There are numerous important considerations companies should focus on to create an enforceable array of protections of their competitive advantage, not only contractually but also under state and federal common and statutory law. In this and in subsequent client communications, we will focus on the most important considerations.
Recognizing and addressing the potential barriers to enforcement
Overbroad Restrictions. Regardless of which state law applies, overbroad restrictions will not be enforced.
Geographic restrictions – Restrictions that limit former employees’ rights to compete within certain geographic areas will not likely be enforced if they cover an area where the employer does not operate or are otherwise deemed to be overly broad.
Temporal restrictions – Restrictions that purport to limit employees’ rights to compete for an especially long period of time are not as likely to be enforced.
Restrictions on how “competition” is defined – The more broadly that a restrictive covenant defines what it means to be “competing,” particularly where the employer goes beyond its core business, the less likely it is to be enforced.
Remember: Pigs get fat, hogs get slaughtered. The employer must demonstrate that the restriction is reasonably necessary to protect a legitimate employer interest, which most often includes (i) access/exposure to confidential information, (ii) possession/access to customer goodwill and relationships (sometimes only long-standing ones) and/or (iii) the restricted employee’s participation in extensive training programs.
Lack of Valid Consideration. Courts routinely strike restrictive covenants where not entered into at the inception of employment, unless supported by additional valuable consideration. The cleanest and easiest approach is to have the agreements signed at the inception of employment. After employment starts, continued at-will employment may be enough to support the restrictive covenant in some states, but is inadequate in other states. If the restrictive covenant is not entered into at the inception of the employment relationship, it may be supported by a raise, promotion or other meaningful new benefits.
State Law and Forum. In drafting the agreements, companies often have flexibility in choosing what state law and forum will apply for the agreement. State laws vary dramatically across the country, including the scope of restrictive covenant permitted, whether the court will modify overly broad agreements, and how certain professions (e.g., doctors and lawyers) are treated. Where multiple states have significant contact with the employment relationship, employers should pay attention to the most restrictive state’s choice of law requirements. Consider exclusive venue and jurisdiction provisions. They can often help the company avoid unfriendly jurisdictions (e.g., California).
Anticipating Employee Defenses. Depending on the applicable state law and the reason for termination, a court may refuse to enforce a restrictive covenant agreement if an employee is discharged without cause. Employers should explore angles to maximize enforceability even where employment is terminated, including the possibility of some type of severance if the restriction is important enough to the employer. Employers should also separate restrictive covenants from other contract and employment terms to avoid a possible claim by the employee that the contract is unenforceable because of a material breach by employer (e.g., failure to pay promised compensation or severance). This may require separating out the consideration driving the restrictions (e.g., access to confidential information and customers, rather than compensation and severance).
Severability or Savings Clauses. This is state specific. Many states will allow modification of an overly broad restriction, and the likelihood of enforcement can be enhanced by the agreement itself providing for “blue penciling” or “equitable modification.” But the employer must know the state law that applies. Some states will strike an entire agreement if any part of it is unenforceable. In some states, the court may refuse to blue pencil and save the agreement without such a clause. Indeed, in some states, the very existence of such a clause can render the agreement invalid.
Beyond a Non-Compete. A company should consider the extent to which its agreement should include confidentiality, employee non-solicitation and customer, supplier and distributor non-solicitation provisions. Courts examine such restrictions closely to ascertain if they are reasonably related to protecting a legitimate company interest, often under the same standard applicable to noncompetition provisions. Make sure non-solicitation of employees, agents, suppliers and customers is broad enough to cover what is enforceable in your state. Simply providing “will not solicit” has too many holes —it does not take much to consider a defense of “they called me first.” Instead, take up the slack: “you will not solicit, communicate with about future employment or terminating employment, hire, etc.” And, equally as important, find out what protectable interest and factual underpinnings are required to support the restriction you are including in states with significant contacts with employment relationships and restrictions. Finally, do not over reach. Protecting legitimate interests you really care about is better than an agreement getting struck down because it restricted conduct that cannot be shown to be a legitimate protectable interest.
Measures a company can take to enhance its protections.
There are many things an employer can do, including:
- When an employee leaves, conduct an exit interview and make sure all property is returned, including all thumb drives and other storage devices. Get the laptop and copy the hard drives and all company information stored at the employee’s home and on third party servers over which employee has access or control and block access to the network. All of these obligations can be included in the restrictive covenant agreement.
- Find out why the employee left and where he or she is working next, if possible. Truthful and complete answers to written exit interview questions can be made part of the employment contract.
- Include in the restrictive covenant agreement a clause requiring the employee to provide a copy of the agreement to his new employer and another giving the old employer the express authority to do so. This helps avoid a claim that the employer is tortiously interfering with the employee’s prospective economic advantage or contract with the new employer.