You Cannot Create A Restrictive Covenant Out of Thin Air

01 August 2016 Labor & Employment Law Perspectives Blog
Author(s): Kevin E. Hyde

I recently read a lengthy, and I have to admit, well-crafted letter by one employer (who I will call Company A) accusing a former executive (Mr. B) of violating every conceivable restriction relating to recruiting employees from Company A. Mr. B had left Company A and remained in touch with his old colleagues. In fact, in his former life Mr. B had recruited many of them to work for Company A. Now Company A’s counsel accused Mr. B of unspecified violations of law because he had specialized knowledge of the employees’ compensation, capabilities, career interests and ambitions, and knew the impact on Company A if the employees – one or all – left to accept employment with the company where Mr. B now worked. The letter was so well crafted that upon first glance it appeared both Mr. B and his new company were deep in trouble.

Or were they?

Upon closer read, I noticed that something was strangely absent. There was no mention of any employment agreement between Company A and Mr. B. No reference to Mr. B being subject to any restrictive covenant with Company A, whether it be non-compete, non-solicitation, or even protection of confidential or proprietary business information. And why no mention? Because Company A had failed to require Mr. B to sign any such agreement. Now Company A needed to “create” those agreements where none existed.

This scenario is a classic example of not thinking ahead. Company A failed to protect its financial investment and employees’ intellectual capital. Putting aside the prohibition or difficulty in some states of a true non-compete, most of Company A’s problems could have been solved with a few simple documents. So what should Company A have done?

  1. Obtain a non-solicitation agreement. Particularly for senior and executive employees, the non-solicitation agreement can restrict an employee from soliciting colleagues from the former employer for a reasonable period of time.
  2. Do not automatically make the non-solicitation a blanket prohibition. It can be, but does not have to be. Instead, consider tailoring the agreements specifically to employees the former employee is most likely to recruit. This may be the direct reports, or those within the same department or area of responsibility. Or, maybe even more specifically individuals listed by name or job title or function. The narrower the better.
  3. Protect pertinent information. Think seriously about the type of information the recruit will have access to and ensure that this information is protected for later disclosure or use. A confidentiality and non-disclosure agreement can accomplish this goal. Keep in mind that there is not a legitimate business interest in every possible scrap of information, but draft agreements broadly enough to cover intellectual property, and confidential business or proprietary information.
  4. Request employment agreements. Think about those employees who may work closely with a particular supervisor and executive and who may be tempted to follow the supervisor or executive somewhere else. Before or after the supervisor or executive leaves, obtain an employment agreement or restrictive covenant preventing or making it much harder for the employees to follow along and leave their current employer.

Restrictive covenants can be dicey. States vary as to their laws and enforcement, the new Defense of Trade Secrets Act creates a federal cause of action in some instances, and there is the employee relations issue of how people will react if asked to sign. But unlike our friends in Company A – who tried to create an obligation where none existed – think ahead of how to secure or retain the continued employment or good employees.

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