Non-Compete Provisions

In some Procurement situations there may be a need to make sure that the Supplier is not selling competing products. Most of the time it’s because the Buyer has committed to make significant investments in the creation of a new product or service. It could also involve the Buyer making certain volume commitments to the Supplier or the Buyer entering into a form of requirements contract where the Buyer is limited to only purchase from the Supplier. 

In the first case the Buyer wants the non-compete provision so they have a better assurance that they will get the return on the investment they made. In volume purchase situations the Buyer wants to be assured that the Supplier will not be taking actions that would prevent the Buyer from purchasing those committed volumes and winding up either having to purchase items they can’t sell, or pay termination charges on the items they don’t take delivery on. In a requirements situation the Buyer would not want to be limited to only being able to purchase from the Supplier while the Supplier is competing with them or creating other relationships that could impact the Buyer’s ability to make the sale. 

Agreements not to compete can be done by either a separate non-compete agreement between the parties or by the addition of a non-compete section where there is a “covenant not to compete”. A covenant is a formal commitment to do or not do something.

Most covenants to not compete will normally answer the following basic questions:

• Who is agreeing?
• What is the scope of the commitment?
• The description of what is being restricted.
• The term of the restriction.
• The geographical scope of the restriction.

Here’s a simple example

Covenant Not To Compete.

Supplier hereby covenants and agrees that it shall not, directly or indirectly, either on its own or through an agent, joint venture, affiliate, or independent contractor, sell, lease or otherwise distribute the Ajax Product (Part number #______  or any product that contains the functionality and performance set forth below to parties other than Buyer. This covenant shall remain in effect for the term of this agreement and shall apply worldwide.

        Description of Product:

        Restricted functionality and performance

 In the example:

• Who is agreeing: The Supplier
• The scope of the commitment: The Supplier shall not, directly or indirectly, either on its own or through an agent, joint venture, affiliate, or independent contractor,  sell, lease or otherwise distribute the Ajax Product (Part number #______  or any product that contains the functionality and performance set forth below to parties other than Buyer
• The description or scope of the restriction: It would exclude both the named product any other products that had the functionality and performance that was described
• The term of the restriction.  For the term of the Agreement with Buyer
• The geographical scope of the restriction: Worldwide

In the example I used functionality and performance as measures as a Supplier could easily come out with a slightly different product and by including both functionality and performance you could control the extent the Supplier may be able to use the technology. For example, you may not be concerned if substantial functionality wasn’t included or if the performance of the product was significantly less so that it didn’t compete on a price performance basis with the Product you are buying.

If you needed a covenant not to compete in an agreement, there are several additional changes that you would want to make to your agreement. The first is you would want the right of injunctive relief to enforce the covenant. Injunctive relief would allow you to seek a court ordered injunction to prevent the Supplier from further violating the covenant. The second thing is you would also want to modify your limitation of liability provision so the damages you could collect from the breach of the covenant would include lost revenue and profits as those would be the primary damages you would have from the breach of the covenant.

One last comment. Non-compete provisions are a form of a restraint of trade. If the circumstances would make sense for a non-compete provision, you should review it with your law department to ensure that the covenant would not be in violation of anti-trust laws and that it would be enforceable.