Most businesses have confidential and proprietary information that they want to protect from being usurped by current or former employees or competitors. One way to do that is by using “restrictive covenants,” which are contract provisions that prohibit one party from revealing or benefitting from the other party’s confidential business information. The most common restrictive covenants involve non-competition, confidentiality, and non-solicitation. While such clauses are legal, they are subject to significant limitations. As a result, it is important to understand what is likely to be permitted under the law.
Use of Restrictive Covenants in Employment
While restrictive covenants can be used in connection with the sale of a business or other commercial contract, they are best known in the employment context to restrict an employee’s activities after employment has ended. As noted above, generally, such clauses provide for one or more of the following:
- Nondisclosure or confidentiality. Forbids a former employee from disclosing confidential or proprietary information relating to the company or its customers;
- Non-competition. Prevents a former employee from competing against the company in a specified geographic range for a specified period of time; and
- Non-solicitation. Prohibits a former employee from soliciting the company’s current, prior or prospective customers or other employees for a specified period of time.
Employees may be required to agree to a restrictive covenant prior to or during employment or upon termination of employment. These provisions may be part of an employment, severance, stock option, or other agreement.
Limitations on Enforcement of Confidentiality, Non-compete, and Non-solicitation Agreements
In order to be enforceable, these provisions must be:
- no greater than is required for the protection of the legitimate interest of the employer;
- not an undue hardship on the employee; and
- not injurious to the public.
If any of these rules are broken, the restrictive covenant may not be enforced. Whether a restrictive covenant meets the requirements depends on the particular facts and circumstances, but reasonableness is the guiding light. For example, a noncompetition agreement must be reasonable in duration and geographic scope, but what may be a permissible restriction in one case may not be enforceable in another.
In addition, courts will take into consideration factors such as the employee’s job duties, unique skills, and access to confidential information. A noncompete is more likely to be enforced against a high-level employee with knowledge of the company’s trade secrets than a lower level employee with little access to such information. Also relevant is the employer’s investment in developing its client base and business goodwill and whether the restrictions on the employee are necessary to prevent disclosure of proprietary information.
Notably, even where a covenant is problematic, New York courts have allowed for partial enforcement. Courts may invalidate some aspects of the covenant and not others or enforce the restriction for a shorter time or in a smaller area.
Where a former employee violates a restrictive covenant, the employer can sue and obtain injunctive relief stopping the employee’s restricted behavior while also seeking damages for any monetary losses. However, non-compete provisions in employment agreements might not be enforced against former employees if they were terminated without cause.
Restrictive Covenants Outside Employment
Restrictive covenants can also come into play in the sale of a business to a competitor. During the due diligence process and negotiations, both sides will want a confidentiality agreement. Later the sale contract often includes non-competition and non-solicitation provisions to prevent the seller from recapturing the good will of the very business that the seller sold.
Conclusion
In order to protect your business, we encourage robust but reasonable restrictive covenants in your employment agreements, severance agreements, asset purchase agreements, stock purchase agreements, or in any agreement where an outsider has inside access to confidential information.
Contact us to discuss your situation.