A large company is about to buy one of its major competitors. A scientist with critical knowledge pertaining to a cutting-edge-technology unexpectedly turned in his two week notice to leave the organization. The vice-president of business development is being laid off due to slower sales during the recent recession. These examples are but a few circumstances in which using restrictive covenants can help preserve business assets that an organization worked hard to develop.
State laws hold varying views on the enforceability of such restrictive covenants because of tension that could arise between the business’ desire to protect its assets and the rights of individual employees to work and engage in a trade. As a result, many states take the perspective that restricting an individual’s right to engage in trade is contrary to public policy. Other states, such as Florida, recognize valid reasons to the restriction exist, which is why it’s critical to identify the law within a contract that will be used to interpret a contract containing restrictive covenants. The following are some tips to help ensure restrictive covenants are enforceable:
The covenants must be crafted narrowly to protect a “legitimate business interest” meaning:
- trade secrets.
- valuable confidential business or professional information other than trade secrets.
- relationships with specific prospective and existing customers, patients or clients.
- customer goodwill associated with a business or professional practice, geographic location, or specific marketing or trade area.
- extraordinary or specialized training.
Make sure the restrictions are limited to what’s reasonably necessary to protect the legitimate business interest or interests justifying the restriction. Many employers want to write these restrictions broadly to afford the most protection. But such a tactic may make the restriction unenforceable, if it can be effectively argued that the broad restriction is not reasonably necessary. Develop security measures within your business operation that support the restrictions. If your business develops confidential and proprietary information, make sure procedures are in place to demonstrate the information is treated as confidential and proprietary. This process may include separate files with limited access on paper files or password access limiting employees’ exposure to only the information necessary to perform their jobs effectively.
Ensure the business has not, in some way, breached other provisions of the agreement it seeks to enforce. If an employer materially breaches the agreement prior to the employee’s poor conduct, the restrictions may be held unenforceable under Florida law. For instance, failing to properly compensate an employee for hours worked may be held as a prior breach invalidating the agreement, thus making restrictive covenants unenforceable.
If properly drafted, incorporating restrictive covenants within business agreements are an effective method to protect valuable company assets and interests. However, employers should remember that enforcement through litigation can be difficult and often expensive. Additional difficulties arise when the restrictive covenants are drafted unreasonably or other issues exist that create defenses to enforceability. Employers should obtain guidance on both the proper drafting of the restrictions and their systems for treating business assets appropriately within the organization.
Mark Addington is a partner at Addington Law in Jacksonville. He can be reached at (904) 248-2429 or email@example.com.