Jeffrey S. Boxer
Employers often enter into post-employment restrictive covenants (commonly referred to as non-compete agreements) with employees only to find that when the employees leave, the restrictive covenants are not enforceable or do not provide sufficient value to the company.
Here are seven steps to improve post-employment restrictions:
1. Identify the Legitimate Interest to be Protected
An employer must have a legitimate interest that will be protected by restraining an employee’s ability to compete. Protecting trade secrets, confidential information, or unique relationships with clients are generally recognized in many states as legitimate interests that will support enforcement of a restrictive covenant. For example, when an employee has access to marketing or product development plans, the employer may have a legitimate protectable interest in preventing the employee from using knowledge of that confidential information for a competitor. Similarly, if an employee develops unique relationships with the employer’s clients, the employer may have a legitimate interest in protecting the goodwill inherent in those relationships.
The employer should have a clear understanding of the legitimate interests a restrictive covenant is designed to protect before entering into the restrictive covenant. Once the protectable interests are identified and understood, the restrictive covenant should be crafted to protect those interests without overreaching.
2. Ensure that the Restrictive Covenant is Reasonable
Restrictive covenants will typically only be enforceable in most states if they are reasonable in scope, geographic range, and duration. Reasonableness depends on the nature of the employer’s legitimate interest and varies from industry to industry, from position to position, and often from state to state. Drafting a restrictive covenant that is more likely to be enforced requires understanding what the company realistically and reasonably needs to protect its legitimate interests if the employee leaves.
For example, if the employee is a salesperson whose territory is the Pacific Northwest and the employer’s legitimate protectable interest is the salesperson’s unique relationships with clients in that territory, a restrictive covenant preventing her from selling a competing product in the Pacific Northwest might be reasonable. On the other hand, an otherwise identical restrictive covenant preventing her from selling a competing product anywhere in the United States may be overbroad and unenforceable.
Similarly, a three-year restrictive covenant precluding an employee from working for a competitor might not be reasonable if it is based on the employee’s unique relationships with clients and the employer only needs one year to introduce and train a replacement. Finally, a restrictive covenant that precludes a vice president of marketing with responsibility for one particular product line from working in any capacity for any company that competes with the employer, even on an entirely different product line, might be overbroad.
3. Consider What State’s Law Should Apply
Determining what law applies to a restrictive covenant can make the difference between enforcement and irrelevance. For example, California has a statutory prohibition on the enforcement of most restrictive covenants, but New York will uphold restrictive covenants in appropriate circumstances. Employers who have all of their operations and employees in a single state typically apply the law of that state in their restrictive covenants. Employers with employees in several states, however, may be able to choose the law to apply. This requires analyzing the laws of the potentially applicable states and including an appropriate choice of law clause in the agreement.
In addition, restrictive covenants typically should contain choice of forum clauses requiring that disputes must be litigated in the state whose law was chosen. Courts in some states may ignore provisions choosing the law of a different state on the theory that their state’s public policy or interest in restrictive covenants overrides the parties’ choice of law. Many courts, however, will enforce choice of forum provisions and leave it to the forum state to determine which law to apply. Thus, if a restrictive covenant provides for Florida law, the agreement should also require that disputes be litigated in Florida.
To further increase the likelihood that choice of law and forum clauses are enforced with regard to employees who do not work in the chosen state, the employer can ensure that there are contacts between the employees and the chosen forum. These contacts could include having the employees (a) attend training programs in the forum state, (b) report to management in the forum state, (c) take on responsibility for clients or vendors in the forum state, or (d) supervise employees in the forum state.
Many employment agreements and restrictive covenants require arbitration of disputes. Even if the parties prefer arbitration, the agreement should permit the employer to seek injunctive relief from a court.
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