Trade secrets and proprietary information are among a company’s most valuable assets. To protect confidential business information, many companies use restrictive covenants, such as non-compete, non-disclosure, and non-solicitation agreements. However, restrictive covenants must be carefully crafted to ensure they are enforceable and do not violate employment laws. Misuse or overly broad restrictions can result in legal challenges, regulatory scrutiny, and costly disputes.
1. What Are Restrictive Covenants?
Restrictive covenants are contractual agreements that limit an employee’s or business partner’s ability to compete, disclose sensitive information, or solicit clients after leaving a company. These agreements serve to protect a business’s trade secrets, proprietary information, and competitive advantage.
Common Types of Restrictive Covenants:
- Non-Compete Agreements: Restrict employees from working for competitors or starting a competing business within a certain time frame and geographic area.
- Non-Disclosure Agreements (NDAs): Prevent employees and contractors from disclosing confidential business information.
- Non-Solicitation Agreements: Prohibit former employees from soliciting clients, vendors, or employees of their former employer.
2. Legal Considerations for Enforceability
While restrictive covenants can be a powerful tool to protect trade secrets, they must meet legal requirements to be enforceable. Courts generally assess:
a. Legitimate Business Interest
- Employers must demonstrate that the restriction protects a legitimate business interest, such as trade secrets, client relationships, or confidential processes.
- General claims of preventing competition are not sufficient to justify enforceability.
b. Reasonableness in Scope
To be enforceable, restrictive covenants must be:
- Limited in duration: Courts typically uphold non-compete agreements lasting six months to two years, but anything longer may be considered excessive.
- Limited in geographic reach: Restrictions should only apply where the business operates or has a genuine competitive interest.
- Tailored to specific industries and roles: A non-compete for a high-level executive may be more enforceable than one for an entry-level employee.
c. Compliance with State Laws
State laws regarding restrictive covenants vary:
- California: Generally prohibits non-compete agreements except in limited cases.
- Michigan: Enforces non-competes if they are reasonable and protect a legitimate business interest.
- New York & Illinois: Scrutinize restrictive covenants heavily to ensure they are not overly broad or restrictive.
Employers must ensure agreements comply with state-specific regulations to avoid invalidation.
3. How to Draft Legally Sound Restrictive Covenants
To ensure enforceability and avoid legal disputes, restrictive covenants should be carefully drafted with the following considerations:
a. Define Trade Secrets and Confidential Information
- Clearly outline what constitutes confidential information and trade secrets.
- Specify that publicly available knowledge is not covered by the agreement.
b. Avoid Overly Broad Restrictions
- Overly restrictive agreements may be struck down by courts.
- Use narrowly tailored language that protects business interests without unfairly restricting employee mobility.
c. Offer Consideration for Employees
- Courts may require consideration (i.e., something of value) for restrictive covenants to be enforceable.
- Examples of consideration include:
- A signing bonus
- Continued employment
- Access to confidential information
d. Include a Blue-Pencil Clause
- A blue-pencil clause allows courts to modify, rather than void, overly broad agreements.
- This increases the likelihood that some level of protection remains enforceable.
4. Enforcing Restrictive Covenants
If an employee violates a restrictive covenant, employers may take the following actions:
a. Send a Cease-and-Desist Letter
- Notify the former employee of their contractual obligations.
- Demand immediate cessation of competitive activity or misuse of trade secrets.
b. File for an Injunction
- If necessary, employers can seek a court injunction to prevent further breaches.
- Courts may grant temporary restraining orders while the case is litigated.
c. Pursue Legal Action for Damages
- If a breach has caused financial harm, businesses may seek monetary damages.
- Some states allow businesses to recover attorney’s fees and punitive damages in cases of willful misappropriation.
5. How Employers Can Protect Trade Secrets Without Overstepping Legal Boundaries
Employers should balance the need to protect trade secrets with fair employment practices. Best practices include:
a. Use Non-Disclosure Agreements (NDAs) More Frequently
- NDAs are easier to enforce than non-compete agreements.
- Ensure NDAs clearly define what constitutes confidential information.
b. Implement Internal Safeguards
- Restrict access to sensitive business information to only essential personnel.
- Use data encryption and confidentiality policies to prevent trade secret leaks.
c. Conduct Exit Interviews
- Remind departing employees of their contractual obligations.
- Recover company-owned devices and ensure no sensitive information is retained.
d. Monitor Compliance Without Overreaching
- Employers should avoid unnecessary surveillance of former employees.
- If a suspected violation occurs, act based on evidence rather than speculation.
6. Final Thoughts
Restrictive covenants play a crucial role in protecting a company’s intellectual property, trade secrets, and competitive edge. However, they must be carefully crafted to comply with employment laws and remain enforceable in court. By tailoring agreements to specific business needs, using NDAs where possible, and avoiding excessive restrictions, businesses can safeguard their valuable assets without inviting legal challenges.
If your company needs assistance drafting or enforcing restrictive covenants, contact Tishkoff PLC for expert legal guidance.