What is a restrictive covenant?
You may have also encountered them in real estate. For example, if your landlord includes a restriction in the least for you not to use the premises in particular ways, thats an example of a restrictive covenant. When I act as legal counsel for employers and employees, a major issue becomes which, if any, restrictive covenants should apply to their employment relationship. Industries in which clients are essential to the business are where you often find restrictive covenants (think: non-solicitation). They are common in sales, investment advising and advertising. They are used more broadly, however, to protect existing employees from being hired away by departing employees and their new employers. Non-competition clauses are often used in industries in which employers want to protect technology or designs, especially if the employees are instrumental in creating and using them. When it comes to enforcing restrictive covenants, how they have been drafted matters greatly. For instance, non-competition clauses are usually not enforceable unless they are very narrowly drafted. And while provisions that restrict solicitation usually are enforceable, they still must be drafted properly, too. This is because courts are reluctant to restrict an employees ability to find new work, especially in their field or area of expertise. The general idea is that when it comes to employment, its in the interest of employers, employees and society in general that people can find new work after their position ends. With that in mind, it makes sense that restricting competition is more difficult than restricting solicitation. What makes restrictive covenants likely to be enforceable is if they accurately and fairly define things like their duration, the geographical area they apply to, and include definitions of terms like competing business. In other words, the enforceable/unenforceable distinction is a general one, and if a term is fair and reasonable, a court may still uphold it. The party benefitting from these termslike an employercan go to court to seek an order enforcing the terms. The usual enforcement mechanism is a cease and desist letter and, failing that or in lieu, an application to the court for an injunction. An injunction is a court order that enforces the restrictive covenant by preventing you from doing what you agreed not to do. For example, if an employer discovers that you downloaded a client list and emailed it to a competitor, and then you announce that you are immediately going to work for that competitor, they could enforce the clause in your contract prohibiting you from doing that by getting an injunction. The injunction would likely state that you and your new employer are not permitted to use that list, that you have to return it, and that you are liable for damages arising from your conduct. An injunction is an extraordinary remedy, and if the legal test is met, it can also be obtained without notice to you. The repercussions can mean loss of new employment and exposure to considerable damages to your new employer. If you sign a restrictive covenant or are asked to, you are wise to speak to a lawyer so that you understand what you can and cannot do. If youve breached these terms with the involvement of a new employer or another party, they could also be on the hook. Most employers are aware of this when they hire you, too. You will often see a term of an employment contract that asks you to promise that you are not bound by such restrictions, which would otherwise prevent you from working for them. Make sure you know what you are signing before you put your name on the dotted line.