Restrictive Covenant Enforcement: It’s About More Than Just Limits Of Time And Geography
Employers spend substantial resources training employees to fit the goals of their organizations. Often times, this includes providing the employee access to confidential information, introducing the employee to key business contacts, or providing the employee with specialized instruction on how to efficiently and effectively perform the role. Post-employment restrictive covenants, such as non-competition and non-solicitation agreements, are common tools employers use to protect against their resources being used by former employees to the advantage of direct competitors, for a period of time after an employee leaves. When an employee departs to work for a competitor and litigation ensues, the litigation frequently focuses on whether the restrictive covenants in place are enforceable based on the geographic scope and time limits in the agreement. Focusing only on the geographic scope and time limitations when drafting restrictive covenants and not on the actual duties of the employee and the employer’s business, however, can render what seems to be a valid agreement not worth the paper it is written on.
Courts in Pennsylvania and New Jersey look beyond the validity of the agreement itself and also focus on whether the employee who signed a restrictive covenant possesses anything worthy of protecting. In other words, for an employer to enforce a restrictive covenant, there must be a “protectable interest” at issue – meaning that, if the employee were to violate the restrictions on behalf or for the benefit of a new employer, his or her former employer would lose a competitive advantage or suffer irreparable harm. Typically, courts look to three different types of protectable interests in determining whether a restrictive covenant is enforceable: (1) goodwill; (2) trade secrets/confidential information; and (3) specialized training. Without showing that your former employee possesses or can leverage one of these, a court is likely to let him or her escape the restrictions previously agreed to. Your company should evaluate the following protectable interests before initiating litigation to enforce an agreement:
- Goodwill: Goodwill is essentially the reputation or loyalty that a business creates with its client base through an employee. An employee can leverage this goodwill based on contacts with clients or suppliers that the former employer facilitated for the employee through the expenditure of its resources to procure and maintain. This category occurs most frequently with individuals involved in sales. Courts tend to protect a company from an employee when the company has spent its resources and enabled the individual to develop a book of business.
- Trade Secrets/Confidential Information: An employee that has access to trade secrets or confidential/proprietary information may also properly be subject to restrictive covenants. Such information, however, must actually constitute a trade secret or truly confidential information. Courts look to whether the information can be discerned from publicly available sources or industry knowledge or, instead, if it was created internally for the sole benefit of the business. Courts also look at whether the company took measures to actually protect the confidential nature of the information through, for example, password protection or requiring all employees who can access the information to sign confidentiality agreements.
- Specialized training: Company-provided training that is specific to the employee’s role at the company, but is distinct from training that is generally available, may also constitute a protectable interest. The training must be focused on some internal process of the company that is unique from training that an employee may receive generally for a particular field or course of study. Courts are more likely to protect the interests of a company who provides a particular skillset for the employee to perform his or her role.
Before you draft that all-important restrictive covenant agreement and seek to have an employee sign it, or before you send out that cease and desist letter when your former employee bolts to a competitor, make sure that your agreement will be enforceable. Understanding what is required to enforce a post-employment restriction could save your company substantial litigation fees, not to mention increasing your chances of prohibiting the former employee from damaging your business and stealing a competitive advantage.