In the digital age, where online transactions are the norm, businesses often rely on terms of service agreements (or terms of purchase) to protect their interests. However, including a non-compete clause in these agreements can be a double-edged sword, posing legal risks and potential backlash from customers and the legal system.

What is a non-compete clause?

A non-compete clause is a clause that in some way attempts to prevent or preclude someone (an employee, a business partner, or even a client, in B2B or B2C transactions) from “competing” with your business.

Non-compete clauses, along with non-disparagement clauses, non-solicitation clauses, and non-disclosure clauses or agreements, are many “favorites” when it comes to business owners attempting to protect their business and business interests – but you should not use or implement any of these without the benefit of experienced legal counsel, because using or implementing these clauses or agreements in the wrong way or at the wrong time, can actually jeopardize your business! (More to come on these other clauses).

But in this article, here are seven compelling reasons why you shouldn’t hide a non-compete clause in your online terms:

1. They may be illegal.

In many states, non-compete clauses are outright illegal. These states view such agreements as overly restrictive and against public policy, aiming to promote fair competition and employee or market freedom and mobility. Thus, including a non-compete clause in your online terms could expose your business to legal challenges and penalties. Most online businesses are interstate in nature and by “reaching in” to other states, you may be subjecting yourself to legal issues including jurisdiction specific issues involving your online terms, or language in your online terms that violate other state laws.

2. Legal Disapproval / Attitude of the Courts performing Legal Review:

Even in states where non-compete clauses are permitted, courts increasingly disapprove of them. Judges often scrutinize these clauses and, if found enforceable, may work to narrow their scope to protect the interests of the employee or party subject to the agreement. There are efforts under way at both state and federal levels to have non-competition agreements and clauses deemed illegal.

3. Balancing Interests:

Non-compete agreements involve a delicate balancing of interests between the parties. Courts assess factors such as the reasonableness of the restrictions, the duration of the non-compete period, and the potential harm to the worker’s ability to earn a livelihood when evaluating the enforceability of these clauses.

(Personally I have a strong preference against non-competes) as they often unnecessarily limit flexibility of workers and businesses, and I believe there are a variety of much more effective ways to protect your intellectual property and business interests without relying on a non-compete).

4. Signature Requirement:

Most states where non-compete clauses are allowed require that a non-compete agreement be signed in writing. This traditional contractual formality ensures that both parties fully understand and consent to the terms of the agreement. Hiding a non-compete clause in online terms may violate this requirement and render the agreement unenforceable.

5. Legal Gray Area:

Non-compete clauses, even if not directly illegal within a state, may still run afoul of laws governing contracts that restrain trade or commerce. Engaging in practices that restrict competition could invite legal challenges and tarnish your business’s reputation.

6. Alternative Protections:

As mentioned above, there are alternative methods to safeguard confidential information, proprietary systems, and intellectual property without resorting to non-compete clauses. Businesses can utilize non-disclosure agreements (NDAs), trade secret protections, and other contractual safeguards tailored to their specific needs. (Please get in touch or schedule a consultation with me if you have questions about these clauses or agreements in your own business and how to use them effectively).

7. Bad for Business:

From a practical standpoint, hiding a non-compete clause in online terms can be detrimental to your business. Customers and potential partners may view such clauses as overly aggressive or unfair, leading to reputational damage and loss of trust.

In my practice, I always encourage a fair and balanced approach – a “protect yourself AT ALL COSTS” approach to business does not work and does not engender healthy or balanced relationships with your clients, partners or vendors. Which is why in nearly every circumstance I recommend against using unnecessarily protective or overbearing language. A non-compete clause or agreement often falls squarely within this category.

In conclusion, while it may be tempting to include a non-compete clause in your online terms to protect your business interests, the potential risks and negative consequences outweigh the benefits. Instead, businesses should explore alternative means of safeguarding their assets while respecting the rights and mobility of the other parties involved. Transparency, fairness, and legality should always be prioritized in crafting online agreements to foster trust and long-term success within a business.

DISCLAIMER: THE INFORMATION PROVIDED IN THIS POST MAY CONTAIN LEGAL INFORMATION, BUT DOES NOT CONSTITUTE LEGAL ADVICE. NO RELATIONSHIP, INCLUDING ATTORNEY-CLIENT RELATIONSHIP, HAS BEEN FORMED AS A RESULT OF THIS POST. YOU ARE ADVISED TO SEEK THE ADVICE OF AN ATTORNEY LICENSED IN YOUR STATE IF YOU HAVE ANY QUESTIONS.

© 2024 Heather Pearce Campbell, The Legal Website Warrior®

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