restrictive covenants in employment agreements: do they really work?

© 2012, Meyer, Unkovic & Scott LLP

Agenda

• What are restrictive covenants and under what circumstances are they enforceable?

• What type of remedies exist for breach of restrictive covenants?

• How do you draft effective restrictive covenants in employment agreements?


Restrictive Covenants 101

• Contractual provisions which restrict an employee's post-employment activities

• Not favored by court and strictly construed

• Used to stop employees from using employer's property

4 Types ofRestrictive Covenants


Non-Solicitation Covenants

• Can prevent solicitation of a former employer’s customers or employees

• A customer non-solicitation must be restricted to customers with whom the employee had contact or responsibility for during a specified period

• An employee nonsolicitation must take into effect how long it will be before the former employee’s influence will be eliminated or diminished


Non-Dealing Covenants

• Focuses on whether an employee can sell to customers who are not solicited but approach him or her for competing goods or services

• Avoids the need to prove that the former employee made the solicitation or approach

• More likely to be enforced where a substantial personal connection between employee and customers can be established.


Non-Competition Covenants

• Broadest form of protection that an employer can include in employment agreements

• Enforceable if there exists a legitimate business interest that cannot be protected by other types of less burdensome restrictive covenants

• Enforced only if they are for a limited duration


Garden Leave Provisions

• In exchange for advance notice of employment termination, an employer continues to pay the employee his full salary and benefits but does not require the employee to work during the period of the advance notice

• The aim of garden leave provisions is to preserve the status quo by keeping the employee out of the market place


Persons Not Subject toRestrictive Covenants

• Lawyers

• Doctors

• Individuals Fired Without Cause


Requirements for Enforceability

1. Must be ancillary to the taking of employment

2. Must be supported by adequate consideration

3. Must be reasonably necessary to protect a legitimate interest of the employer

4. Must be reasonably limited in duration and geographic scope

5. Must be consonant with public interest

Available Relief


Monetary Damages• Monetary relief is available to recover any actual

damages that an employer has suffered as a result of an employee’s breach of restrictive covenants

• It is inherently difficult to quantify monetary relief

• Monetary relief may include:– Lost Profits– Training/Replacement Costs– Competitor's Profits– Loss of Good Will– Attorney’s Fees


Injunctive Relief

• Most employers seek injunctive relief • In most cases, the form of that injunctive relief is in the

nature of a temporary restraining order (TRO) or preliminary injunction sought shortly after discovery of the employee’s breach

• To obtain injunctive relief, an employer must show:– Immediate and Irreparable Harm– Reasonable Probability of Success on the Merits– Balance of the Equities– Public Interest

Drafting Restrictive Covenants


Know the Facts and Circumstances

• Avoid using “form” employment agreements or restrictive covenant language

• Know the facts and

circumstances surrounding the employment of each employee or group of employees


No Precise Formula For Drafting

• Courts look to each restrictive covenant and the facts to determine whether the covenant will be enforceable.

• It is often times helpful to see what already has been enforced by the court, but depending on your facts, the covenant may nevertheless be unenforceable.

• Each covenant really should be drafted to meet the specific needs of each employer and the position of the employee.


Covenants normally include:

• A recitation that the agreement is ancillary to the taking of employment and is a precondition to the commencement of the employment relationship

• A recitation of when the restrictive covenants will be invoked, i.e., upon the employee’s termination, whether voluntary or involuntary

• A prohibition of what conduct or activities are prohibited upon the employee’s termination

• A statement of the period of time and limited geographic scope of the restrictive covenants

• The employee’s acknowledgement and agreement that the restrictive covenants are reasonable and valid in duration and scope and in all other respects

• The employee’s acknowledgment and agreement that he or she will be able to earn a livelihood in the event that the employer seeks to enforce the restrictive covenants


Covenants normally include: (continued)

• The employee’s agreement that the employer will suffer irreparable harm upon the breach of the restrictive covenants which cannot be adequately compensated by money damages alone

• The employer’s right to seek injunctive relief in addition to any other type of relief necessary, including monetary damages in the event of an employee’s breach of the restrictive covenants

• The employer’s right to recovery attorneys’ fees and costs as part of any action to enforce the restrictive covenants or recover damages for their breach

• A choice of law provision, i.e., what state’s law will apply

• A choice of forum provision, i.e., what court will have jurisdiction to hear the dispute

• An assignability provision stating that the agreement and its restrictive covenants may be assigned by the employer


Conclusion• Restrictive covenants constitute restraints of trade;

however, they are not per se unenforceable or invalid

• Employers must review the circumstances of employment for every employee from whom they require a restrictive covenant and then carefully draft the covenant based upon the information derived

• “Form” restrictive covenants may be declared unenforceable and not lead to the desired result


Thank you!

Ronald L. Hicks, Jr.Meyer, Unkovic & Scott LLP

Henry W. Oliver Building

535 Smithfield Street, Suite 1300

Pittsburgh, PA 15222

412.456.2800

www.muslaw.com

restrictive covenants in employment agreements: do they really work?

Documents