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Non-Compete Blog

If you are an employer in a highly mobile and competitive industry, whether it is banking, tech, staffing or otherwise, obtaining a valid restrictive covenant agreement is a key step in protecting yourself from unfair competition if your employees are poached by rivals or otherwise seek to compete with you after leaving.   But unless it is properly- and narrowly-drafted and the circumstances under which it is obtained are appropriate, the agreement and the employer’s ability to enforce the agreement will be subject to challenge, and that agreement for which the employer paid good money may prove unenforceable.

Until passage of the federal Defend Trade Secrets Act (the “DTSA”), previously discussed in this blog, employers had limited access to the federal courts when their trade secrets were misappropriated.  We pointed out that the DTSA allows employers to file a civil suit in federal court for theft of trade secrets and obtain injunctive relief against the misuse of those secrets as well as damages and attorneys’ fees.  In extraordinary circumstances, the DTSA allows for the ex-parte seizure of trade secrets by law enforcement to prevent their propagation or dissemination.

A breach of a restrictive covenant agreement containing a non-compete, confidentiality or non-solicitation provision can result in the dissemination of company trade secrets, loss of customers, and damage to a company’s goodwill. Similar claims may arise in employee lift-out cases, or when there has been the sale and purchase of a business or professional practice.  To stem the damage or likely risk of harm, most aggrieved employers will file a breach of contract suit and initially request emergency “injunctive” relief, via a “temporary restraining order” which can be granted ex parte on demonstrated need without a trial, and a “preliminary injunction” that can only issue after a hearing.

When a court determines that a non-compete agreement is overly broad and unenforceable as written, that may not be the end of the story. A distinct minority of states will refuse to enforce the entirety of a non-compete agreement that the court deems unreasonable, a practice sometimes referred to as “all or nothing enforcement.” However, the majority of courts will still try to enforce the agreement if they can correct its flaws. Certain courts will rewrite parts of the contract to make it reasonable, a policy referred to as “judicial reformation.”  In addition to, or instead of judicial reformation, some jurisdictions employ “blue penciling,” a practice where courts will strike the offending language from the agreement.

The enforceability of restrictive covenants depends, to some degree, on which State’s law applies to an employment agreement. Many employment contracts have a choice-of-law provision, but a recent case from New York’s highest court makes clear that the parties’ choice of law will not always be honored.

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