Non-Compete and Non-Disclosure Agreements

Have you ever entered into a non-compete or non-disclosure agreement (NDA) or understanding of any kind? If not, have you ever wondered what you are expected to do if you are ever presented with such a situation?

Usually, many people confuse non-disclosure and non-compete agreements as being the same and one form of agreement. 

Though you will come across a few cases where it might be true, these 2 legal agreements are legitimately quite different and serve entirely different purposes. Hence, neither of the arrangements needs to be attached with the other.

These two agreements will protect company owners from certain kinds of harm. However, as a company owner, you need to be able to distinguish between the two.

If you fail to differentiate between a non-compete and non-disclosure agreement and end up using the wrong agreement, your business can end up in a very vulnerable position and be susceptible to damage.


What Is A Non-Compete Agreement?

Non compete and non disclosure agreements

It is a one-way agreement where the recipient settles down on not competing against the disclosing party in either of the following:

  • A specific geographic location.
  • A particular business line.
  • For a specific duration.

This non-compete agreement keeps an employee from switching a firm and prevents them from forming their own competitive company in direct competition and near their previous organization.

A non-compete agreement can be treated as an isolated agreement or usually be found as clauses within another significant agreement, like a franchise agreement or an employment contract.

Generally, non-compete agreements will restrict workers from setting up a similar business of their own within a short distance from their previous firm.

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It also states the employee cannot work within a specific period, starting from when they separated from the company. For instance, an organization can make its employees sign a non-compete agreement and prevent them from starting their own business within 40 km of their location for at least a year.

Non-compete agreements/clauses are quite beneficial in discouraging workers from directly forming a competition against their former or parent company. Still, whether they are enforced on employees or not clearly depends on the state you reside in.

Many states have come to the conclusion that non-compete agreements limit freedom of trade and have declined to impose them.

On the contrary, if companies offer monetary reimbursements and include them as part of the non-compete, courts can see these agreements’ validity differently. Companies will financially compensate their employees for not setting up a business within a specific distance or time frame of exiting the company.

Should You Sign A Non-Compete Agreement?

Unless you are employed in a state where non-compete agreements are prohibited, your employer can ask you to sign a contract as one of the terms and conditions of employment.

Put merely, if you want the job, you need to sign the non-compete contract as an organizational requirement. Still, it does not mean you sign anything that that is placed in front of you.

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What Is A Non-Disclosure Agreement?

Non-disclosure agreements (NDAs) are also commonly known as Trade Secret agreements or Confidentiality agreements. Besides the vast array of names, the usual function of an NDA is relatively narrow.

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It is a kind of legal contract that merely restricts or limits an employee, freelancer or independent contractor, prospective affiliates, or business partners from disclosing private and confidential information like documents, trade secrets, etc.

Like non-compete, NDAs are often observed as clauses within a more significant agreement like an employment contract. In other instances, it might be treated entirely as an isolated agreement of a more significant arrangement; such as when 2 firms agree to converse on the likelihood of a merger and sign numerous contracts simultaneously.

The primary advantage of using NDAs is their ability to safeguard the company’s trade secrets, confidential financial information, clientele lists, marketing plans, and other personal information.

These bits of information are generally not accessible to the public. Still, they are inevitably revealed to the other party as an essential part of conducting business.

Should You Sign A Non-Disclosure Agreement?

NDAs and confidential agreements are a surefire way to safeguard all of a company’s confidential information and trade secrets meant to remain secretive. Mostly, there is nothing that can go wrong with signing a non-disclosure agreement, providing you comprehend the terms and conditions of the contract.

The Ultimate Difference between a Non-Compete and Non-Disclosure Agreement

The most significant distinction between the two agreements is their functionality. While a non-compete agreement protects companies from unfair rivalry, a non-disclosure agreement protects a company’s private and confidential information and trade secrets from being exposed to other rivals and the public at large.

The two contracts are designed exclusively to protect businesses’ best interests but cover entirely different topics of significance. The scope of these agreements also differs. Companies can enforce non-compete agreements only if they have a limited scope.

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So, time-bound and geographical restrictions are some of the grounds on which courts can reject non-compete agreements.

Conversely, non-disclosure agreements are rigid and open to much lesser judgment by the authorities and courts. Unless a particular party can legally prove they have insights on confidential information from an external source, courts will typically enforce NDAs.

Moreover, non-compete agreements are one-sided contracts, whereas NDAs are mutual. For instance, when 2 firms establish a joint venture to work on a project, they will most likely disclose confidential and private information amongst each other.

Hence, an NDA will need to clearly specify what information should be kept confidential between each party.