It has long been common practice for employers to use restrictive covenant agreements to safeguard their confidential information and trade secrets as well as to protect the investments they make in their employees. Restrictive covenant agreements — which are essentially contracts between employers and employees that incorporate types of nondisclosure, noncompete and/or nonsolicitation provisions — are valuable tools that help employers shield themselves against theft and misappropriation of their information.
However, implementing restrictive covenant agreements that are both legal and enforceable is the challenge.
Generally, restrictive covenant agreements are enforceable if they are reasonable in scope, geography and duration and are necessary to protect the legitimate business interests of the employer. Beyond this general guideline, though, employers must look to state statutes and case law when establishing their own restrictive covenant agreements. Both state statutes and case law change often, making this area of law one full of potential landmines.
The landscape is even more difficult to navigate for those who employ personnel in multiple states due to the diverse positions individual states take regarding the enforceability of restrictive covenants. California, North Dakota and Oklahoma, for example, generally do not permit employee noncompete provisions unless written very narrowly (i.e., to protect trade secrets). On the other hand, Florida, Kentucky and Maryland often take a broader view and ordinarily recognize the enforceability of reasonably drafted noncompete provisions. Even a well-drafted restrictive covenant provision, however, is not safe from a court’s unique interpretation of the particular set of facts. In other words, even in a state that permits employee noncompete agreements, a judge could find provisions to be unenforceable for any number of reasons, such as protecting the public interest.
Not all is lost, however, as the vast majority of well-drafted, well-intentioned and reasonable restrictive covenant provisions are enforceable in those states that permit them. Here are some ways to maximize that likelihood:
Review. Schedule regular reviews of your restrictive covenant agreements with inside and/or outside counsel and make necessary adjustments. It is important to communicate to counsel any changes in the business operations and/ or if specific job duties have changed since your personnel last signed agreements. Following your review, make the appropriate changes and ask employees to sign new agreements (especially at the time of demotion, promotion or when material job duties change). It may be necessary to offer additional consideration to the employee as, in many states, continued employment may not be sufficient consideration to support a new agreement.
Choice of law and venue. Speak with counsel about the appropriate choice of law and venue provisions contained in your agreements. Many courts have found fault in provisions with arbitrary or generic choice of law and venue provisions by employers that employ personnel in multiple states.
Reasonable and tailored. Avoid unreasonable and one-size-fits-all approaches. Restrictive covenant provisions should be reasonable and tailored to the specific job functions of the employee. Be sure to take into consideration the location in which each person works. The CFO who regularly travels and the marketing intern who only works in Massachusetts should not be bound by the same agreement.
Compliance with the law can be achieved even in the face of an ever changing legal environment. The employer that regularly consults with counsel, keeps abreast of changes in the law and, most importantly, updates agreements when appropriate, is in the best position to defend an attack on the enforceability of its restrictive covenant provisions.
