Protecting your company's trade secrets through the use of restrictive convenants in employment agreements

Global Publication January 11, 2016

Restrictive covenants are provisions in employment agreements designed to restrict employees from certain activities after their employment terminates. Restricting an employee’s activity after his or her termination can be a significant way for an employer to protect valuable trade secrets of the company. 

The “non-compete” and “non-solicit” are two commonly seen restrictive covenants. A “non-compete” is designed to preclude the employee from competing with the employer or working for a competitor. A “non-solicit” is designed to prevent the employee from soliciting an employer’s clients or an employer’s current employees.

So are restrictive covenants enforceable?

It depends on the state law governing the agreement. For example, with a few exceptions, a “non-compete” is not enforceable in California and former employees are generally free to compete with their employer. This is because California’s public policy favors employee mobility and will only protect an employer when actual or threatened misappropriation of the employer’s proprietary information occurs. On the opposite end of that spectrum, in Florida, restrictive covenants are enforceable. Under Florida law, courts are required to construe restrictive covenants in favor of protecting the employer’s interest. 

New York law governs many contracts; are restrictive covenants enforceable in New York?

Yes, but with more limitations than in Florida. As an example, New York law provides that a “non-compete” should be strictly construed because of the powerful considerations of public policy which militate against sanctioning the loss of a person’s livelihood. However, the “non-compete” will be enforceable if it is reasonable in that it (1) is no greater than is required for the protection of a legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public. 

So why doesn’t every employer utilize a choice of law provision in the employment agreement selecting a state law like Florida’s to govern the enforcement of the agreement?

Many employment agreements do include a “choice-of-law” provision that states which any dispute will be governed by a particular state’s laws.  In many instances employers will use a choice-of-law provision to select a state law that is proven to be favorable for employer and for the enforcement of restrictive covenants.  

But is this legal? 

Well that depends.  In New York, when an agreement provides a choice of law other than New York, that choice of law may not be enforced by the court in certain circumstances.  Generally the choice-of-law must bear some substantial relationship to the parties of the agreement and the application of that law must not violate the public policy of New York.  In other words, the court will compare the law on restrictive covenants from the choice of law state selected in the agreement with the law of New York.  If the enforcement of the restrictive covenant in the choice of law state differs from New York and those differences violate the public policy of New York, then the court will not enforce the choice of law provision and will apply the law of New York in determining the extent of enforcement, if any, of the restrictive covenant.

What is the takeaway?

The enforceability of a restrictive covenant depends on which state’s law will apply and the answer to that question is not always clearly defined by the contract’s choice of law provision.  When possible it is a good idea to seek legal advice before drafting such covenants in an employment agreement so that you can ensure that your company’s trade secrets can be protected.

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