specific, and with defined time frames and areas of coverage. Equally, it must neither be ambiguous nor too broad as to give the employer too much power over former employees: It must describe in detail what kind of business or services the employee may not provide once he leaves and for how long (indeed, the period may vary depending on the employee's seniority-or how close he has worked with trade secrets-though two years from his separation is generally acceptable) and the penalties he courts if he violates the covenant.

A non-competition agreement also comes into play when one party sells a business and the buyer wants to make sure that the seller does not open a similar business that would compete directly with the business he had just sold. The seller should not undermine the goodwill that was part of the price paid by the buyer.

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