The US courts will apply US law when a UK company attempts to enforce restrictive covenants in the US. This can become complicated because the laws of the 50 states vary with respect to restrictive covenants, sometimes dramatically.
Having a choice of law provision in employee agreements will help, unless the restrictions are too broad and violate the public policy of the relevant state. Because many states take a more employer-friendly approach than does English law, it may be worthwhile choosing the law of a US jurisdiction as your choice of law, as long as there is a sufficient connection to that state.
The variations from state to state can be striking. For example, Florida is very employer-friendly regarding the enforcement of restrictive covenants. Conversely, employee-friendly California will not enforce a noncompetition provision, enforcing only non-solicitation provisions. In the middle of the country, Texas will enforce non-competes drafted for narrow purposes, such as the protection of confidential information. Therefore, employers in the United States should take care in choosing an appropriate state law.
Almost all states will only enforce a restrictive covenant if a ‘protectable interest’ justifies the restriction. This means that it is generally ineffective to require all employees to sign a restrictive covenant. In general, courts in the US define protectable interest the same way as English courts, but some states are very specific. For example, in Florida, the law defines ‘protectable interest’ as protection of trade secrets, confidential information, substantial relationships with existing customers, goodwill and specialised training of employees. Most courts do not require the agreement to identify the protectable interest, but it is still a good practice to assist enforcement.
Virtually all jurisdictions in the US will enforce restrictive covenants only to the extent that they are reasonable in both geographic scope and duration. Geographic scope will depend upon the nature of the protectable interest. For example, a US-wide restriction might be appropriate for a national sales manager but not for a regional sales manager. However, be cautious about the differences in state law. Some states will enforce a restrictive covenant only within a certain distance of where an employee worked (such as a 50-mile radius).
Reasonable temporal restrictions depend on the nature of the protectable interest and the particularity of the state law. For an employee in a hightech business, where the importance of a particular piece of software may only have a short lifespan, a short duration may be appropriate if the protectable interest is solely confidential information, but a longer term may be justified if the protectable interest is customer relations. Again, state laws differ: Florida law states that restrictive covenants are presumed enforceable if the duration is between six and 18 months; other states may say anything longer than 12 months is unreasonable.
Many states will not enforce an agreement that is too broad in any way. Others, such as Florida, will enforce a broad agreement to the extent the court believes reasonable. Other states take the English law approach, allowing the court to strike the overly broad provision but enforce the rest (e.g. finding a three-year non-competition covenant unreasonable but a three-year non-solicitation covenant reasonable).
Employers should review covenants regularly and be aware of changes in state law. For example, previously Georgia courts rarely enforced restrictive covenants. However, the Georgia Legislature passed new rules for restrictive covenants in 2011, and Georgia is now very pro-enforcement in respect of covenants post-dating the new law. Therefore, any company with employees in Georgia should have new covenants signed after the date of the new law.
All courts in the US require that an employee receive some consideration for agreeing to a restrictive covenant. In most jurisdictions, the employment itself is ample consideration, so long as the agreement is signed at the initiation of employment. Most states also recognise ‘continued employment’ as a legitimate consideration, but some will require additional pay or benefits be provided at the time the new covenants are signed.
Finally, no matter how well-drafted a covenant may be, enforcement depends on gathering evidence of the departing employee’s breach. Departing employees commonly take with them tools that will be valuable in their new employment, whether customer lists or product secrets. Investing in some computer forensics immediately upon an employee’s departure can be money well spent if you plan to enforce your agreements. When presented with sufficient evidence of wrongdoing, most US courts will prevent the employee from benefiting from their improper conduct, by enforcing either a restrictive covenant, a statutory provision such as a state’s Trade Secrets Act or a federal law relating to computer theft.