In addition to drafting a restrictive covenant in a narrow fashion in order to protect the employer’s legitimate business interests (as discussed above), there are a number of other things that employers can do to draft restrictive covenants that are both enforceable and broad enough to effectively protect the employer’s confidential trade secret information. Additionally, employers should always draft their restrictive covenants with enforcement in mind.
Therefore, the company, with the assistance of employment counsel, should take some time to determine whether a court will strike the restriction because it is too broad, or whether a lawsuit relating to the restrictive covenant will be brought in a favorable forum. Here are some additional recommendations to make restrictive covenants more likely to be enforceable.
(Secure the Promise Not to Compete During Pre-Hire Negotiations) It is much easier to secure a legally-binding promise or agreement not to compete from an employee during pre-hire negotiations compared to trying to secure one after an employee has already begun employment. If a restrictive covenant is obtained during employment (as opposed to before or as a condition of), courts will generally look to see whether valid consideration was given in exchange for the covenant. As discussed above, in Illinois, continued employment for “a substantial period of time” (e.g., two or more years) has been held to be sufficient consideration for a restrictive covenant to be enforceable after an employee has already begun work. However, there is always the question of what constitutes a “substantial period of time.” This rule of law does not apply in every state.
Yet another reason why it is better to secure a pre-employment agreement not to compete is that, in some states with strong employee protections, terminating an employee for refusing to sign a confidentiality agreement or non-compete agreement can be a wrongful termination in violation of public policy.
(Consider Venue and Forum Selection Clauses)
An employer’s failure to include within an agreement the protections of a venue and forum selection clause may be outcome-determinative. Since an employee may avoid a restrictive covenant’s enforcement by rushing into a employee-favorable state or federal court, this omission may be fatal. Employers should carefully balance the merits of a forum where jurisdiction is easily obtained and where a quick hearing may be held against the importance of finding a forum that will apply favorable law.
In light of this consideration, employers should draft into their restrictive covenants venue and forum selection clauses to avoid to the extent possible the unwanted “race to the court.” If an employer can ensure that the merits of a case are heard in the forum most favorable to the employer’s arguments, the employer’s likelihood of protecting its interests will be greatly enhanced.
(Consider Choice of Law Provision)
A choice of law provision may also be essential to enforcing a restrictive covenant. A choice of law provision dictates what state law applies (regardless of where the case is filed) and certain states have more favorable laws when it comes to the enforceability of restrictive covenants than others. When inserting a choice of law provision, a drafter must pay particular attention to make sure that the choice of law provision actually helps to enforce the restrictive covenant. For example, choosing California law will clearly undercut any attempt to enforce a restrictive covenant since it is against that state’s public policy to restrict an employee from working for a competitor.
It is also important, as with all contracts, that the choice of law provision bears a reasonable relationship to the state where the employer is located or where the employment agreement has been executed. A court will likely invalidate a choice of law provision which dictates that Illinois law will apply when, for example, the employer is located in California, the employee lives in California and the employment agreement was entered into in California.
(Consider Savings and Extension Clauses)
A “savings clause” is a clause in a contract which states that if any of the provisions contained in the agreement are declared unreasonable, against public policy, or otherwise void, the agreement should still be interpreted
to bind the employee to the maximum extent provided by law. Although different states adopt different rules, savings clauses are generally recognized and serve as a substantial advantage to employers since they can rescue potentially invalid or overly broad non-compete agreements.
Equally as important is a provision that extends any restriction during an employee’s breach. For example, if an employee has a one-year restrictive covenant and litigation over the restrictive covenant takes a year, without an extension clause, the employee will be able to compete at the end of the litigation regardless of the outcome of the litigation. In short, an extension clause is a way to ensure that the employer gets the benefit of the bargain and the full protection of the restrictive covenant.
(Carefully Consider Arbitration Clauses)
Arbitration is a dispute resolution mechanism whereby parties to a contract agree to submit any disputes arising under the agreement to resolution by a neutral arbitrator or arbitrators selected through a procedure outlined in the agreement. The arbitration mechanism is authorized by both state and federal courts. The decision rendered by the arbitrators is generally final and not appealable.
Whereas many employers prefer arbitration since it involves less preliminary process and because the ultimate claim resolution is quickest, and typically because arbitrators are selected due to their expertise in a given field, arbitration is not always an appropriate means to resolve restrictive covenant disputes. For example, it does not always offer a means for securing immediate injunctive relief to stop a breach on a temporary basis and the costs of the arbitrators can be quite high, often running into the tens of thousands of dollars (whereas the filing fees in common law courts are small). Moreover, securing the testimony of a non-cooperative, out-of-state witness can be difficult, if not impossible, during an arbitration.
However, if you do use an arbitration clause, make sure that it is drafted carefully and enforceable. For example, don’t limit remedies that would be available to an employee in court and don’t require employees to pay for the costs of arbitration -- both of these could invalidate the arbitration agreement on grounds that it is unfair or unconscionable to the employee.
Additionally, make sure the arbitration clause provides for adequate discovery,
is sufficiently clear, conspicuous and unambiguous and that it clearly outlines which issues can be arbitrated. Finally, make sure that language is included in the agreement that the arbitrator must render written findings of fact and a reasoned decision.
(Consider Attorney Fee and Injunction Provisions)
While not specifically related to whether a restrictive covenant is enforceable, it is prudent for employers to insert an attorney fee provision in their employment agreements stating that the employee agrees to pay all reasonable attorneys’ fees and costs incurred in enforcing the restrictive covenant. Among other reasons, simply having this provision can serve as a deterrent to a former employee who may not want to run the risk of having to pay its former employer’s attorneys’ fees if there is litigation about the covenant. Such attorney fee provisions are generally enforced by the courts.
However, be aware that some jurisdictions may not enforce a one-sided provision that purports to award fees only to the employer.
The same provision should also include language expressly providing that the employer shall be entitled to an injunction restraining the breach or illegal competition by the former employee. This may further serve to protect the employer from protracted and costly litigation. In fact, very frequently these cases are, in practical effect, decided virtually upon filing if the employer seeks and is granted a temporary restraining order against the competitive activity. This order usually puts the ex-employee out of work and deprives him/her of the means to pursue the battle in the long term, especially if the agreement has an attorneys’ fees clause. Continued defense of the claim by the ex-employee becomes too great of an economic risk.
(Ensure That the Restrictive Covenant Is Executed by the Proper Parties) Today, many companies have several affiliated or related companies, as well as assumed names that they use in their particular industries. Moreover, there are many instances where companies are purchased by others but corporate formalities are not observed. These and other similar situations pose roadblocks for employers in the enforcement of restrictive covenants. If, for instance, a restrictive covenant is in an employment agreement signed by Company A, but Company B, for whatever reason, attempts to enforce the agreement, a court is likely to hold that it is not enforceable because, among
other reasons, a protectible interest has not been sufficiently established.
Likewise, if the enforcing employer is not in good standing with the Secretary of State, enforcement will not lie.
Similarly, Illinois law is clear that if a corporation uses a wrong name, it will not be permitted to benefit from the protections afforded them under the law.
In fact, a corporation’s failure to properly use its corporate name will stop it from asserting a legal right to which it may otherwise be entitled. If corporate formalities are not adhered to, an employer runs the risk of having a court invalidate the restrictive covenant on basic contract principles.
(Include Assignability Provision)
Many states will not enforce a restrictive covenant when the identity of the employer has changed (e.g., by an asset sale) unless the agreement includes a consent to assignability. Therefore, make clear in any restrictive covenant agreement that the company may assign the covenant to an affiliated company or successor in interest without notifying the employee. Also, defining the employer at the beginning of the agreement to include the company’s successors and assigns is likewise recommended.
C) Other Legal Theories That Can Protect Confidential Information