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Protect Your Business – Restrictive Covenant Agreements

By Katharine K. Sangha

Many states allow businesses to require employees to sign agreements restricting their competitive activities following the termination of employment. Such restrictive covenant agreements, including non-competition and non-solicitation agreements, can be great tools to protect an employer’s business interests. 

Business owners should keep the following in mind to increase the chances that the restrictive covenant agreements are enforced:

  • What is the employer’s protectable interest? An employer generally must set forth a protectable interest to justify the prohibitions contained in a restrictive covenants agreement. Protectable interests can include trade secrets, customer relationships and customer-related information, and confidential business information. If an employee does not have access to confidential business information or trade secrets, or does not have access to client information or contact with clients, a restrictive covenant agreement may not be enforceable against that employee.   
  • Are the geographic, temporal, and/or customer restrictions contained in the restrictive covenant reasonable? Overbroad restrictions will generally not be enforced. For example, a restrictive covenant preventing an employee from working anywhere within the United States following the end of his or her employment is often not enforceable (with limited exceptions). Likewise, a restriction preventing an employee from contacting any/every customer of the business may also not be enforceable with respect to customers with whom the employee had no material contact during his or her employment.         
  • Did the employee receive adequate consideration for entering into the agreement? In some states, continued employment is not sufficient consideration for a restrictive covenant agreement. In other words, in those states, the restrictive covenant agreement must be supported by additional consideration separate and apart from continued employment to be enforceable.    
  • Also, remember that restrictive covenant agreements should be signed by both the employee and a representative of the company to be a binding contract. 

While restrictive covenant agreements can be useful tools to protect your business, they are considered restraints of trade, and courts may look for reasons to either lessen their impact or strike them outright. Carefully drafted agreements are more likely to be enforced, protecting a business from former employees who may seek to exploit the knowledge gained and relationships cultivated on behalf of a new employer.