It’s more and more common for a company to have some kind of intellectual property it needs to protect. This can be technology or other trade secrets, but it can also be data on sales prospects or clients. It could even be what makes up a special sauce. Every company has its own information which gives it an edge.
For that reason, restrictive covenants or restrictions on what an employee can do after leaving are more important all the time. It’s also commonly believed that they are difficult to impossible to enforce. That’s not true at all if they are reasonable, with proper consideration of the circumstances and the law.
Kinds of restrictive covenants
Every employment contract needs to have the rights of the company to restrict the use of its intellectual property spelled out. This should be done at the time of hiring, but it can also be done with a new contract or addendum later on.
The restrictive covenants on employees leaving the company fall into four broad areas:
- Non-compete covenants, which limits an employee’s ability to work for a period of time for any competitor in the same industry.
- Non-solicitation covenants, which cover contacting or otherwise seeking business from clients.
- Non-poaching covenants, which ban the taking of other employees with them to another company.
- Confidentiality agreements, which limit the use of just about anything that is deemed critical to the company such as business plans, etc.
As you can see, all of these are limits on the rights of employees to do certain things after they leave a company. That is the potential problem when they fall before a court. Written too broadly, they might limit a former employee’s ability to ever work in the same field again. It’s critical to be reasonable and specific about the company’s intellectual property needs when defining restrictive covenants.
What is enforceable?
Courts in New York reviewing any restrictive covenants, such as the ones above, consider three key criteria:
- Geographic scope of the restrictions – is it necessary to protect the business to include competitors anywhere in the world, or is the business primarily local?
- Duration of the restrictions – a six month restriction is usually upheld, but a three year limit can be applied if it is not highly restricted by geography.
- Scope of the business activities – restrictive covenants are only valid to the extent they are necessary to protect confidential information or trade secrets, not to prevent the employee from ever working.
The standard is always being reasonable and carefully outlining what the company needs to protect upon the employee leaving. Note that it is not required, but helpful, to give the employee something of value in return such as stock options or a severance package to make the agreement in their own best interests.
Crafting good restrictive covenants
If your business has a need to protect its intellectual property with restrictive covenants, or if you are an employee who needs to have restrictions place on you examined, consultation with an attorney with experience in restrictive covenants is essential.
More cases care tried constantly, and greater clarity regarding what can be enforced and what cannot is being achieved. It does depend on the circumstances as much as the law, however. Every situation is as unique as the intellectual property that the company has a need to protect.
