levin insights

Definition of Business in Non-Competes

September 15, 2021

Companies often use non-competes to protect their business ideas from departing employees, advisors, and consultants. Sometimes non-competes are structured as a separate agreement, other times it appears as language embedded within the employment agreement or inventions assignment agreement.  A key property of a non-compete is centered around the definition of the company’s “Business”.

As a rule of thumb, the broader the business is defined, the more restrictive it is to employees. The employer will prefer a broadly restrictive term which will capture both current operations, similar operations, and future pivots of the company.

On the other hand, employees will prefer to narrow the scope of the definition. The narrower the definition is, the easier it would be for them to work in a similar field in the future.

Courts are less likely to honor non-compete provisions deemed “unreasonable”. This definition of unreasonable has a wide variation state to state, so the balance is somewhere along the lines of broad enough to provide a sufficient level of comfort but not overly broad and generic.

This is how a common business definition would appear in a non-compete: “Business” shall mean [BUSINESS DEFINITION], or any other business that the Corporation engages in during the term of employee’s engagement with the Corporation.

Example 1: Fuel Pod Inc. is a company that creates energy bars out of organic ingredients.

The employer will prefer broad language such as “any business engaged in manufacturing, production and distribution of organic food products.” This broad language will allow Fuel Pod to expand into additional food products and even beverages while still capturing the business definition to tie the employee into the non-compete.

The employee will prefer a narrow scope such as “any business engaged in manufacturing, production and distribution of organic energy bars.” By using this specific language, the employee can work for similar companies, like an organic beverage company or nut butter company.

Example 2: Lunarfy Inc. is a company that wants to settle people on the moon.

The employer will probably prefer the language “any business engaged in space research and travel.”

The employee will prefer to narrow to scope to “any business engaged in moon settlement.”

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