Reasonable Competitive Restrictions Get Results
Restrictive covenant in agreements seek to restrict certain conduct. The restriction could be a prohibition to contact customers serviced by the employee while employed or customers in a particular area serviced by the employer. It could prohibit a seller from soliciting or servicing customers sold to a buyer, restrict a former employee or seller from engaging in the same business, permanently or for a particular time, etc. The terms of the restriction could be endless.
Enforcing agreements with restrictive covenants is generally a matter of state law, either by statute or case law (judicial interpretation). If there is a statute then the enforcement of the restrictive covenant would seem easier to draft. Trying to figure out the rules by reading court decisions can leave much to interpretation, particularly true when it comes to enforcing restrictive covenants.
Restrictive covenants are generally enforceable to the extent necessary to protect the interests of the employer (or a buyer), without unduly preventing the employee (or seller) from earning a livelihood, so as to not have a negative effect on the public (such as causing prices to rise by eliminating competition). So it’s a balancing act and the scale is tipped in favor of the employee, generally.
As an employer you should restrict your employees and former employees only in a way necessary for your business and not unduly burdensome to the employee. It’s reasonable to prevent your employee from soliciting your customer to whom you introduced the employee. But even that may not be indefinite in duration. If you draft unreasonable restrictions (those not absolutely necessary to protect your business) then don’t expect them to be enforced. Of course, an employment agreement with a restrictive covenant may act as a deterrent, so your employee is not willing to risk breaching the agreement and getting sued. All of your employees should sign a standard employment contract.
Our summer intern, Jesse Kirschenbaum, (Brooklyn Law School class of 2013), conducted the following research concerning Arizona, which has case law, and California and Florida, which have statutes:
Arizona — Arizona courts tend to disfavor noncompete clauses. Usually, a restrictive covenant is reasonable and enforceable when it protects a legitimate interest of the employer, beyond the mere interest in protecting itself from competition by preventing competitive use, for a reasonable period of time. This relates to information or relationships, particularly to an employer and what the employee acquired in the course of employment. In regard to the length of time a restrictive covenant can be enforced after an employee leaves, Arizona courts have consistently held two years or more to be unreasonable.
In sum, enforcement of restrictive covenants is limited to the extent reasonably necessary to protect the employer’s best interests. An employer does have a protectable interest in maintaining customer relationships when an employee leaves. The law will guard this interest by means of a covenant not to compete for as long as may be necessary to replace the employee and give the replacement a chance to show they can do the job.
California — In California, noncompete agreements are illegal. Business and Professions Code §16600 states “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Any covenant that prohibits a California employee from working for a competitor after termination of employment violates §16600. To ensure a noncompete as well as a nonsolicitation clause is valid in California, it is highly recommended the employer use language prohibiting the employee from using or disclosing the employer’s trade secrets after they leave the company. If the covenant is written as to restrict only the actions necessary to protect confidential and valuable information of the company, it is hard to imagine an employee being able to attack the covenant’s enforceability.
Florida — In Florida, a covenant not to compete is enforceable if it is deemed reasonable in time. Concerning former employees, Fla. Sta. §542.335(1)(d)(1) states that restraints of six months or less are presumptively reasonable while restraints of more than two years are presumptively unreasonable.
Ken Kirschenbaum has been a recognized counsel to the alarm industry for 35 years and is principal of Kirschenbaum & Kirschenbaum, P.C.
(www.kirschenbaumesq.com). His team of attorneys, which includes daughter Jennifer, specialize in transactional, defense litigation, regulatory compliance and collection matters. The opinions expressed in this column are not necessarily those of SSI, and not intended as legal advice.
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