Labor: 5 considerations for evaluating restrictive covenant enforceability

Figure out your chances before heading to court.

Companies often seek to protect confidential, proprietary business information, customer and employee relationships and restrict unfair competition by requiring employees to sign restrictive covenants prohibiting certain activities after their employment ends.

Such restrictions may involve: agreements not to compete with the former employer, agreements not to solicit customers, agreements not to solicit or hire employees and agreements not to disclose confidential information. Agreements that limit post-employment competitive activities are typically governed by state law and may or may not be enforced. Many Courts dislike enforcing these agreements unless it is necessary to protect the employer’s legitimate business interests.

1. Locate the agreement

As simple as this sounds, there are times when an agreement cannot be located even though management is convinced  that a departed employee signed one. While there are a variety of other causes of action that may be brought against a former employee who is believed to be competing unfairly with his former employer (e.g., breach of the duty of loyalty, violation of Trade Secrets laws, violation of the Computer Fraud and Abuse Act), a copy of the signed agreement containing the restrictive covenant must be located so that its precise terms can be reviewed, if the employer and appropriate claims based upon the agreement can be asserted.

4. Examine whether the agreement meets the standards for enforcement in the jurisdiction.

In states where restrictive covenants are considered enforceable, courts will usually review the covenant in question to determine if the restriction is necessary to protect the employer's legitimate business interests, is sufficiently limited in time and geographic scope, does not present an unreasonable burden on the employee and does not violate public policy. An analysis should be conducted to determine if the covenant meets the standards set forth in decisions interpreting the applicable state’s laws.

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Sharon Margello

Sharon Margello is a shareholder in the Morristown, NJ office of Ogletree Deakins and Co-chair of the firm’s Unfair Competition and Trade Secrets Practice...

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