Effective Restrictive Covenants Are Harder Than Ever To Draft

Are you considering asking your employees to sign a confidentiality or non-solicitation agreement? If so, have you carefully considered just what you are seeking to protect? Before creating an agreement with post-employment restrictions, an employer must understand just what it is seeking to protect and keep that legitimate protectable interest in mind as it prepares the agreement. An agreement that protects any more than this legitimate protectable interest may not survive legal challenges in an area employers are increasingly finding it difficult to enforce.

Why do you need Restrictive Covenants?

Restrictive covenants are needed to protect a company from a former employee taking the training he received, the customer base he fostered at company expense, or confidential information learned and providing it to a competitor. It prevents a competitor from “purchasing” business by offering an employee an over-market salary to bring business with him. Unfortunately, however, courts do not like restraints on trade, and thus these agreements must be carefully drafted.

Non-compete agreements

Non-Compete agreements are agreements that prohibit an employee from working in a competitive business for a set period of time and within a specific geographic area following separation from employment. These agreements should be used sparingly, as this type of restraint on trade are viewed disfavorably by courts. Limiting non-competes to employees who present a genuine competitive threat demonstrates the importance and reasonableness of any restrictions, and enhances the likelihood that the agreements are enforced. Moreover, they are enforceable only to the extent that the restrictions are no greater than necessary to protect the employers’ legitimate business interests and do not impose and undue hardship on the employee.

Anti-piracy agreements

An anti-piracy (aka non-solicitation) agreement is less restrictive. An anti-piracy agreement permits a former employee to work in a competitive business, but restricts him from interfering with customer relationships. Employers must take care to ensure that the restrictions in such an agreement are not broader than necessary to protect its legitimate business interests. This generally means that the restriction must take into consideration the relationship the employee had with the customer. The restriction cannot encompass all company customers regardless of the relationship the employee had with those customers. It must also be limited in time to what is no longer than necessary for the employer to put a new employee on the job and to allow that employee a reasonable opportunity to demonstrate his effectiveness. Employers should consider whether accounts will be reassigned to current employees or whether a new employee will need to be hired and trained. This may assist employers in selecting an appropriate duration.

Additionally, some non-solicitation agreements prohibit employees from soliciting employees from their former employer. Again, those restrictions must be reasonably tailored in duration and scope to protect the employer. Restrictions that are broader than necessary (i.e., those that restrict solicitation of employees regardless of their knowledge or the extent of their relationship) are likely unenforceable.

Confidentiality or non-disclosure agreements are used to prohibit an individual from using or disclosing a company’s proprietary information both during and after the employment relationship has ended. Confidentiality agreements can only protect truly confidential information that is not generally known to the public. Information that is available through public means, but pieced together at significant time and expense by an employer is not considered confidential. Employers must also take care not to restrict an employee from using skill and general know how acquired during employment. Such restrictions are overly broad and not enforceable.

Trade Secrets

Although trade secret information is given added protection under the Arizona Uniform Trade Secret Act (the “Act”), trade secrets should also be identified in confidentiality and non-disclosure agreements. Employers should limit access to trade secrets to only those employees who actually need such access. Otherwise, trade secret information should be password protected and access to such information should be monitored. The more protection given to this information, the more likely a court may treat this information as a trade secret and the less likely an employee with access will be able to retain access following separation from employment.

Conclusion

Restrictive covenants, such as non-compete or non-solicitation provisions should be considered only for key employees. Confidentiality agreements, on the other hand, should be used with all employees. Keep in mind that restrictive covenants are only as good as an employer’s willingness to seek enforcement. Employees are more likely to take these agreements seriously when employers make it clear that they will seek enforcement as a result of any breach. Narrowly tailored agreements may also be regarded more highly as they don’t aim to overly restrict departing employees. We encourage employers who have specific questions about implementing confidentiality and non-solicitation agreements to contact Jodi Bohr at jrb@tblaw.com or (602) 255-6082.