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Restrictive Covenants in USA

1. Definition of Restrictive Covenants

Restrictive covenants are contracts entered into between the employer and employee to protect the employer’s business interests, such as trade secrets and other confidential information, investments in employee training, and customer goodwill.

2. Types of Restrictive Covenants

a. Non-Compete Clauses

Non-compete clauses generally prohibit an employee from working for competitors or otherwise engaging in competitive business activities during the period of and for some set period after employment.

b. Non-solicitation of customers

These provisions typically try to protect customer goodwill by preventing employees from attempting to take away the employer’s customers post-employment.

c. Non-solicitation of employees

These provisions typically try to protect the employer’s investment in training and development of its workforce by preventing employees from attempting to take away the employer’s employees post-employment.

3. Enforcement of Restrictive Covenants—process and remedies

The enforceability of restrictive covenants in the U.S. is determined by state law. Generally, courts in states that enforce non-compete agreements hold that a covenant restricting the activities of an employee upon the termination of his or her employment with the employer will be enforced if it protects a legitimate business interest, is reasonably limited in scope, time and place, and is supported by consideration, and is reasonable.
Some common remedies included in restrictive covenant agreements are:

  • Irreparable Harm: Acknowledges that breach will cause and entitle employer to seek and obtain injunctive relief.
  • Attorneys’ Fees: Beware of generic “prevailing party” language (some courts interpret this as a requirement for success on the merits).
  • Arbitration: Particularly if confidentiality is a real concern (including right to expedited discovery and relief).
  • Forfeiture: Conditions the receipt of certain benefits / compensation on the promise of non-competition.

4. Use and Limitations of Garden Leave

Like restrictive covenants more generally, there is no clear federal law regarding garden leave and each situation will be examined independently. Unlike in many countries, however, it should not be assumed that garden leave would be valid in the U.S. if it does not satisfy restrictive covenant requirements.

For more information on these articles or any other issues involving labour and employment matters in United States, please contact John Sander, Partner at Jackson Lewis P.C. (www.jacksonlewis.com) at John.sander@jacksonLewis.com
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