Restrictive covenants are clauses typically found in an employment agreement that are meant to protect an employer’s legitimate business interest. Legitimate business interests range from customers and employees to trade secrets and proprietary information. To protect themselves from a former employee who wishes to compete with the employer, employers can use restrictive covenants to prohibit the former employee from using the employer’s proprietary information or soliciting the employer’s customers or employees.
Restrictive covenants have a long history—dating back for more than a century. In recent years, they have become increasingly common and the types of employers utilizing them has grown as well. Courts are continually evolving their analysis of restrictive covenants and the circumstances under which restrictive covenants are enforceable. Due to the complexity of this area of law, it is critical to engage an experienced attorney regardless of whether you are an employer who wants to protect your company’s trade secrets and clientele or an employee who is subject to one or more restrictive covenants. Our business attorneys have decades of experience both drafting restrictive covenants and litigating the issues of validity and enforceability of such agreements. Two common types of restrictive covenants are non-compete agreements and non-solicitation agreements.
A “non-compete agreement” (also known as a “non-competition agreement” or a “covenant not to compete”) limits an employee’s ability to compete with an employer for a specified period of time. The law recognizes that an employer has a right to protect its investments and legitimate business interests. That right is not without limits. Employees also have a right to work when and where they choose. Public policy disfavors contracts inhibiting commerce or limiting individual’s ability to be productive members of society. And since non-compete agreements have the effect of inhibiting commerce and limiting an individual’s ability to earn a living in the same industry in which he has been working, courts scrutinize them closely.
Because of the unique nature of non-compete agreements, a covenant not to compete that outright bans working for a competitor will be unenforceable in most states. There are four factors that courts generally consider when deciding the enforceability of a non-compete agreement:
- The Employer’s Legitimate Business Interest;
- The Geographic Limitation of the Restraint;
- The Duration of the Restraint; and
- The Industry Covered by the Restraint.
A “non-solicitation agreement” or a “non-solicitation clause” typically has the goal of protecting a former employee from luring away an employer’s clients or other employees. When an employee leaves, employers do not want that employee taking the employer’s clients or other employees to a competitor.
Courts are more sympathetic to these types of restrictive covenants because they do not necessarily restrict an employee’s ability to work. However, a non-solicitation agreement must still be reasonable to be enforceable. As with non-compete agreements, courts apply the “totality of circumstances” test to determine if a non-solicitation agreement is reasonable and enforceable.
It is also important to consider the circumstances surrounding the employee’s departure—such as whether the employee was terminated. Many factors go into determining the enforceability of restrictive covenants and simply having a well-drafted form restrictive covenant will not be sufficient to make it enforceable in every situation.
For employees, this can be a good thing because often they sign employment agreements without reading through the entire contract and may later be accused of violating restrictive covenants they didn’t even know they’d entered. For employers, this is a warning to draft restrictive covenants carefully to improve their chances of enforceability and to consult a knowledgeable attorney before taking any action such as terminating an employee subject to restrictive covenants.
Too often, employers don’t involve an attorney until after they have terminated an employee and want to enforce the restrictive covenants. To make matters worse, employers often aren’t fully aware of what is in their restrictive covenants. The hallmarks of poorly drafted restrictive covenants are vague and overly broad terms that are entirely one-sided in favor of the employer. While broad, general language may be appealing attempt to cover all the bases, many courts require specificity for a restrictive covenant to be enforceable. A poorly drafted restrictive covenant coupled with an improper termination can drastically limit an employer’s ability to enforce its restrictive covenants.
In some cases, employees and employers negotiate the terms or modification of restrictive covenants. The key is to find common ground which allows both parties to get what they want.
When drafting, negotiating, or enforcing a restrictive covenant, it is vital to have a knowledgeable and experienced attorney. Our Chicago and DuPage County attorneys at DiTommaso have decades of experience negotiating restrictive covenants and litigating disputes over restrictive covenants. We have assisted employees with negotiating prospective restrictive covenants, ensured that their decision to enter restrictive covenants were informed, and advised them as to the enforceability of existing restrictive covenants. For employers, we have drafted restrictive covenants, analyzed existing restrictive covenants for enforceability, and represented employers in court seeking to enforce restrictive covenants. For a free consultation, contact us online today or call us at 630-333-0000.
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