noncompete agreement

1. A clause in an employment agreement in which an employee consents not to compete against the employer following termination of service. The agreement generally includes a specific length of time and the place or area in which competition is prohibited. For example, a salesperson signs an agreement not to contact the firm's customers for three years after leaving employment with the firm.
2. A contractual arrangement in which a business agrees not to compete with another business. For example, a broadcasting group signs a contract with a cable operator giving the cable operator reduced access to the firm's programming in return for an agreement the cable operator will not buy sports programming from another source.

Case Study An employee of a Minnesota company resigned in 2000 to work for a California firm that made electronic devices similar to those manufactured by his former employer. Following the employee's arrival in California, the new employer filed an injunction to preclude the Minnesota firm from making use of a noncompete agreement that had previously been agreed to by the employee. The Minnesota firm then filed a lawsuit in its home state to enforce the agreement. A Los Angeles County superior court ruled in favor of the California firm and against the noncompete agreement. However, the California Supreme Court subsequently overturned this decision by ruling that the noncompete agreement could be enforced. The decision by the state's high court was somewhat of a surprise, because California law had generally made most noncompete agreements illegal. In practice, the legality and enforcement of these agreements varies widely among the states.