RESTRICTIVE COVENANTS
April 24, 2012
Jessica Golden Cortes
Partner
212-468-4808
jcortes@dglaw.com
RESTRICTIVE COVENANTS
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Restrictive Covenants
TYPES OF RESTRICTIVE COVENANTS
- Non-Compete
• With and without guaranteed severance for termination
with out cause
• With and without salary continuation at employer’s
choice
• Industry-wide vs. limited by product or competitor
• Varying lengths
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Restrictive Covenants
TYPES OF RESTRICTIVE COVENANTS
- Client non-solicitation and Client non-service
• Can apply to all Company clients; or
• Limited to clients employee serviced (greater
likelihood of enforceability)
- Employee non-solicitation (non-raid)
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Restrictive Covenants
OTHER CREATIVE SOLUTIONS
WITH SIMILAR IMPACT
»Notice Period/Garden Leave
- Employee obligation to give fixed notice of
resignation
- Employee remains an employee during notice
period – duty of loyalty continues
- Salary and benefits continue
- Employer right to shorten; sideline employee
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Restrictive Covenants
OTHER CREATIVE SOLUTIONS
WITH SIMILAR IMPACT
» Deferred Compensation – future vesting of cash
payments in exchange for continued employment
and/or restrictive covenant; forfeited by resignation
» Restricted Stock Options – equity-based incentive;
vests over time; forfeited by resignation
» Forfeiture for Competition – benefits contingent upon
compliance with restrictive covenant; not subject to
same scrutiny by the courts because of employee
choice
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Restrictive Covenants
REMEDIES
» Injunctive relief
- expedited process to prevent “irreparable harm” that
cannot be quantified in money damages;
- Expensive; time consuming; can be difficult to prevail given
general disfavor of courts on restricting freedom to earn
living
» Liquidated damages
- i.e., 1 year’s revenue from the “stolen” client; 33% of
“poached” employee’s salary, representing headhunter fee
to replace employee
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Restrictive Covenants
NEW YORK
»Legitimate employer interests:
- Protect against misappropriation of trade secrets/use or
disclosure of confidential information
- Protection from competition by employee whose services
were unique or extraordinary
- Protection of customer relationships and goodwill
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Restrictive Covenants
NEW YORK
»Arakelian v. Omnicare, Inc. (E.D.N.Y. 2010)
- restrictive covenants unenforceable where
employee terminated without cause;
• “Enforcing a noncompetition provision when
the employee has been discharged without
cause would be ‘unconscionable’ because it
would destroy the mutuality of obligation on
which a covenant not to compete is based.”
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Restrictive Covenants
CALIFORNIA
»For most part, restrictive covenants are
unenforceable and illegal in California, unless
incident to sale of a business;
»Employee non-solicitation provisions still valid;
»Provisions prohibiting use and/or disclosure of
confidential/proprietary Company information valid
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Restrictive Covenants
ILLINOIS
» Similar to New York
» Legitimate employer interests under the totality of the circumstances.
Factors considered:
• Strength/permanence of the relationship w/ the client
• Possession of confidential/proprietary information
• Time/territorial restrictions.
- Restriction must not unduly burden employee or be injurious to the
public
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Restrictive Covenants
TEXAS
»Marsh USA v. Cook (TX Supreme Court, Dec. 2011)
- Previously, continued employment not sufficient
consideration for restrictive covenant; exchange of
confidential information required.
- After Marsh, customer relationships/good will
protectable
- Stock options/compensation can be consideration
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Restrictive Covenants
RESTRICTIVE COVENANTS: TIPS
»How to Tailor:
- Geographic limitations
- Product Competitor Limitations (e.g., if worked on
Coke account, cannot work on Pepsi account at
competitor for one year)
- Client service limitations (those employee worked with)
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Restrictive Covenants
RESTRICTIVE COVENANTS: TIPS
» When should an employee sign an agreement?
- At inception of employment (continued employment is consideration);
- Note: if after commencement of employment, in some states, continued
employment alone is not sufficient consideration;
• IL – not sufficient unless employee continues to work for a
“substantial period” after signing agreement (Illinois)
- IL courts have held 7 months not enough, 2-3 years enough
• Sign along with discretionary bonus/raise/other tangible
consideration
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Restrictive Covenants
RESTRICTIVE COVENANTS: TIPS
»Ask candidates for employment whether they are subject
to post-employment obligations of a current or former
employer
»Add language to offer letter stating that candidate
represents and warrants that she is not subject to any
post-employment obligations that will prevent her from
performing services for new employer
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Restrictive Covenants
QUESTIONS?
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Restrictive Covenants