Employers who want to protect their businesses should consider using restrictive covenants. The most common restrictive covenants include non-compete agreements, non-solicitation agreements, and confidentiality agreements. Careful consideration to the following questions will help employers choose the right tools for protecting their businesses.
What is the goal?
The first question is: What is the employer trying to accomplish by requiring employees to sign a restrictive covenant? Employers should consider what they are trying to protect as it relates to information, as well as what they are trying to protect against. These answers will help determine whether the employer has a legitimate business purpose in using restrictive covenants. If there is no legitimate business interest, then certain restrictive covenants will not be enforceable in court, although this doesn’t necessarily mean that an employer will not want to have employees sign them anyway.
Protecting against the disclosure of a bona fide trade secret or preventing unfair competition from a competitor who acquires a competitive edge from the good will developed by a former employee may be legitimate business interests given the correct circumstances. But attempting to prevent general competition is not a legitimate business interest. Determining what the goal of the employer is will assist in identifying what tool is most appropriate to protect the employer.
What tools are available?
With the goal identified, the employer should determine what type(s) of restrictive covenant(s) to put in place.
A non-compete agreement is generally used to prevent a former employer from going to a competitor. Non-competes carry a heavy burden and must comport with reasonable scope, time, and geographic limitations.
Non-solicit agreements take several forms and can accomplish various tasks. A non-solicit may prevent a former employer from soliciting other employees to “jump ship” with the employee to a competing firm. It may also prohibit an employee from contacting a specific list of clients for a certain period of time after employment terminates.
Finally, a confidentiality agreement may not restrict the former employee from working for a competitor or contacting former clients, but it may protect against disclosure of a trade secret, confidential strategic and marketing information, or other information that would be severely detrimental to a business if disclosed to a competitor or the public.
What other legal requirements must be met?
Each restrictive covenant is permissible under the law provided it meets certain legal requirements. Such requirements may take into account the scope, duration, and geographic restrictions on the employee; the duration of employment of the employee; when the agreement was entered by the parties (before employment began or after); and the nature of the employee’s duties for the employer.
Each state has unique requirements and factors. For example, while Indiana does not have a bright line rule requiring a specific duration of employment for a non-compete to be effective, an Illinois court recently issued a decision requiring that an employee work at least two years after a mid-employment non-compete was signed to be effective. Employers should be specific in their restrictive covenants to avoid being over-broad and therefore unenforceable. This may include identifying specific competitors, specific clients, or specific product lines the employee is prohibited from working for or with in future employment. Employers should consult with an attorney if they choose to implement such restrictive covenants.
Restrictive covenants are an important tool for employers to protect their business interests, especially with the technological advancements and tools available making it easier and easier for a competitor to get their hands on trade secrets, confidential information, and disclosure of the whereabouts of former employees.
Employers seeking assistance in these matters should contact Burke Costanza & Carberry LLP.