Keeping sensitive business information a secret can mean the difference between a company’s survival or its demise. Additionally, while competition is an important part of a healthy business market, unfair competition can have serious consequences. To address these potential problems, there are many legal contracts that a business owner can use to their advantage. Two of the most notable are the Non-Compete Agreement and the Non-Disclosure Agreement. Each serves a different function, but the key goal is the same: protecting businesses from potential threats.
What is a Non-Compete Agreement?
Sometimes called a Non-Compete Clause or a Covenant Not To Compete, a Non-Compete Agreement is a legal document in which a person/business asks the subject of the non-compete (typically an employee or potential employee) to not compete with the business in various ways. This typically involves restricting the activities of an employee after they leave a company. For instance, an employer will often require that an employee cannot reveal any trade secrets that they learned during their employment. Other restrictions include preventing the former employee from opening a competing business within a certain geographic zone for a period of time, or even forbidding them from working with their former employer’s direct competitors at all. Generally speaking, one either requires an employee to sign a Non-Compete when they take a job, though in some cases an employer might request that an existing employee sign one due to changing circumstances.
What is a Non-Disclosure Agreement?
A non-disclosure agreement (often abbreviated to just NDA) is a legal document in which a person/business asks the subject of the NDA not to share confidential information the person/business has shared with them. NDAs can be used in a variety of different situations, though they are most often used during the employment process. They also tend to be signed during the start of a potential joint business venture, when two parties are sharing information about their businesses and they want to be sure that the information remains protected, even if the joint venture doesn’t happen.
What Is The Business Value of a Non-Compete or a NDA?
While they are functionally quite different, a Non-Compete Agreement and a Non-Disclosure Agreement are similar in that they are both focused on protecting your business by placing certain restrictions on the actions of another party. With a Non-Compete, this involves making a deal with a potential competitor (whether a former employee or an outsider) that limits how much they can directly compete with your business. For a NDA, this means protecting vital information by limiting what certain parties are legally allowed to discuss.
With Non-Competes, the main focus is protecting against unfair competition. This most often means placing restrictions on former employees that leave a business that prevents them from sharing company secrets or working with a competitor, but they can also be applied to outside figures. Perhaps you are in an industry with a lot of competition and you want to keep the market from expanding too much. Or maybe you live in an area with no competition and want to keep it that way. Either way, it can be used in any situation where a business needs to protect against competition and another party is willing to sign it in exchange for something.
The focus of a Non-Disclosure Agreement is a bit different: it’s all about protecting confidential business information. Though this sometimes factors into a Non-Compete, it is the main point of a NDA. Confidential information can include many things, such as customer and client lists, trade secrets, intellectual property, information on new products, and financial strategies among others. Outside of the obvious employment situations, there are a number of scenarios where you might want to use a NDA. For example, you might be presenting an invention or a new product to a potential investor or business partner, or perhaps you’re sharing financial or marketing information with a prospective buyer of your business. There might also be times when employees need access to confidential and proprietary information of your business during the course of their job
Are They Legal and Enforceable?
Non-Compete Agreements are enforceable throughout the United States, but every state has a slightly different approach to restricting competition. Some states aim to limit the enforceability of Non-Compete Agreements because they are seen as overly severe restrictions on competition. Some states have specific policies that limit such agreements to only certain types of professions, while others make certain requirements based on pay grade. For instance, Illinois forbids Non-Compete Agreements between an employer and low-wage employees. Additionally, courts tend to demand that Non-Competes are specific in their wording: an overly broad non-compete might be deemed unenforceable.
Similarly, a Non-Disclosure Agreement is far from invincible. For one, NDAs don’t prevent anyone from sharing vital information, it simply means that there are consequences for them if they do. Given today’s world of internet and anonymous leaks, it can be difficult to fully enforce a Non-Disclosure Agreement, especially depending on how many people know the confidential information in question. Additionally, there has been a growing pushback against NDAs, with some claiming that they help facilitate abusive and exploitative behavior.
Remember To Be Reasonable
Ultimately, an NDA or Non-Compete boils down to someone voluntarily giving up a right that they would otherwise have. As such, one should always aim to be reasonable with their offer, ideally providing something worthwhile in return. This can go a long way towards ensuring that your business and its secrets are kept safe.
 Kenton, W. (2021, February 16). Non-Compete agreements: What you need to know. Investopedia. https://www.investopedia.com/terms/n/noncompete-agreement.asp.
 Kenton, W.
 Harroch, R. (2016, March 10). The key elements of non-disclosure agreements. Forbes. https://www.forbes.com/sites/allbusiness/2016/03/10/the-key-elements-of-non-disclosure-agreements/.
 Steinmeyer, P. A., &; Clark, D. J. (2019). Non-compete laws: Illinois. Practical Law. https://www.acc.com/sites/default/files/2019-02/2018-04-Non-Compete-Laws-Illinois.pdf.
 Debra S. Katz, L. J. B. (2019, December 11). The call to ban NDAs is well-intentioned. But it puts the burden on victims. The Washington Post. https://www.washingtonpost.com/opinions/banning-confidentiality-agreements-wont-solve-sexual-harassment/2019/12/10/13edbeba-1b74-11ea-8d58-5ac3600967a1_story.html.