E. Restrictive Covenants and Related Problems

As discussed in Chapter Three, restrictive covenants are clauses in agreements that prohibit you from directly competing with or working for a competitor of your employer. They also are drafted to protect employers against the dissemination of confidential trade secrets and other information.

Each state has its own rules for deciding whether to enforce a restrictive convenant. Obviously, where possible, avoid signing any such clause in an employment agreement before you begin working. The reason is that even if the company cannot validly restrain you from using confidential information (such as a customer list) or prohibit you from earning a living in the future, the threat of a lawsuit or the filing of a lawsuit will cost you time, money, aggravation, and expensive legal fees.

Tip: Avoid signing any document with significant restrictions. Always consult a lawyer before deciding to execute such a document. (Note: Signing a document prohibiting you from revealing trade secrets or confidential information is often not as serious as one prohibiting you from calling on customers you previously serviced or working for a competitor. Trade secret covenants are often difficult to enforce. Thus, weigh the relative risks and benefits before signing.)

Additionally, consult an experienced lawyer immediately when an ex-employer threatens to sue you to enforce a restrictive convenant. You may be surprised to learn that the employer will be unsuccessful in a lawsuit. However, the lawyer may suggest a settlement (such as reducing the time of the covenant from six months to two months or agreeing to refrain from competing provided you are paid your regular salary during this period) with the employer to spare you the additional expense.

Counsel Comments:When companies are in breach of important contract terms, the law sometimes presumes they have unclean hands; often in such situations, restrictive covenants will not be applied against you.

For example, the author once defended several sales employees who had gone into business in competition with an ex-employer. Previously, they contacted me to review an employment agreement they had signed with the ex-employer. The agreement contained a restrictive covenant. During the consultation I learned that the employer had reduced their salary contrary to the agreement. My clients had protested this unfair, unilateral action, both orally and in writing.

The employees were sued after commencing business operations. At the trial, the judge heard testimony regarding this unauthorized unilateral cut of pay. The judge ruled that the employer was obligated to pay a specified, predetermined salary per the contract. Since the employer had unfairly reduced their compensation, the restrictive covenant was not enforceable.

The issue of whether a restrictive covenant cannot be applied against you depends on the unique circumstances and facts of your particular case. Often the issues are not clear-cut and the results cannot be predicted easily. For example, a New York Supreme Court justice recently upheld a six-month anticompetition clause in an employment agreement. New York courts have traditionally been reluctant to enforce noncompete clauses that prevent someone from earning a living unless the former employee is ÒuniqueÓ or could use the employer's trade secrets. However, the covenant was enforced against four terminated foreign exchange brokers because the employer agreed to pay the employees their full salary during the six months that the covenant was in effect.

Tip:The case might have been decided differently if the covenant was longer than six months. However, the case illustrates the importance of always consulting with an experienced employment lawyer for advice where applicable.