Restrictive Covenant Pitfalls

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By: Scott Gilbert and Mary Kathryn Curry

As a general matter, many courts disfavor restrictive covenants in the employment context because they restrain trade. However, the law also seeks to prevent unfair competition. As a result, if an employer can point to a legitimate business interest in need of protection, it may be able to enforce a restrictive covenant agreement (RCA) that is narrowly tailored to protect that interest. What constitutes a protectable interest? This varies from state to state; however, courts typically recognize an employer’s need to protect the following: 

  1. Confidential information and trade secrets 

  2. Longstanding customer goodwill

  3. The value of specialized training

  4. Workforce stability. 

As with other considerations related to the enforceability of RCAs, what qualifies as a protectable interest will vary from state to state. To protect these interests, employers typically employ a combination of the following devices:

  1. Nondisclosure 

  2. Noncompete

  3. Customer/client nonsolicitation

  4. Employee nonsolicitation. 

Of these, a non-compete is the most difficult to enforce and will receive the closest scrutiny from a court during an enforcement action. Unlike a nonsolicitation provision, which focuses on preventing a former employee from stealing an employer’s customers on behalf of a competitor, a non-compete provision prevents an employee from working for that competitor at all. Because a non-compete can significantly limit an individual’s ability to earn a living, courts will evaluate a number of factors to determine whether the non-compete is reasonably necessary to protect the employer's interest—commonly referred to as the “Rule of Reason.”

Click through to read the full article regarding the enforceability of restrictive covenants in different states and best practices employers can take to maximize their chances to enforce restrictive covenants.

Note: this article was first published in Employee Relations Today’s Fall 2017 Edition, 2018 Wiley Periodicals, Inc.