To some extent, all non-competes inhibit the rep’s ability to run its business. The scope is usually defined by the specific prohibitions, e.g., length of time, geographic territory, the principals and/or customers, hiring of personnel and other matters. Sometimes there is a non-compete or other prohibition that can be imposed on a principal (e.g., granting the rep the exclusive right to sell).

Most jurisdictions, at least to some extent, allow non-compete provisions. In certain scenarios, however, the non-compete may be attacked as being too broad or otherwise unenforceable. And, very often, interpreting the enforceability is not easy.

There are substantial practical differences between pre- and post-termination non-compete provisions. And, the scope of a non-compete can be a lot different than the rep thinks.

During the term of a relationship between a rep and a principal, there can be an express non-compete and sometimes the non-compete can be implied, the scope of which has a major impact on both the current and future business of the rep. Generally, the scope of an implied non-compete relates to representation of a direct competitor at the assigned customer or in the assigned geographic territory. But, there are variations on what is considered prohibited competition and each case can be different based on specific facts. An example can be where principal “A” has limitations as to the kinds of products it can make that are different than the products of principal “B.” These differences may include types of products, sizes, material composition or other variations. Here, it is important to determine if there is, or can be, an overlap. Also, there are instances where the principals expressly or implicitly waive a potential conflict. Among a number of other circumstances, this can happen because the principals recognize either their practical limitations in the products and/or customers they are really interested in pursuing and/or that the rep can make a good case for the customer’s appreciation of being able to deal with one rep for multiple, different, and even substantially similar products. Another reason can be where the customer is going to award the business to more than one supplier and the rep represents more than one qualified supplier who can produce products that meet the customer’s needs.

What should be of significant concern to the rep is the express written non-compete agreement that operates during the tenure of the rep/principal relationship, but extends post-termination. A post-termination provision can have varying terminology. Because the agreement is usually unique on a case-by-case basis, it is critical that the rep understand the scope of the provision. It is the scope of the prohibition that will affect its impact. Therefore, the rep must fully understand what will be involved and for how long the non-compete will be in effect.

The best approach is to avoid or limit a non-compete provision during the relationship and avoid any post-termination non-compete provisions. If a principal insists on some form of non-compete, a determination must be made by the rep, before signing anything, as to how these limitations will impact its business. In essence, the rep needs to determine how broad and how long the provision will deny the rep’s ability to take on a competing principal or other prohibition, what will be sacrificed by doing so, and what really will be that sacrifice’s economic impact on the rep’s firm.

The rep must fully understand what will be involved and for how long the non-compete will be in effect.

Further, if a rep is entitled to post-termination commissions, the maximum length of the post-termination non-compete should not extend beyond the principal’s obligation to pay those post-termination commissions. It is best to have a limit on the post-termination non-compete to the specific products to the specific customers upon which the Rep is to receive post-termination commissions.

In sum, avoid non-competes whenever possible. And, if compelled to accept some limitations, determine the impact, both current and future, in every specific instance. Interpreting the scope of non-competes is not for amateurs; this analysis can only be obtained from a lawyer familiar with the applicable law, the rep business and the rep’s specific facts.

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