Although restraint-of-trade concerns may be raised and generally are disfavored, the courts will enforce a reasonable covenant not to compete if the employer can establish a legitimate “protectable interest,” according to Patricia Diulus-Myers, partner at the law firm of Jackson Lewis.
The question is what is a protectable interest and how do the various types of agreements differ from situation to situation. Smart Business asked Diulus-Myers to sort it out for us.
What type of protectable interests must a company demonstrate to support requiring employees to sign restrictive covenants?
Some examples of legitimate protectable interests in many states are trade secrets, confidential information and business relationships, i.e., goodwill. Also, some courts have recognized specialized training and unique employee services as legitimate bases for enforcement of a covenant not to compete.
Thousands and even millions of dollars are spent to develop goodwill with customers, vendors, suppliers and referral sources. Therefore, courts often recognize such relationships as a basis to enforce a covenant not to compete.
Are covenants not to compete, nonsolicitation agreements and nondisclosure agreements basically the same thing, or should they be approached differently?
These covenants are different and usually are found as separate covenants within one agreement. The covenant not to compete is generally more restrictive and more of a restraint on trade than a nonsolicitation agreement, which can address nonsolicitation of customers and/or employees.
Often, we recommend the use of nonsolicitation agreements when a covenant not to compete would be too restrictive or in states which are strict on enforcing the noncompetes.
A confidentiality, or nondisclosure, agreement should be used broadly, even if a company does not employ the use of the other restrictive covenants. This latter agreement demonstrates, at a minimum, a company’s affirmative steps at protecting its confidential information.
What constitutes reasonable restraint?
The following factors typically are used to evaluate reasonableness of a restrictive covenant: length of time of the restriction; geographical area covered; scope of business covered; fairness of and business need for the protection accorded the employer; extent of the restraint on the employee’s opportunity to pursue a trade; and extent of interference with public interests.
What should be included to enhance the enforceability pf noncompete agreements?
Each of the factors of reasonableness must be met in a covenant or there is a risk that it will not be enforced. On the other hand, time, geographical and business restrictions are intertwined in determining the reasonableness of a covenant.
For example, restrictions covering a large territory or scope of business might be reasonable if in effect for a short time, while restrictions covering a small territory or scope of business might be reasonable for a longer time. What is reasonable for one industry may not be reasonable for another. It is important to note that enforcement of a noncompete is a matter of state law.
The timing of signing the noncompete covenant may be significant in one state but not in another state. For example, in Pennsylvania, if the noncompete is not signed at the inception of employment, then additional consideration must be given to the employee who is asked to sign a noncompete during the course of employment.
Are there other measures, besides requiring the signing of restrictive covenants, that the employer should take to enhance the ability to enforce those covenants?
First, all employees with access to confidential information of the company should be required to sign restrictive covenants, including nondisclosure agreements. Then, establish a climate of confidentiality within the workplace. This includes developing a practical policy of maintaining confidentiality and procedures which consistently implement that policy.
The policy should include physical security issues, information security issues, communication with employees concerning the policy and contractual protection of information (nondisclosure agreements). A practice for marking documentary information as confidential should be established as well as documenting compliance with the procedures established. This will provide evidence to the court that the information at issue is valuable and that the employees are aware that the information is considered to be valuable.
PATRICIA DIULUS-MYERS is a partner in the Pittsburgh office of Jackson Lewis LLP. Reach her at (412) 232-0180.