Richard Hunt, The Daily Record Newswire
Noncompetition agreements may be declared unenforceable or void depending upon the state law, the scope of the agreement and other factors. Therefore, it is important that a company require its employees to sign agreements containing other types of restrictive covenants limiting them from soliciting the company's customers and employees, prohibiting acceptance of business from former clients and preventing improper use, disclosure or misappropriation of confidential information.
Covenants restricting competition
Noncompetition restrictions are not enforced in every jurisdiction. For example, California prohibits noncompetition agreements in almost all circumstances. Some other states impose requirements such as advance notification of noncompetition restrictions or a requirement of execution of the noncompetition restriction prior to or upon initial employment.
Noncompetition restrictions are also subject to attack if they are overly broad in scope or duration. On the other hand, noncompetition restrictions that are narrow and intended to prohibit the individual from performing a specific type of work or working in a specific industry are more likely to be enforced. Similarly, noncompetition restrictions that are shorter in duration or confined to a specific geographic area are more likely to be upheld.
Non-solicitation restrictions
An agreement should also contain a separate non-solicitation restriction that restricts an individual from soliciting both customers of the company and employees of the company. Although some courts treat non-solicitation restrictions the same as noncompetition restrictions, in most jurisdictions non-solicitation restrictions are viewed as less restrictive than noncompetition restrictions that prevent an individual from going to work for a competitor.
A non-solicitation restriction allows an individual to work for a competitor but restricts that person from soliciting the customers or employees of the company. Non-solicitation restrictions are more likely to be enforced if they are for a limited duration. Some states, such as Oregon, cap the duration of non-solicitation restrictions.
Clauses prohibiting acceptance of work
Many jurisdictions allow employees who have terminated their employment to publish an announcement informing the public of their new position with a different company and their new contact information at that new company. Former employees often contend that they did not solicit customers following separation from their former employer, asserting that the former customer approached them and sought to renew the relationship. A clause restricting a former worker from accepting the business from former customers may be effective and enforceable, even if the individual made no direct solicitation to that former client or customer.
Confidentiality restrictions
Even if noncompetition restrictions and non-solicitation restrictions and restrictions against accepting business are not enforced, the company should always have language in its agreement that protects against taking, disclosing or otherwise misappropriating confidential information.
The agreement should define the term "confidential information" and often will include information concerning customers, vendors, suppliers, financial data and business operations. Any definition of confidential information should include information that is stored on electronic devices.
Also, the provision should require the return of all confidential information upon termination, for whatever reason. Confidentiality restrictions should apply to conduct during the course of employment and for an indefinite duration after employment.
In jurisdictions where noncompetition or non-solicitation restrictions are unenforceable, if the court determines that confidential information has been used by a departing individual to unfairly compete or conduct customer solicitations of former customers, then courts (even in California) often rule that such conduct is improper.
Provisions permitting rewrites or revisions of overly broad covenants
An agreement containing restrictive covenants should include a "blue pencil" provision empowering the court to revise or rewrite or narrow an overly broad covenant so that it can be enforced as revised. However, the danger of having a covenant that is excessively overbroad is that a court may decide that it will not make any revisions and instead declare entire covenants as void and unenforceable.
Clause extending the restriction in the event of breach
An agreement containing restrictive covenants should also contain a clause that provides that in the event that a violation is established, the restrictive period should be extended so as to run from the date when the breach is identified.
Choice of law and venue provisions
The agreement should provide that it is governed by the law of a particular state, such as the law where the company is headquartered or the county and state in which the individual works. A choice of venue provision is recommended particularly for companies that want to have disputes heard in the state and county where the company is headquartered. In some instances courts will decline to enforce a choice of law or choice of forum provision if there is an overriding interest in the state in which the individual works or is employed.
In summary, even if some restrictive covenants are not enforced as written, it is strategically advantageous to have a variety of restrictions in an agreement so that if a court declines to enforce some restrictive covenants, it will have the option to enforce other provisions or modify provisions.
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Richard Hunt is a partner at Barran Liebman LLP. He represents and advises clients concerning employment law issues, including noncompetition and trade secrets litigation, and employment-related litigation on behalf of employers. Contact him at 503-276-2149 or rhunt@barran.com.
Published: Tue, Dec 02, 2014
