A Restrictive Covenant Review clause establishes the terms under which a vendor agrees not to compete with, solicit customers from, or work with competitors of the contracting party during and after the business relationship. This clause typically specifies the geographic scope, duration, and types of activities that are restricted. The clause matters because it protects the company's competitive position, customer relationships, and business investments by preventing vendors from leveraging their access and knowledge to benefit rival companies. However, restrictive covenants are subject to enforceability challenges in many jurisdictions, which scrutinize whether the restrictions are reasonable in scope, duration, and geography.
Courts often refuse to enforce overly broad restrictive covenants, particularly those that extend indefinitely or cover unreasonably large geographic areas. The practical value of this clause depends heavily on your jurisdiction's legal standards—some states (like California) disfavor non-competes entirely, while others enforce them if they protect legitimate business interests. A well-drafted clause should clearly define what "competition" means, specify a reasonable time period (typically 1-3 years), and limit geographic scope to areas where the company actually conducts business.
Before including a restrictive covenant in a vendor agreement, research your jurisdiction's enforceability standards and consult local counsel. Draft the restriction narrowly to cover only legitimate business interests (trade secrets, customer relationships, confidential information) rather than general competition. Specify exact geographic boundaries, reasonable time limits (typically 12-36 months), and clearly define prohibited activities. Consider whether the restriction is truly necessary for this particular vendor relationship, as overly broad covenants may be unenforceable and could damage vendor relationships. If the vendor balks at restrictions, consider alternative protections like confidentiality agreements or customer non-solicitation clauses, which are often more enforceable.
Frequently Asked Questions
What does this clause mean in simple terms?
A Restrictive Covenant Review clause establishes the terms under which a vendor agrees not to compete with, solicit customers from, or work with competitors of the contracting party during and after the business relationship.
Why should I care about this clause?
This clause typically specifies the geographic scope, duration, and types of activities that are restricted.
What are my options?
The clause matters because it protects the company's competitive position, customer relationships, and business investments by preventing vendors from leveraging their access and knowledge to benefit rival companies.
How does this affect small businesses?
However, restrictive covenants are subject to enforceability challenges in many jurisdictions, which scrutinize whether the restrictions are reasonable in scope, duration, and geography.