Employees can be an organisation’s biggest asset, but, on departure, they can also represent its biggest threat. Nowhere is this potential exposure more apparent than at the senior management level, where employees have access, during employment, to confidential information. They may be privy to key strategic plans. They may have inside knowledge regarding what factors and employees have been instrumental in the success of the organisation thus far. They will generally be familiar with the organisation’s weaknesses, strengths and goals, and frequently will have been instrumental in crafting the road map used to achieve those goals. In many jurisdictions, employers seek to minimise this threat by requiring key employees to sign a wide variety of post-termination restrictions or “restrictive covenants”. In a few jurisdictions, such as California, they are unenforceable, but in most U.S. states and countries worldwide, they are enforceable, provided they are properly drafted for the relevant jurisdiction.

Some jurisdictions require particular payments to be made to the ex-employee in exchange for the undertaking not to compete, solicit, etc. In Germany, for example, ex-employers are obliged to pay the individual 50 per cent of his or her former remuneration, throughout the period of the restriction, in exchange for the privilege of protecting its interests this way. Some jurisdictions, notably Austria, Italy and China, impose a statutory limit on the maximum permissible duration of such covenants. In others, such as the United Kingdom, a nuanced assessment of exactly what length and ambit of restriction is “reasonable” must take place when the parties enter into the contract. Getting this wrong is highly problematic, as a restriction which, in the view of the court, seeks to provide too much protection (in terms of the scope or duration) will result in the entire covenant being declared void and unenforceable, leaving the former employer with nothing.

Drafting for application in one jurisdiction is comparatively simple. Well-drafted covenants can deter a former employee from working for a competitor, or taking clients or former colleagues to a competitor in that jurisdiction, for a pre-agreed period. In an era, however, where business is becoming increasingly international, how do prudent employers best protect themselves against unfair competition from former employees on a global basis? What happens when the senior executive moves to a competitor in another jurisdiction, where the law applicable to restrictive covenants differs?

Jurisdictional Differences

Differences in applicable law may prevent full reliance on restrictive covenants. For example, a UK court might consider a covenant preventing the ex-employee from working in a jurisdiction outside the United Kingdom to be reasonable and issue an injunction preventing breach. Enforcement of that injunction in a foreign court, however, is not a given. When requested to intervene in matters involving employer and employee, courts in many jurisdictions will, as a matter of public policy, refuse to enforce an order affecting the individual’s interests if the “mandatory law” in the jurisdiction is more favourable to the individual. A German court, therefore, would refuse to enforce a standard U.S. state or UK covenant proscribing competitive activity (even if enforceable under the law governing the contract) because it could not be enforced in Germany without payment during the restrained period.

Possible Solution

One possible solution open to multinational employers whose major competitors may operate out of different jurisdictions is to address the issue of jurisdictional variation head on. This involves requiring their most senior executives to enter into a series of restrictions that reflect the jurisdictions of possible enforcement. This would mean agreeing specific terms in specific jurisdictions for specific employees. This structure (which involves the parties expressly agreeing that each set of restrictions will be governed by the laws of the jurisdiction of enforcement), allows the covenants to be tailored so as to give each set of restrictions the optimum chance of enforceability in the applicable jurisdiction(s). It also allows the employer to select the jurisdictions that most closely reflect the locations of competitors to which it can least afford to lose its top talent.

This approach requires the employer to incur the cost of obtaining advice in each jurisdiction up front and has the further disadvantage of setting a precedent of differential treatment amongst certain employees or categories of employees which some employers may, understandably, be reluctant to introduce. An employer choosing this approach must be prepared to litigate in foreign jurisdiction(s) to protect its business at home.

It is important to bear in mind that, while securing signature may act as sufficient deterrent, if enforcement is necessary, the ultimate forum of enforcement will remain relevant. Recent English case law (Duarte v Black and Decker [2007] EWHC 2720 (QB)) has confirmed that covenants expressed to be subject to a foreign governing law will not be enforced by the English courts (even if they would be deemed enforceable in the chosen jurisdiction) if those covenants are considered unenforceable as a matter of English law.

Employers who choose to implement this type of structure are therefore advised to identify and focus on the battlegrounds they consider to be most important: those in which the former key employee would, if not properly restricted, represent the biggest threat. As competitors develop, these jurisdictions may change.

Tactical Issues

Introducing covenants can be a challenge. Senior executives may understand the company’s legitimate need to protect its position, but simultaneously be affronted by the lack of trust implicit in requesting their agreement to restrict future activities.

The timing of introduction is key. It is generally easier to secure agreement at the point of hire than in an ongoing employment relationship where such restrictions have never been mentioned. Cultural issues may also play their part. In some jurisdictions, these restrictions will be viewed as de rigueur and are likely therefore to be readily accepted. In others, however, such as the United States (where it is commonplace not to have written contracts even at the most senior levels), employers may face more of a challenge. An employer may want to introduce new restrictions based on a realisation that existing agreed contractual provisions are not fit for purpose—either because domestic law has changed or because it has become clear that by far the biggest threat is posed by an executive in a jurisdiction where restrictions would not be enforceable.

This is a fairly common problem. Many employers have, for example, persuaded employees to sign up to covenants, despite their absence in original contracts, by including the provisions in incentive vehicles, such as share scheme rules. Covenants in standard documents which, when drafted, were intended to apply to a wide variety of employees located in a number of different geographical locations may fall foul of the enforcement rules of the jurisdiction in which the employee works for the company, or to which they may move after termination. The employer may feel that the executive has already been paid handsomely, perhaps in the form of long- or short-term incentive schemes, for the original covenants. The employee may resent being asked to sign more restrictive covenants than accepted previously. In such circumstances, being asked to sign new covenants will nonetheless require fresh consideration.