Uncertainty in the Employment Context: Which Types of Restrictive Covenants Are Enforceable?

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INTRODUCTION

Restrictive covenants have become a classic condition of employment, as employers feel the need to protect business interests.1 Although commonplace, restrictive covenants lead to an overwhelming amount of litigation over enforcement after the employment relationship ends.2 The parties potentially involved in this type of litigation are the former employer, employee, and prospective employer. An employer can draft any of the following three forms of restrictive covenants: non-competition agreements, which restrict employees from working for competitors;3 non-solicitation agreements, which limit employees from contacting former clients;4 or non-disclosure agreements, which prohibit the disclosure of the former employer's proprietary information to the prospective employer.5

The reality that there are no clear rules regarding the enforceability of restrictive covenants6 can be frustrating for an employer that has a vested interest in sustaining its competitive advantage.7 On the other hand, the employee can also be placed in a vulnerable position,8 as he or she may have refused other employment offers and may not have the benefit of legal counsel when negotiating the employment contract. Ultimately, the employee may endure unnecessary trepidation over the possibility of losing the employment opportunity if the agreement, which may have little chance of being enforced, is not signed.9 Although the agreement was formed between the employee and the previous employer, a third party-the prospective employer-may be introduced to litigation if the former employer believes the new employer obtained access to alleged protected interests. Consequently, prospective employers might be cautious about hiring an individual bound by a covenant because they do not wish to become engaged in expensive litigation where priceless proprietary information may be revealed.10

In analyzing restrictive covenants in an era of high employee mobility,11 it is sometimes difficult to rationalize the need for these agreements. This sentiment is reinforced by the notion that restrictive covenants can be contrary to capitalist principles of free-market competition,12 resulting in numerous courts endorsing invalidation.13 At the same time, there still exists an employer's countervailing interest in prohibiting former employees from exploiting its information or processes.14

The interests of the three parties create a predictable conflict in restrictive covenant enforcement. There are many sources that provide drafting tips for employers,15 but limited information is available for employees. Restrictive covenants have become very common in the employment context,16 but do employees really understand the ramifications of what they are signing, and, furthermore, do they have the option of negotiating the terms of these agreements? The purpose of this Note is to bring some understanding as to which types of restrictive covenants are enforceable. Clarification of this area of the law is needed as many employers unfairly present these agreements to employees at the commencement of employment with little or no guidance. To that end, this Note will review the restrictive covenant dispute between employers and employees along with the standards of enforcement in the following manner: Part I will examine enforceability standards with respect to English influences and American law. Part II will discuss how the at-will employment relationship affects restrictive covenants. Part III addresses the areas where restrictive covenants are most practical.

Additionally, this Note asserts that employment lawyers should insist that their clients only use restrictive covenants in the narrowest of cases and tailored to the most unique of employees in an effort to limit the amount of litigation in this area. Too often, employers abuse restrictive covenants to deter all levels of employees from pursuing opportunities with competitors. In a time of job insecurity and in a country that prides itself on the entrepreneurial spirit, it is unfair to limit employees from pursuing their employment goals unless the restriction is protecting a bona fide, legitimate interest. …