Clause primer
Exclusivity and non-compete clause (commercial agreements)
Restricts a party from dealing with others, or from competing with the counterparty, in a defined product line, territory or customer group for a defined period.
Legal information, not legal advice. What a clause does depends on its exact words, the rest of the agreement and the governing law.
Also called: exclusive dealing clause, exclusivity provision, commercial non-compete, exclusive distribution clause. Where you find it: Distribution, reseller and agency agreements, supply and manufacturing agreements, licensing and franchise agreements, joint ventures, and business purchase agreements.
SAMPLE CLAUSE (INVENTED FOR THIS PRIMER)
During the Term, Distributor will not, directly or through any affiliate, market, sell or distribute in the Territory any product that competes with the Products, and Company will not appoint any other distributor for the Products in the Territory. "Territory" means the states listed in Schedule A. Company may continue to sell the Products directly to the accounts listed in Schedule B. If Distributor fails to meet the Minimum Purchase Commitment in any contract year, Company may, as its sole remedy for that shortfall, convert Distributor's appointment to non-exclusive on 30 days' written notice. This Section does not restrict Distributor from acquiring a business that sells competing products if those products account for less than 10 percent of that business's revenue.
How it works
Two-way restriction
The first sentence contains two separate promises: the distributor will not sell competing products, and the company will not appoint another distributor. Exclusivity can run one way or both ways, so check exactly which party is restricted and from what.
Scope: product, territory and customers
The definitions of competing products, Territory and reserved accounts decide how far the restriction reaches. Vague terms such as "similar products" invite disputes, so concrete schedules are commonly used.
Performance link
The minimum purchase commitment ties exclusivity to results, and the remedy converts the appointment instead of ending the agreement. Without such a link, a party may be locked into an exclusive arrangement with a counterparty that is not performing.
Acquisition carve-out
This sentence keeps a corporate acquisition from causing an accidental breach. Also check whether the restriction binds affiliates, which can extend it to the whole group of a future parent company.
Why it is there
Exclusivity lets a party invest in a product, territory or relationship with some assurance that the other side will not undercut it. A non-compete in a business sale protects the goodwill the buyer paid for. Because both forms restrict competition, they are tested for reasonableness of scope and duration and can raise antitrust questions in some circumstances.
How it works with other clauses
- Minimum purchase or performance commitments are often the price of exclusivity, and the remedy for missing them should be read with the termination clause.
- Assignment and change of control provisions affect who is bound if a party is acquired, particularly where the clause covers affiliates.
- Term and survival provisions determine whether any non-compete continues after the agreement ends.
Negotiating it
Who it protects: The party whose market or investment is shielded, and often both parties in a two-way arrangement.
If it protects you
- Clear definitions of competing products, territory and customers, preferably in schedules.
- Coverage of affiliates and indirect activity, so the restriction cannot be avoided through a related entity.
- Injunctive relief language and, for any post-term non-compete, a survival period that is reasonable for the context.
If it runs against you
- Standard ask: narrow the products, territory and duration, and limit the restriction to the term.
- Fallback: accept exclusivity only with a performance-based exit, such as conversion to non-exclusive if the other party misses agreed minimums.
- Carve out acquisitions, existing product lines and passive investments.
Escalate before accepting: An open-ended restriction on "any competing business" that binds all affiliates, survives termination without a defined end date and offers no performance exit should be escalated.
What AI explanations get wrong
- Applying employment non-compete rules to a commercial exclusivity clause. Check: identify the context (distribution, supply, business sale or employment), because courts and statutes often treat these differently.
- Missing that the restriction runs only one way. Check: map each obligation to the party it binds and the activity it covers.
- Overlooking affiliate language. Check: see whether the clause binds affiliates, and consider how an acquisition by a larger group would affect compliance.
Where the law varies
Courts generally assess commercial restrictive covenants for reasonableness, but the tests, the willingness to narrow an overbroad clause and the treatment of covenants tied to a business sale differ by state. Federal and state antitrust law can also apply to exclusive dealing and territorial arrangements.
Sources
- 15 U.S. Code § 1 - Trusts, etc., in restraint of trade illegal; penalty
- 15 U.S. Code § 14 - Sale, etc., on agreement not to use goods of competitor
TOOLS
Need a primer like this for a clause in front of you? The Clause Primer Kit, included in All-access, produces one in this format inside the AI tool you already use, with checks built in. For reviewing whole agreements, see the Commercial Contracts Starter Pack.