A covenant not to compete is an agreement or contract that prevents or restains a person from performing a lawful profession, trade, or business for a period of time. For instance, an engineering firm may want to restrain departing employees from working at competing companies for a certain period of time. The rationale behind these noncompetition provisions is based on the argument that a departing employee will inevitably use concepts, ideas, and potentially trade secrets learned while working at the company once it goes to work for a competing firm. What companies regard as valuable IP is often very broad and goes beyond the legal definition of trade secrets (e.g. employeed trainning, business methods, general experience gained while working, etc.) The regulation of these contracts is a matter of state law and varies from state to state. In general, however, any contract that presents a person from performing his lawful profession or business is generally considered to restrain free trade and is not favored by the corts. Some states, such as California, prohibit these type of restrains on trade. These contracts are enforsable when they meet the requirements of 1) consideration (i.e. the employee must receive something in exchange from it), 2) protection of a legitimate business interest, and 3) reasonabless of the restrain (duration, scope, etc).

Covenants not to compete are intimately related to trade secrets. In fact, companies use these contract to protect their "intellectual property" (defined in more general terms than its legal definition) and competitive advantage. While companies may not be able to enforce some of the noncompetition provisions in certain states, they always can prohibit an employee from using "confidential information" (i.e. trade secrets). If the company can demonstrate that a departing employee is using information that meets the legal requirements of trade secret, it can file a lawsuit to prevent this from happening and seek compensation for the damages caused. The success of these lawsuits greatly depends on the specificity of the trade secret and the company's trade secret management and security plan (e.g. the nature of the confidentiality agreement, how the company treats the secret information, etc.).

Primary Reference:
[1] Stim, R. "Intellectual Property. Patents, Trademarks, and Copyrights" West Legal Studies.
[2] Black's Law Dictionary 5th ed., (West Publishing, 1979).