‘Tis the Season…(to review your restrictive employment agreements)
To get your New Year off to a good start, we suggest you consider entering into restrictive employment agreements with key employees to protect your company’s business and goodwill. If you already have such agreements, but they have not been reviewed recently, it is a good idea to have them reviewed now.
When litigating restrictive agreements, the side opposed to the agreement will always point out that “courts do not favor restrictive agreements because they constitute a restraint of trade.” As a result, courts continue to revise what they believe is reasonable to enforce. In particular, the courts will look at the employer’s legitimate business interest in seeking enforcement and will weigh that against an employee’s right to seek employment in a free market economy. A restrictive agreement that may have been acceptable to a court five years ago may be rejected by a more modern court as being too restrictive.
The rules may be slightly different depending on the state of employment and your particular state’s court decisions may need to be examined to ensure your restrictive covenants are in line with current decisions. This article will focus primarily on Indiana cases.
Elements of Agreements
The first determination needs to be whether the employment will be at-will or the employment will be for a specific duration. For the most part, the courts do not seem to be concerned with the length of the employment when it comes to enforcing the restrictive covenants.
Most of the litigation seems to concern non-compete agreements, a specific type of restrictive covenant. The courts continue to look at three main topics to determine whether the agreement is reasonable. Those are: 1) time; 2) area; and 3) activities. First, with regard to time, it is generally accepted that an agreement that lasts no more than two years after the employment relationship is terminated is reasonable. Although a longer period may be considered if the former employee is a principal of the company and is agreeing to stay out of that line of business when the company is sold, for a non-owner employee, two years seems to be the maximum amount of time. Nevertheless, if the company’s business is highly competitive such that its customer base or goodwill does not extend beyond a year, courts will scrutinize (and perhaps not enforce) a two-year restriction in such circumstance. Second, with regard to the area, courts prefer that the employer have a narrowly defined geographic area from which the employee will be prohibited from working. Some courts insist that an employer has no legitimate business interest in enforcing an agreement in geographic areas where the employee did not work. It has determined to be outside the employer’s legitimate interest when the employer itself is not doing business in a certain geographic area. For example, if an employer is regional, but insists on enforcing its non-compete agreement “throughout the world,” it is extremely likely that the court will not enforce such a broad agreement. Third, the activities proscribed have been narrowed further by the courts. Courts have held that an employer does not have a legitimate business interest in keeping an employee who has worked as a sales person from being a janitor for a competitor. The theory is that the employee’s skills and information gained as a sales person would have no benefit to him (or his new employer) as a janitor with a competitor. (Even though that is the example often used by attorneys litigating against a restrictive covenant, we have yet to see a case where a sales person has in fact sought to be a janitor elsewhere.) Regardless, courts seem to be more likely to enforce an agreement if the employer limits its application to performing similar duties for a competitor.
Another type of restrictive covenant is a non-solicitation provision. We often draft non-solicitation provisions in agreements and these are more likely to be enforced by a court than a non-compete agreement. A typical agreement would restrict an employee from soliciting fellow employees to leave their employment. The courts seem to be bothered by the idea of “corporate raiding,” where a group of employees are solicited to work for a competitor. With regard to solicitation of customers, a court may be reluctant to enforce a non-solicitation agreement where the customers are not those who worked with the employee previously (i.e., restricting a large customer list against employees who had no contact with or information respecting those customers). Also, we have seen that some courts are reluctant to enforce the non-solicitation of customers with whom the employee has not had contact for several years.
We normally recommend that an employer also include a provision against the use of confidential information. (Note, however, that a company’s failure to take reasonable steps to protect its confidential information may result in a court’s refusal to grant it protection under trade secret laws.) Included in a confidentiality of information provision should be the requirement for the employee to return all company property, including data, upon termination of employment.
Other clauses which should be considered include a protective provision by which the employer advises in writing that its employee should not use confidential information concerning its former employers and disclosure of any non-compete agreements in effect from a former employer. We also suggest including a requirement that the employee notify the company of subsequent employment during the restrictive period. An agreement should include a provision for payment of attorney’s fees and costs and the remedies which may be sought in enforcing the agreement. We suggest including which state’s law should be applied in interpreting the agreement and we may even suggest including where the case may be initiated (we prefer Indiana). Finally, we recommend that the agreement be subject to review by the employee’s legal counsel if the employee so chooses. It takes some of the equitable argument away from an employee if he is unable to claim that the agreement was “forced down his throat” without the opportunity to be reviewed by his own counsel.
Please let us know if we may be of assistance in drafting or reviewing restrictive employment agreements for you or your company.
Author Donald S. Smith
Don Smith limits his practice to representing employers and executives in labor and employment matters. He defends employers in cases pending before state and federal courts, the National Labor Relations Board, Equal Employment Opportunity Commission, Indiana Civil Rights Commission, U. S. Dept. of Labor, OSHA, IOSHA, Indiana Dept. of Workforce Development, and Indiana Worker’s Compensation Board. Don advises employers concerning various employment issues such as employee handbooks, employment agreements, severance agreements, covenants not to compete, restrictive covenants, wrongful termination, collective bargaining, labor arbitration, unions, discrimination, harassment, wage and hour matters, unemployment compensation and worker’s compensation.
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Posted on Jan. 8, 2018, by Donald S. Smith