Limits how confidential information can be used for competitive purposes, preventing recipients from leveraging disclosed secrets to gain market advantage against the disclosing party.
High Complexity
What This Clause Does
A competitive use restriction clause goes beyond standard confidentiality obligations to specifically prohibit the Receiving Party from using disclosed information to compete against the Disclosing Party. While a standard NDA prevents disclosure of confidential information to third parties, a competitive use clause restricts what the Receiving Party can do with the information internally, including using it to develop competing products, target the Disclosing Party's customers, or gain strategic market insights.
Why This Clause Matters
Prevents Strategic Intelligence Gathering: Without this clause, a competitor could learn your pricing, customer lists, product roadmap, or business strategies and use that knowledge against you, all while technically keeping it "confidential."
Protects Customer Relationships: Explicit restrictions prevent recipients from using disclosed customer information to poach your clients or undercut your relationships.
Addresses the Competitor Problem: When evaluating partnerships, investments, or acquisitions with competitors, this clause ensures the information shared cannot be weaponized if the deal falls through.
Supplements Standard NDA Protection: A basic NDA only prevents disclosure; competitive use restrictions prevent harmful internal use that may not involve any third-party disclosure.
Creates Clear Boundaries: Parties know exactly what they can and cannot do with the information, reducing ambiguity and potential disputes.
Legal Context
Competitive use restrictions occupy a middle ground between confidentiality obligations (generally enforceable) and non-compete agreements (heavily regulated). Courts evaluate these clauses for reasonableness in scope, duration, and geographic reach. Unlike employment non-competes, which restrict a person's ability to work, competitive use clauses in commercial NDAs restrict use of specific information and are generally more favorably viewed by courts. However, overly broad restrictions may be unenforceable as unreasonable restraints of trade. California and other states with strong non-compete prohibitions may scrutinize these clauses more carefully when they effectively function as business non-competes.
Competitive Use Restriction
The Receiving Party agrees that it shall not use the Confidential Information for any purpose that competes with the Disclosing Party's business. The Receiving Party shall use the Confidential Information solely for the purpose of evaluating a potential business relationship between the parties.
Basic Version: Simple restriction tied to permitted purpose. Suitable for preliminary discussions where detailed competitive boundaries are not yet needed.
Competitive Use Restrictions
1. Prohibited Uses. The Receiving Party shall not, directly or indirectly, use any Confidential Information:
(a) To develop, design, manufacture, market, or sell products or services that compete with those of the Disclosing Party;
(b) To solicit, contact, or do business with any customer, client, vendor, or business partner of the Disclosing Party identified in the Confidential Information;
(c) To recruit, hire, or solicit any employee of the Disclosing Party identified in the Confidential Information;
(d) To gain competitive intelligence about the Disclosing Party's business strategies, pricing, costs, or market positioning; or
(e) To assist any third party in any of the foregoing activities.
2. Permitted Purpose. The Receiving Party may use Confidential Information solely for the purpose of [evaluating a potential business transaction/performing its obligations under the parties' existing agreement] (the "Permitted Purpose").
3. Duration. The restrictions in this section shall continue for a period of [three (3)] years following the termination or expiration of this Agreement, or until the Confidential Information no longer qualifies as confidential under this Agreement, whichever occurs first.
4. Residual Knowledge. Nothing in this Agreement shall restrict the Receiving Party from using general knowledge, skills, and experience retained in the unaided memory of its personnel, provided that such use does not involve disclosure of specific Confidential Information or violation of any other provision of this Agreement.
Standard Version: Comprehensive competitive use restrictions with specific prohibited activities, defined permitted purpose, time limits, and residual knowledge carve-out.
Absolute Competitive Use Prohibition
1. Comprehensive Prohibition. The Receiving Party absolutely and unconditionally agrees that neither it nor any of its affiliates, subsidiaries, parents, directors, officers, employees, agents, or representatives shall, at any time during or after the term of this Agreement:
(a) Use any Confidential Information to develop, enhance, manufacture, market, distribute, license, sell, or support any product or service that is competitive with, or a substitute for, any product or service offered, planned, or under development by the Disclosing Party;
(b) Use any Confidential Information to enter into, expand, or improve the Receiving Party's position in any market in which the Disclosing Party operates or plans to operate;
(c) Contact, solicit, divert, or take away any customer, client, account, vendor, supplier, or business relationship of the Disclosing Party, whether or not specifically identified in the Confidential Information;
(d) Recruit, hire, engage, or solicit any current or former employee, contractor, or consultant of the Disclosing Party;
(e) Use any Confidential Information to negotiate, bid, or compete against the Disclosing Party for any business opportunity;
(f) Share insights, analysis, or conclusions derived from Confidential Information with any personnel involved in competitive activities; or
(g) Permit any Confidential Information to influence, inform, or benefit any competitive decision-making, product development, or strategic planning.
2. Clean Team Requirements. The Receiving Party shall limit access to Confidential Information to a designated "clean team" of individuals who are not involved in any competitive activities. The Receiving Party shall provide a list of clean team members to the Disclosing Party and obtain written approval before any changes.
3. Information Barriers. The Receiving Party shall implement and maintain information barriers (ethical walls) to prevent any Confidential Information from reaching personnel involved in competitive products, sales, or strategy.
4. Perpetual Obligation. The competitive use restrictions in this section shall survive termination of this Agreement and shall continue in perpetuity, or for the maximum period permitted by applicable law.
5. Strict Liability. Any violation of this section, regardless of intent or whether it results in actual competitive harm, shall constitute a material breach of this Agreement and entitle the Disclosing Party to all available remedies, including injunctive relief and liquidated damages of $1,000,000 per violation.
Warning - One-Sided: This version imposes sweeping restrictions that may function as a de facto non-compete. Perpetual obligations, strict liability, and million-dollar liquidated damages are likely unenforceable. Receiving Parties should negotiate reasonable time limits, remove liquidated damages, and ensure restrictions are tied to specific confidential information rather than general competitive activity.
1
Tie Restrictions to Specific Information: Push back on restrictions that apply to all competitive activities. Effective clauses should restrict use of specific confidential information, not all competition generally.
2
Negotiate Reasonable Time Limits: Perpetual competitive use restrictions are rarely enforceable. Negotiate for a reasonable duration (1-3 years) that aligns with how long the confidential information remains competitively valuable.
3
Protect Residual Knowledge: Insist on a carve-out allowing your personnel to use general skills and knowledge retained in memory. Without this, employees who see confidential information may be effectively prohibited from working on any competing products.
4
Clarify Permitted Purpose: Ensure the permitted purpose is clearly defined and broad enough to accomplish your business objectives. An overly narrow purpose can make the confidential information useless for legitimate needs.
5
Address Existing Business: If you already compete in some areas, negotiate carve-outs for your existing products and services. The restriction should not force you to exit markets you already serve.
6
Reject Clean Team Requirements: Unless absolutely necessary for the deal, resist requirements to use clean teams or information barriers. These are operationally burdensome and create compliance risks.
Restrictions on All Competition
Language prohibiting you from competing "in any market" where the Disclosing Party operates functions as a non-compete agreement. This may be unenforceable and goes far beyond protecting specific confidential information.
Perpetual or Unreasonably Long Duration
Competitive use restrictions lasting "in perpetuity" or for decades are likely unenforceable and signal overreaching. Reasonable durations typically match the confidentiality period (2-5 years).
No Residual Knowledge Exception
Without a residual knowledge carve-out, your employees could be prohibited from using general industry knowledge they retain from exposure to confidential information. This is both impractical and potentially unenforceable.
Covers Non-Solicitation of All Customers
Prohibitions on contacting "any customer" of the Disclosing Party (whether or not identified in confidential information) function as a customer non-compete, not a confidentiality protection.
Mandatory Clean Teams or Information Barriers
Requirements to establish clean teams create significant operational burden and compliance risk. These should only be accepted when there is a compelling business reason and the deal justifies the overhead.