As the business world becomes more complex, many of us must deal with the issue of legal restrictions regarding key employees leaving to join competitors or to start competing businesses. Such restrictions are found in a variety of agreements and are commonly referred to as “non-competition provisions” or “restrictive covenants.” If you are an employer, you wish to protect your customer relationships and proprietary information. As an employee, you desire to be reasonably employed and compensated but without inappropriate limitations on your ability to pursue other employment and business opportunities. The tension between these respective interests often raises a number of significant legal and business issues.
In many instances, both the employer and employee initially fail to adequately review and assess boiler-plate language involving non-competition, non-disclosure and non-solicitation restrictions. Later, when circumstances, interests and pursuits change, they may discover that such language appears strained and confusing and that it does not adequately reflect the true intentions of the parties when the agreement was originally reached.
We have experienced on a fairly frequent basis employers and employees contacting us to determine whether particular forms of restrictive language are enforceable. Regardless of the source of the question, we usually first explain that the courts do not typically favor restrictive covenants. This probably stems from the strong policy against restraint of trade and the recognition of a person’s general right to make a living freely through his or her skill, knowledge and experience. However, because these matters have been the subject of vast litigation in recent years, the courts have become more understanding of the need for a business to protect reasonably its secrets, procedures, information and goodwill usually generated through a long, difficult and costly process.
The court will generally uphold a non-competition provision where it determines that (1) it was supported by adequate consideration; (2) the language protects the legitimate business interests of the employer; and (3) it is reasonably limited in geography and time so as to protect those interests. With such a stringent standard being implemented, it is not unusual for the court to “blueline” (edit and modify) a non-competition provision to eliminate any offending portions. The court will also consider the degree to which either side has acted in bad faith or unfairly.
Importantly, the absence of a non-competition provision is not the end of the analysis. There are instances where a former employee is not permitted to reveal or use trade secrets or confidential information even where the employer failed to secure a restrictive covenant. Whether a court will prevent the employee from doing so will depend on the specific facts and circumstances of the particular case. Obviously, in instances where a trade secret or confidential information is integral to the business, the employer is much better served by having a specifically tailored restrictive covenant. Otherwise, the employer is faced with the unenviable task of establishing through court proceedings that the information constitutes a trade secret or protected confidential information.
With so much at stake, the parties should give careful consideration to these issues before employment commences, during the course of employment particularly when promotions and pay raises are involved, and at the end of employment when both sides would like to conclude reasonably the relationship. An employer must understand its rights when an employee leaves to join a competing business. Most well-drafted restrictive covenants provide the employer with an opportunity to go immediately to court to stop any inappropriate conduct by the ex-employee in what is called an injunction proceeding. On the other hand, an employee must understand the ramifications of such restrictive language if he or she intends to compete elsewhere. I can think of nothing worse than starting a new job or business only to find out, after investing substantial time and costs, that an injunction order has been issued by the court precluding you from further participation in that new endeavor. The bottom line is that whether you are an employer or an employee you should properly address these issues in advance rather than being stuck resolving them through litigation.
— Curt Ward