On Restrictive Covenants

I did not start July with the plan to make it Restrictive Covenants Month! But here we are.

A restrictive covenant is a condition that restricts, limits, prohibits, or prevents the actions of someone named in an enforceable agreement.

When talking about our expertise-based businesses, the restrictive covenants we worry about are (cue spooky font):

Previously, we covered non-disclosure agreements (you can find the post here). Next week, I will cover non-solicitation covenants. This week, it’s non-competes turn.

A non-compete is a restrictive covenant that prevents you from providing services (i) to a competitor of your client or (ii) that compete with your client.

These restrictions are often buried in the miscellany of services agreements and confidentiality agreements. You must read everything!

You know I am tweaked by the overuse of NDAs, but I am on a mission to eliminate non-competes, with the limited exception of a seller of a business agreeing not to turn around and create a business that competes with the buyer.

A typical non-compete provision:

This is provision greatly restricts your ability to seek and work with similar clients. And what is a group of similar clients? A niche!

Non-competes are the enemy of strong positioning.

Here is how I suggest you respond:

Always try to avoid a non-compete provision. Point the client to the non-disclosure and non-use obligations, which are surely elsewhere in the agreement. So long as you are using your expertise, not the client’s confidential information, there is no reason to limit who you can work for.

That said, you are most likely to get pushback if you are a subcontractor. The prime contractor may justifiably object to you poaching the end client. In this case, narrow the scope as much as possible to the specific engagement.

Any language about “proposed business or business interests” is especially far-reaching and deadly. Never, never, never agree to give up your existing relationships.

For kicks and giggles, the most egregious non-compete I’ve ever reviewed.

This isn’t a restrictive covenant; it is an elimination covenant, making it virtually impossible to do business. Any sales activity in your niche would be a breach.

Long story short: When it comes to non-compete provisions for engagements using your expertise, Just 👏🏽 Say 👏🏽 No 👏🏽.

Have questions, Hit me up!