Post-employment restrictive covenants appear frequently in employment agreements across many industries. Despite their popularity with employers, few contractual provisions create more vexing issues of suitability and predictability of enforcement. The phenomenon flows from the inherent tension between an employer’s interest in protecting its business and an employee’s interest in pursuing his livelihood. In a series of six articles concerning restrictive covenants, of which this is the first, we seek to debunk the myths and disinformation that plague this area of the law, provide some tools and guidance to help navigate it, and shape reasonable expectations for the deployment and enforcement of these provisions.
To balance the tension between employers’ and employees’ interests, most jurisdictions which permit restrictive covenants examine whether they are necessary to protect a legitimate interest of the employer and are no more restrictive in scope or duration than is reasonably necessary to protect those interests so as to avoid undue hardship on the employee or an adverse effect on the public. Recognized protectable interests include preventing the misuse of trade secrets and confidential information and competition from “unique or extraordinary” employees. In addition to principals or senior executives with intimate knowledge of business plans and processes, “unique” employees can include individuals possessing goodwill associated with specific client relationships developed or enhanced with the employer’s assistance.
Non-compete clauses prevent employees during the term of employment, and for a period of time following employment, from working for a competitor or providing services competitive with the employer, often within a particular geographic region. Enforceability of non-competes varies from state to state. California statutes prohibit them, statutes in other states limit their application and other states rely on common law precedents. Non-competes are advantageous to an employer because they impose the most comprehensive restraint and afford bright line certainty to determine whether a departing employee is complying with the agreement. However, as potentially the most burdensome restraint, non-compete agreements are the least popular with employees, attract the closest scrutiny and skepticism of the courts and often present the greatest enforcement challenge.
Client non-solicitation clauses
Client non-solicitation clauses prevent employees from inducing the employer’s clients to do business with a competitor during the course of their employment and for a reasonable period of time thereafter. A client non-solicitation clause should normally be limited to clients with whom the employee had business dealings through which the goodwill to be protected was developed (rather than all clients of the employer). The advantage of the employee non-solicitation clause is that it can protect goodwill associated with client relationships and is normally viewed as less burdensome than a non-compete provision since an employee is not forbidden from associating with a competitor or pursuing her livelihood. On the other hand, the clause is not an absolute bar doing business with the employer’s clients and access to proof of solicitation may be difficult if enforcement is required.
Client non-acceptance clauses
Client non-acceptance clauses prevent employees from servicing or accepting business from a client of their former employer after employment ends, even where the employee has not solicited such business. While the clause is less restrictive than a non-compete, the absolute bar to doing business with certain clients bears similarities to the comprehensive restraint of a non-compete clause. Like a non-compete agreement, the non-acceptance of business clause prevents any business with the employer’s clients and thus likely will be examined with scrutiny similar to a non-compete clause.
Employee non-solicitation clauses
Employee non-solicitation clauses prevent employees during the course of their employment and for a reasonable period of time thereafter from inducing co-workers to leave the employer and join a competitor. These clauses have been expanded to prevent employment or association with former employees. New York and many other states generally recognize the enforceability of employee non-solicitation clauses.
“Garden leave” clauses
“Garden leave” provisions require that notice be given prior to termination of employment and permit the employer to alter the employee’s duties or to direct the employee to stay away from the place of business for the duration of the notice or garden leave period. The employee continues to be paid by the employer and to receive other employment benefits during this period. “Garden leave” provisions appear less restrictive in the first instance than non-compete clauses since they can be viewed as imposing no post-termination restraint. However, courts may treat “garden leave” provisions like non-competes if the employee is directed to sit home by the employer. This may result in close scrutiny of the clause as if it were a non-compete. Given its increasing popularity, the enforceability of “garden leave” provisions will be addressed in more detail in a subsequent article in this series.
A confidentiality provision protects against the use or disclosure of the employer’s confidential information and prevents an employee from using or disclosing that information for the benefit of others. Employees generally have a common law duty to maintain the confidences of their employers. Confidentiality provisions serve the useful purpose of defining for the employee what the employer considers to be proprietary and provide some evidence that the employer takes reasonable steps to protect its trade secrets and confidential material.
Selection and enforcement of an appropriate form of restraint is a complex matter. It involves not only balancing the employer’s and employee’s legal interests, but is often affected by the parties’ bargaining leverage. Restrictive covenants should be tailored to the situation; a “one-size-fits-all” approach for a range of employees with varying responsibilities may deliver less than desirable results. Even perfectly crafted agreements can face enforcement challenges based on the parties’ respective performance under the agreement and the circumstances of termination. Despite the challenges, effective contracts can be implemented and enforced. The remaining articles in this series will examine some of the key issues regarding the use of restrictive covenants in more depth.