That’s an oxymoron. Why would you need a non-compete for a strategic alliance?
The whole idea behind developing a strategic alliance is to join forces, create a business partnership, leverage each other’s resources. It seems counter-intuitive and downright offensive to be talking about non-competition at a time when you should be focusing on synergy.
Raise the Issue
The truth is that non-competition is the elephant in the room. Neither party wants to bring it up or discuss it, but it may suddenly appear in the agreement. Or if it doesn’t, then one or both parties may secretly not share their best information because they are afraid their strategic “partner” may steal it and use it to compete with them.
Don’t shy away from the issue. It is important to bring it up early, to create an understanding and set some expectations. By talking about it, you diffuse the problem. Both sides are clear about what they are contributing to the relationship and both sides get some comfort and ideally some protection that collaboration will not breed competition.
There are many different types of non-compete provisions. What is important is to pick one that supports your business strategy. Frankly, if you are new to a field, you don’t have much to lose by collaborating. And if you expect your contributions to the relationship to grow over time, then you may be able to negotiate a more favorable deal later. In that case a weak non-compete or no non-compete may be appropriate for starting out the relationship.
On the other hand, if you have a lot to lose, then a strong non-compete may be in order. For example, imagine you are the leader in your industry with a good reputation and a blue chip list of clients. You want to partner with a young technology company with a hot new product. The risk is that you introduce your best clients to your new technology partner, and then over time you get cut out of the deal or worse, your technology partner starts to refer your clients to your competitor. What you need is a good non-compete.
Global Non-Compete. This is the most common. It is an absolute prohibition on competition. Each party must define what their business is in sufficient detail that the other party agrees not to compete in that field. This is a very sharp knife because it cuts out a whole major area of business that you agree to give up. It is also the most powerful protection because it gives the other party comfort to collaborate knowing you will not compete against them. For a good example of a “global non-compete” check out this Non-Compete Agreement.
Limited Non-Compete. It is often difficult to define how your business is different from your strategic partner. In fact, they may be the same. Regardless, you may each agree to give up some potential business for the sake of collaboration. A “limited” non-compete is a way to define specific areas that the two parties agree they not to compete, without having to give up the whole field. Historically, the most common way to limit the non-compete provision was by geography or setting a radius in miles. Collaborators would agree to define their territories by country, state, city or zip code. Today, with the advent of the Internet, it may not be practical to define your business solely based on physical location. As an alternative, newer more creative approaches limit non-competition by type of product or service, type of customer, market segment, distribution channel, or social media.
Right of First Refusal. A variation on the limited non-compete is a reciprocal “right of first refusal” or “ROFR”. The ROFR works well when both parties are in the same line of business, but as between them, they agree to exclusively refer a certain type of transaction. Under the ROFR, one party agrees to notify the other party of a potential lead for the specific type of transaction. The other party will have the right to pursue the transaction by accepting or declining its participation within 10 days (or other agreed upon time frame). The referring party will receive a commission or be included as a contractor to perform service or manage a portion of the deal. This type of reciprocal ROFR works well where the two parties recognize they are likely to compete with each other, but agree to give each other a first shot at a specific type of business.
Other Protection. A good non-compete or ROFR provision does not stand alone. There are other complementary terms that you may want to include in your collaboration agreement that will help minimize the risk of competition, such as provisions for confidentiality, non-solicitation, non-disparagement, and non-circumvention. In addition, you can also reduce competition by protecting your intellectual property with patents, copyrights, trademarks and trade secrets, which automatically provide you with exclusive rights by law.
None-at-all. Although it is our job as lawyers to recommend various legal protections, sometimes it is best to use none at all when you are just starting out in an industry or you value the strategic relationship (or the potential opportunity) more than your own business. In those cases, it may be premature or inappropriate to require exclusivity or non-competition protection. Once you have acquired the experience and established your position in the market place, you can negotiate the appropriate legal protections later.
The key to negotiating non-competes is to consider what is most important to protect in your business. Is it your customers? Your systems or processes? Your employees? Your knowledge? Your inventions? If you focus on the key assets, you can then develop a non-compete strategy that will best protect your business.
Roger Glovsky is a business lawyer who believes legal documents should be accessible, affordable and comprehensible. As author of ContractsGuru.com, Roger coaches business owners how to draft and negotiate their own contracts through workshops, teleseminars and online programs. As founder of LEXpertise.com, he plans to make it easier for business owners to find the right legal documents when they need them. Originally from Massachusetts, he now lives in Boulder, Colorado.