Twas the night before Christmas, when all through the company;
A disgruntled employee kept saying “please jump with me.”
She was trying to line up a grand, mass departure;
Of which she was certain no one could outsmart her.

Her files had been copied, her clients all contacted;
She’d consulted a lawyer ‘bout things she had contracted.
He said that her covenants were quite overbroad;
Of this she was certain, they’d all be deemed flawed.

She proceeded to upload the secrets she’d learned;
On to flash drives, and emails and discs she had burned.
With not one regret, she reamed out her boss;
Quite sure she’d not erred, it would soon be his loss.

With eyes all upon her, out the door she receded;
Two colleagues joined with her, at least that's what she tweeted.
The office was stunned, and management surprised;
No one had foreseen that they’d soon be downsized.

“Let’s call up the lawyers. What options have we?
We’ll file a lawsuit, and then she will see!
Without our permission, our computers she hacked!
This must run afoul of the Computer Fraud & Abuse Act.”

“We must stop her now, her acts are illicit.
Without an injunction, our clients she’ll solicit.
And don’t forget the others who joined her, you see;
Together they formed a civil conspiracy.”

“Hold your horses," say the lawyers, "don’t get carried away.
Let’s pull out their contracts and see what they say.
But where are they kept? We’ve got piles and piles.
For sure they’ll be found in personnel files.”

“Let’s draft the complaint, and seek an injunction.
The defendants, you see, acted without compunction.”
The Court set a hearing, the plaintiff went first.
“Your Honor, it’s horrible, obscene and the worst!!”

“She’s taken our staff, our trade secrets, purloined;
She must be shut down, she must be enjoined!
In her contract she promised, she swore, she agreed.
The protections we seek are all guaranteed.”

“She may not solicit. It’s in simple prose.
She may not take secrets, or use or disclose.
But even without the help of contract;
Her conduct defies the trade secrets act.”

The lawyer sat down, feeling smart, feeling pleased;
The defense will be begging, they’ll get down on their knees.
So the court turned to the left where defense counsel sat;
And asked, “My dear sir, what do you say to that?”

“Your Honor, you see, they’ve got it all wrong.
Just hear me out, this won't take too long.
The data at issue are far from trade secrets.
You’ll find it in public, in brochures and on leaflets.”

“The contract is void, it lacks consideration.
And the covenants purport to cover the nation.
My clients, they acted at all times with great reason.
In contrast, the plaintiffs use contracts adhesion.”

Defense counsel sat, while the court thought about it;
Parsing through the arguments each party had spouted.
And finally the court was ready to rule;
To give its decision at this time of Yule.

“First let me address the non-compete clause;
Please wait ‘til I’m finished; please hold your applause.
The non-compete is too onerous, it’s unreasonable;
But I find that the covenants are quite severable.”

“Defendants have breached the clause nondisclosure;
Confidential information – indecent exposure.
And let’s not forget the non-solicitation;
That covenant is of reasonable duration.”

“So I’m going to issue a restraining order;
Please take this down, my dear court reporter;
A bond shall be posted at ten thousand dollars;

I say this to both parties and their legal scholars:

Explore resolution. Think how not to fight.
Merry Christmas to all, and to all a good night.”

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed

As with any contract, to be enforceable, a post-employment restrictive covenant must be supported by consideration. In some states, if a restrictive covenant is signed by an at-will employee after the inception of employment, the covenant must be supported by new and independent consideration (such as a promotion or a raise in salary).  In other states, the promise of continued employment—even to an at-will employee—constitutes sufficient consideration. Because the law varies from state to state, employers with nationwide operations must be aware of each state’s law regarding the validity of restrictive covenants signed by employees after the employee has commenced employment.

The Colorado Supreme Court recently fell in line with the clear majority position among those states that have addressed the question, holding that continued employment alone is sufficient consideration.  In Lucht’s Concrete Pumping, Inc. v. Horner, the Court explained: [w]e hold that an employer that forbears from terminating an existing at-will employee forbears from exercising a legal right, and that therefore such forbearance constitutes adequate consideration for a noncompetition agreement.”  (A copy of the court’s opinion is available in pdf format below.)

In Luchts, the former employer originally hired the employee in 2001.  In 2003, the employee signed a non-compete agreement, and he was not offered any pay increase, promotion or any other additional benefit.  In 2004, the employee resigned and joined a competitor.  Not long thereafter, the former employer sued to enforce the restrictive covenant, and the trial court found it unenforceable due to a lack of consideration.  The Colorado Court of Appeals agreed because, in its view, the continued employment of an at-will employee cannot by itself constitute consideration for a non-compete agreement.  The appellate court reasoned that under these circumstances, nothing prevents the employer from discharging the employee after he signs the non-compete, and therefore, the at-will employee receives nothing more than what he was already promised at the inception of at-will employment. 

The Colorado Supreme Court disagreed, and stated that it chose to join the majority of jurisdictions “that conclude that an employer’s forbearance of the right to terminate an existing at-will employee constitutes adequate consideration to support a noncompetition agreement.”  The Court reasoned that when an employer presents a restrictive covenant to an at-will employee, it is essentially offering to renegotiate the terms of employment, and the employee can choose to stay or choose to go.  If the employee chooses to stay, in effect, he accepts the offer of continued employment subject to the terms of the non-compete agreement. 

As for the lower court’s concern that an employer could turn around and immediately fire an employee who signs a restrictive covenant, the Colorado Supreme Court noted that such covenants must always be assessed for reasonableness upon the facts of each case.  Therefore, “legitimate consideration exists as long as the employer does not act in bad faith by terminating the employee shortly after the employee signs the covenant.”

While Colorado has followed the majority rule, there are some states that see the issue differently.  For example, the New Hampshire Supreme Court has implied that mere continuing employment would be insufficient consideration to support a covenant entered into after commencement of employment. In Merrimack Wood Products v. Near, 876 A.2d 757, 764-65 (N.H. 2005), the Court declined to modify an overbroad covenant so that it could be enforced more narrowly, concluding that the employer was not entitled to this equitable benefit because it had not “acted in good faith” in connection with the execution of the covenant. The evidence of the employer’s “bad faith” was the fact that the covenant was not discussed with the employee during his job interview, it was not presented to him until six months after he started work, and he was told his continued employment was contingent on his signing the covenant. The Court concluded that this was adequate evidence of “bad faith” to preclude modification of the covenant.  Although the Court did not address the issue as one of consideration, and although it is not apparent what the Court would have done with an after-thought covenant that was otherwise reasonable, its conclusion that providing a covenant after commencement of employment amounted to “bad faith” suggests that late-signed covenants may be treated with disfavor in New Hampshire.

The question thus becomes “If additional consideration is required, what type of consideration will suffice?”  In practice, the answer to this question may be as multi-faceted as the number of judges sitting on the bench.  The enforcement of a restrictive covenant is subject to a court’s equitable discretion and is often framed in terms of reasonableness.  Most judges will try to reach the result that is fair and equitable under the circumstances provided it is consistent with controlling law.  If they believe enforcement of a non-compete would be inequitable, they may be more inclined to take issue with the adequacy of consideration.  In contrast, if they believe an employee is up to no good, they may find the consideration in question to be sufficient.  That being said, employers seeking to strike the correct balance may find the following guideline to be useful: provide the employee with some appreciable, tangible benefit to which he or she was not already entitled.  A new promotion accompanied by a raise and additional responsibilities may pass muster more easily than an extra week of vacation time.  Employers might also consider stock grants or specialized training. Benefits to which the employee was already arguably entitled (such as an annual raise) may meet with more scrutiny.

In short, employers must be keep in mind the consideration requirements of each state in which they attempt to bind employees to restrictive covenants after the inception of employment. In the event that additional consideration beyond continued employment is required, the employer may increase the odds of enforceability by bestowing an appreciable benefit to which the employee was not already entitled.

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

Lucht's Concrete Pumping, Inc. v. Horner.pdf (162.03 kb)

How much consideration is enough?  I am asked this question frequently by employers and employees attempting to determine whether their non-compete is supported by adequate consideration.  Regular readers of this blog know by now that covenants signed by at-will employees after the inception of employment must be supported by new and independent consideration.  But how much consideration is enough?  My take: there are as many answers to that question as there are judges on the bench. 

Sure, the cases provide some guidance.  In some states, mere continued employment will provide sufficient consideration.  In other states, something more is required, such as a raise or a bonus.  But courts differ in their treatment of how much consideration is enough.  Applying Minnesota law, the United States District Court for the Eastern District of Wisconsin recently found sufficient a promise to supplement any loss of income attributable to a non-compete agreement.  Given its similarity to so-called “Garden Leave” provisions, this case is worthy of mention.

In Timothy Thiesing v. Dentsply, 2010 U.S. Dist. LEXIS 102372, the former employee (Timothy Thiesing) challenged Dentsply’s non-compete agreement arguing that it was not supported by consideration.  About three years after Thiesing started working, Dentsply presented him and all of its other sales representatives with an agreement during an annual meeting in Dallas.  The employees were told to sign the agreement or they would be fired.  Understandably, Thiesing signed the agreement.  Later, he argued that it was not supported by consideration.

In its search for consideration, the court examined two provisions of the agreement.  First, it reviewed a Garden Leave clause in which Dentsply promised to pay Thiesing his base salary for the two-year duration of his non-compete so long as he could document conscientious efforts to find other work.  The court concluded this provision did not constitute consideration in support of the non-compete clause because Dentsply was not unconditionally bound to pay Thiesing.  Rather, Dentsply retained the option to not pay Thiesing if he failed to conscientiously seek other employment, and Thiesing would nonetheless remain bound by the non-compete. 

Next, the court considered a separate provision of the agreement in which Dentsply agreed to pay Thiesing the difference between his salary at a new job and his salary last received at Dentsply if the non-compete clause prevented him from securing a job of equal or greater pay.  Unlike the Garden Leave provision, Dentsply’s obligation in this regard was unconditional.  Accordingly, the court found that it qualified as consideration warranting the enforcement of the agreement.  Acknowledging that it had previously found the Garden Leave provision to be insufficient consideration, the court noted that “a promise is not rendered unenforceable by the fact that part of the consideration for it is invalid.... In other words, one valid consideration is enough.” 

For a copy of the court's decision, click on the pdf file below.

Thiesing v. Dentsply.pdf (173.07 kb)

Previously, we have written about the Top Ten Things to do When an Employee Resigns to Join a Competitor and the Top Ten Mistakes Made by Departing Employees.  Given the favorable feedback, we continue with the following Top Ten Things to Consider When Drafting a Non-Compete  Agreement. 

1. Tailor restrictions to the jurisdiction in which employees work or reside.   In some states, an overly broad non-compete clause can be fatal because courts will refuse to enforce the entire agreement even if the non-compete is slightly overbroad.  In other states, courts will “blue pencil” overly broad provisions (i.e., simply strike the offending language).  Still, other state courts will modify overly broad language to make it enforceable.  If you are drafting agreements in a multi-jurisdictional context, generally a handful of versions – a few for “problem” states and others for “typical” states – will account for most variations in the law.

2. Include choice of law & venue provisions.  Many employers are tempted to choose the law and venue of the state where they are incorporated or headquartered.  If this requires the application of law contrary to the public policy of the state where the employee works or resides, or if it requires an employee to defend an action far from home, these provisions may not be honored.  In many instances, tying the choice of law and venue provisions to the state where the employee works or resides is a good choice because it may spread the risk of negative court decisions and minimize the chance that the choice of law or venue provision will be rejected. 

3. Tailor the contract to the employee’s position.  A common refrain among courts is that a non-compete or non-solicitation agreement must be no more burdensome than necessary to protect a legitimate interest of the employer.  Legitimate interests commonly recognized by courts include confidential information, goodwill, and/or unique training.  Tailoring the duration, scope, and geographic restrictions of the covenant to the particular position and circumstances of the employee (or category of employees) is likely to enhance the enforceability of the agreement.
  
4. Determine what constitutes sufficient consideration for the covenant.  Virtually all states agree that covenants executed prior to the start of employment are supported by consideration (note, however, some states say that an agreement is not supported by consideration if it is executed after the offer is accepted by the employee).  Other states hold that if execution of the agreement is followed by a substantial period of continued at-will employment, the employment will suffice as consideration.  But other states require specific, additional consideration for agreements signed after the start of employment. 

5. Determine what type of restrictions most appropriately protect the company.  Do you need a non-competition, non-solicitation of customers, non-solicitation of employees, non-disclosure provision, or all four?  Identify the legitimate interests that you seek to protect, and choose a restraint suited to protect each interest.

6. Include provisions regarding injunctive relief.  Consider including clauses providing for a presumption that any harm done is irreparable and difficult to quantify, and consenting to injunctive relief.  Including such a clause rarely makes injunctive relief a certainty, but the absence of such a clause can hurt even more.

7. Consider an attorneys’ fee provision.  You may be able to increase your leverage with a clause providing that the company will be reimbursed for reasonable attorney’s fees and costs in the event litigation is required to enforce the covenants.   However, be aware that some jurisdictions may not enforce a one-sided provision that purports to award fees only to the employer.  Some jurisdictions may convert such a provision to a “prevailing party” provision, meaning that the “loser” is required to pay the other side’s fees.  

8. Require return of confidential documents and information.  Contracts should require employees to return any information or documents relating to the company upon request or within a short time after their termination.  Don’t forget to cover copies, derivations of company documents, and information contained on electronic devices, such as cell phones, blackberries and the like. 

9. Include an 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 an agreement includes a consent to assignability.  Where the jurisdiction permits and/or requires such a provision, make clear the company may assign the covenant to an affiliated company or successor in interest without notifying the employee.  Defining the "Company" at the beginning of the agreement to include the company, its successors and assigns is also a good idea.

10. Include language extending the term of the covenant in the event of a breach.  If the jurisdiction permits such a restriction, make sure your contract states that the period of the covenant is automatically extended for any time during which it was being violated. 

A merger that looks good on paper can lose value when too many employees in the target company get nervous about what life will be like after the deal closes -- Will the culture be different?  Is the acquiring firm too big?  Too rigid?  Will they understand how we do business?  These risks have had enormously negative impacts on many mergers.  Employee attrition following mergers and acquisitions is so common that it has been the subject of psychological studies, has been written about in Human Resources publications, and even has spawned its own name -- “Merger Syndrome.”  Back in 1986, Psychology Today published an article called, “The Merger Syndrome: When Companies Combine A Clash Of Cultures Can Turn Potentially Good Business Alliances Into Financial Disaster.”  What can an acquirer’s Legal Department do to manage this risk? 

            Check the Old Restrictive Covenants – Do They Exist?  Are They Enforceable?.  Start early in the process.  During due diligence, check whether the target company has its key people under enforceable restrictive covenants.  Don’t just inventory HR files.  Analyze what restrictions are in the contracts.  Where are the employees located?  Are those restrictions enforceable in those states?  Were the contracts signed at the inception of employment or later?  If they were signed later, then consideration may be an issue, depending on the state. 

            Will You Have Standing to Enforce the Old Covenants After the Deal Closes?.  Even if there are non-compete agreements in the file for the right groups of employees, you must determine whether you – as the acquiring entity – will have the right to enforce the old non-competes after the deal closes.  Do the covenants have clauses providing that the agreement is assignable, or better yet automatically assigned, to a successor upon merger or acquisition?  If the clauses are there, you probably can enforce.  If not, the question may be much trickier – it will depend on the state’s law that governs, and on the form of the transaction.  Mergers and stock purchases are more likely to transfer the right to enforce.  Asset purchases are less clear. 

            Think About New Covenants.  If you find that many of the old contracts are not enforceable, then you want to build into the negotiation a strategy for getting newer and better agreements from the key people, especially for executives you want to retain after the merger.  Everyone knows that.  But make sure you identify the types of attrition that can turn a great deal into a disaster.  Often the sales force is a key.  In September 2005, Wall Street giant Merrill Lynch agreed to purchase AXA’s Advest brokerage unit for $400 million.  By May 2006, it was being reported that 417 out of Advest’s total of 505 brokers had jumped ship.  See K. Burke, “Failure to Launch,” Registered Rep (May 1, 2006).  It literally became a case study of a failed merger.  See S. Grantham, Risk Assessment as a Function of a Successful Merger: Merrill-Advest Merger, 11 Journal of Communications Management 247-57 (2007). Mergers and acquisitions can be especially stressful for employees lower down the chain of control, who have access to less information.  As one study noted, mergers “can change an individual’s working life significantly but fail to provide the individual with any control over the event.”  Julie K. Anderson, “People Management: The Crucial Aspect of Mergers and Acquisitions,” Industrial Relations Centre, Current Issue Series (1999).  Don’t make the mistake of only worrying about the top few executive non-competes.  Carefully assess points of exposure to potentially damaging employee defection, and then craft restrictive covenants that will protect the company.

Consideration for New Agreements.  If new contracts are required, you must address issues of timing and consideration.  The demands of adequate consideration vary depending upon the form of your transaction, and the states in which key employees are located.  In a statutory merger or stock purchase situation, the employment of target-firm employees continues uninterrupted through and after closing.  In many states, simply agreeing to continue employing people is legally sufficient consideration to support execution of a covenant not to compete executed during the midst of employment – what some cases refer to as “mid-stream” covenants.  But in a substantial and important minority of states, merely keeping someone on the job is not sufficient consideration for a mid-stream covenant.  In these states – North Carolina and Pennsylvania are two examples – you must give each employee new and sufficient consideration.  Sufficiency will be measured in proportion to the employee’s pay level and duties.  A check that would be sufficient for one employee will not be seen as sufficient for a much higher compensated employee.    

Determine Whether Key Employees are Located in “Problem States”.  It is inconvenient, to say the least, that nearly all of the legal issues relevant to the risk of employee defection are governed by varying state laws, rather than by one consistent federal standard.  In fact, it is so inconvenient that many companies simply ignore this undeniable reality.  They do so at great risk to their ability to protect themselves against defections.  One size rarely fits all when drafting restrictive covenants.  If you roll out one version of your agreement, it may well fail in any number of key locations, including tricky states such as California, Georgia and others.  You probably can cover the national map with anywhere from three to six versions of an agreement, depending upon how many different types and levels of employees you are signing up.  You may be tempted to side step this problem by inserting choice-of-law/forum clause, but this often fails and is inadvisable in any case.  It is dangerous to put all your eggs in one basket.  If things turn bad in your chosen state, you are out of luck everywhere.    

Don’t Forget to Use Carrots with Your Sticks. The company of course is even better off if employees decide to stay on board, and are happy about doing so.  This is why the most effective method is to roll out an attractive employee retention plan designed to induce important players at all levels to stay around long enough get to know what is good about your company.  Consider stay-bonuses, with repayment obligations that kick in if an employee leaves within a year (or two or three  years, as the case may be) after receipt.  Salary or minimum bonus guarantees also can ease concern about transition into a new compensation environment.  At a minimum, you can use retention agreements to be sure key employees stay with you long enough to get through the transition period after the deal closes. 

Communicate Your Retention Offers Early.  Retention packages are more effective tools when deployed rapidly and when their benefits are communicated effectively.  Deal with this immediately after announcement of the pending merger.  Don’t wait until closing.  Headhunters will waste no time starting to recruit the most valuable employees from your target company.  The last thing you want is for the dominant voices to be those of recruiters calling in and reinforcing the natural fears of employees whose company is being acquired. “[T]he period following the announcement of the takeover is one of intense personal risk analysis, in which the individual decides whether s/he will leave the organization or stay.”  Gunter K. Stahl & Sim B. Sitkin, “Trust in Mergers and Acquisitions”, in Mergers and Acquisitions: Managing Culture and Human Resources (G.K. Stahl & M. Mendenhall, eds., Stanford University Press 2004).  Effective retention packages offer sufficient financial inducement for employees to remain on board, and ideally are communicated before the headhunters are out in full force.  You know the announcement is coming before they do.  Take advantage of that head start -- don’t announce until you are ready to convey information about retention packages almost simultaneously. 

Employee attrition will always be a risk factor in mergers and acquisitions, but careful attention to restrictive covenants and retention packages can go a long way toward minimizing those risks.   

For companies with employees in multiple jurisdictions, creating a single non-compete agreement for use by employees throughout the country can be tempting.  A single agreement is less expensive to draft than multiple agreements, and less cumbersome to distribute to employees in different states.  But will a single agreement be enforceable in multiple jurisdictions?  The answer:  it depends where the company’s employees are located.  The laws governing enforceability of restrictive covenant agreements vary by state, and an agreement that is enforceable in one state may well be unenforceable in another.  Depending upon the jurisdiction, the risk of attempting to use a single agreement in multiple states can vary from simple unenforceability to exposure to a claim for damages for requiring an employee to sign an unenforceable agreement. 

The following is a brief summary of some of the issues that vary from state to state and that should be considered when determining how many agreements a company needs and how to maximize the likelihood of enforcement of a company’s agreements across jurisdictions:

1.         The duration and geographic scope of the covenant.

In evaluating whether the terms of the agreement at issue are reasonable, most jurisdictions will scrutinize the duration and geographic scope of the covenant to determine whether it is reasonable.  What is reasonable in one state may not be reasonable in another.  Although the analysis will likely be fact-based in most states, in others, it may also be a matter of statute.  Some states specify, for example, that any covenant that is beyond two years in length is presumptively unenforceable.  Other states absolutely require that a covenant contain a geographic limitation in order to be reasonable.  In Louisiana, for example, a statute dictates that unless the restrictive covenant names the specific parishes to which it applies by name, it will not be enforced. 

2.         Does the state permit “modification” or “blue-penciling” of overly broad covenants?

Some states permit courts to revise overly broad covenants to make them enforceable.  For example, in Pennsylvania, a court has discretion to modify the terms of an overly broad covenant if they are unreasonable as drafted.  Other states, like North Carolina, follow a strict “blue pencil” approach, meaning that courts in those jurisdictions will not rewrite a contract if it is too broad, but will simply not enforce it.  In “blue pencil” states, if the contract is separable, and one part is reasonable, the courts are permitted to enforce the reasonable provisions.  Still other jurisdictions, like Georgia, do not permit courts to enforce any portion of an agreement if even one part is unenforceable as drafted.  Where courts will not modify an agreement, or will strike unenforceable provisions, it is particularly important to scrutinize every portion of the agreement to ensure that each provision is enforceable as written.

3.         What constitutes adequate consideration for the restrictive covenant?

As is the case with any agreement, a restrictive covenant must be supported by consideration to be enforceable.  In some states, if a restrictive covenant is signed after the commencement of employment, it must be supported by new and independent consideration, such as a promotion or a raise, in order to be enforceable.  In other states, the promise of continued employment constitutes sufficient consideration in exchange for execution of the covenant.  If covenants are being distributed to employees in multiple jurisdictions after the commencement of employment, the company should be aware of the law in each jurisdiction to determine whether new consideration is necessary to make the covenant enforceable.

4.         Is the covenant is assignable?

In some jurisdictions, corporate acquisitions and mergers can raise issues about the enforceability of a restrictive covenant.  Some states permit assignment of the covenant to the purchaser as a matter of course regardless of whether the employee consents to the assignment.  Other states, such as Pennsylvania, do not.  In Pennsylvania, the court will consider the nature of the transaction in determining whether the covenant is assignable without employee consent.  Still other states will require employee consent regardless of the nature of the transaction.   Employers should be aware of the requirements of the states in which they do business and should make efforts to obtain express consent where it is required.  In some jurisdictions, this can be accomplished through the incorporation of an assignment provision in the agreement.

5.         Is the covenant enforceable if the employee is terminated?

Even if the covenant is otherwise enforceable, some states will not permit enforcement of a restrictive covenant if an employee is terminated by his or her employer.  Other states, like Massachusetts, will examine whether the termination was conducted arbitrarily or in bad faith in determining whether the covenant is enforceable.  The company should be mindful of the requirements for the jurisdictions in which its employees are signing restrictive covenants and ensure that any terminations are conducted with knowledge of the impact they may have on an existing restrictive covenant.  Where the state in which the employee is located is likely to evaluate the circumstances surrounding the termination in determining whether the covenant is enforceable, special care should be taken to properly document the reasons for the termination. 

6.         When and how the covenant must be presented to be enforceable? 

Some states have specific requirements as to when and how a covenant must be presented to an employee.  In those states, an employer may be required to present the covenant at the time the offer is extended, or prior to the commencement or employment.  North Carolina has specific requirements for the timing and manner of presentation of restrictive covenants, for example.  Other states have similar requirements.  An otherwise enforceable agreement can be rendered unenforceable in these states unless it is presented to an employee at the right time and in the right manner.  It is therefore important to evaluate the requirements in each state in which the covenant is being presented to employees to ensure that the timing and manner of presentation of the covenant meets all applicable requirements.

7.         Does the state permit provisions extending the period of the restrictive covenant in the event of an injunction?

Many states permit provisions in agreements that purport to extend the period of a restrictive covenant by the amount of time in which it was violated prior to entry of an injunction.  For example, in those states, an employee with a one-year non-competition agreement who violates the agreement by working for a competitor for one month before being enjoined from further competition may be enjoined for the remaining duration of the covenant plus one month in order to account for the period in which the employee was violating the agreement.  While many states permit this type of extension of the covenant, some states expressly forbid it, and in other states, the court is unlikely to extend the covenant absent specific language in the agreement allowing such an extension.  It is important to consider the jurisdiction and tailor the language of the covenant and any provisions relating to injunctive relief accordingly if the company is interested in attempting to obtain an injunction that extends the period of the restrictive covenant to account for any period of non-compliance.

8.         Does the state permit non-competition agreements at all?

Some states, such as California, do not permit non-competition agreements in any form.  In those states, although the company cannot present employees with a non-competition agreement, the company may have reasonable alternatives that would still afford some protection.  In California, for example, while a non-competition agreement is not enforceable, a properly drafted confidentiality agreement is enforceable. 

9.         What types of employees will be signing the restrictive covenants?

Most states commonly ask whether a restrictive covenant contains restrictions that are reasonably necessary to protect one or more of an employer’s legitimate interests.  Commonly recognized legitimate interests include confidential information, customer relationships, and unique or unusual training.  Consequently, it is important to consider the types of employees who will be signing the restrictive covenants and to think about what interest the company seeks to protect.  It may be easier to justify a broad geographic restriction on competition for employees with access to confidential information that could be used throughout a geographic region.  Similarly, when an employer seeks to protect against the exploitation of customer relationships, a non-solicitation agreement may suffice. 

In sum, although the law can vary significantly from jurisdiction to jurisdiction, this does not mean that employers must have separate agreements for every state in which they do business.  Generally, a handful of agreements will suffice to address the variations in law between different jurisdictions, as there is significant overlap between the law of many jurisdictions.  The key to ensuring enforcement of restrictive covenants in multiple jurisdictions is to be knowledgeable about the differences in state law and to address those differences both in the agreements themselves and in the manner in which they are presented and enforced.

Many employers with offices or employees located in multiple states use the same non-compete/confidentiality agreement in each state in which they do business.  Typically, the form of the non-compete/confidentiality agreement originated in the employer’s home state, and the employer went on to use this same agreement wherever the employer does business.  However, these employers may find out too late that a non-compete/confidentiality agreement enforceable in their home state may not be enforceable in another state.

State law on the enforceability and interpretation of non-compete/confidentiality agreements differs from state to state, and what is entirely reasonable in one state may be viewed as entirely unreasonable—and unenforceable—in another state.  If you do business in multiple states and want to effectively protect your customer good will and confidential and proprietary information, we recommend that you review the enforceability of various provisions of your non-compete/confidentiality agreements under the laws of each of the relevant states.

There are many ways in which relevant laws, and courts’ views, differ in various states on the enforceability and interpretation of non-compete/confidentiality agreements.  Some of the more important variables include—but are not limited to—what constitutes adequate consideration, whether the court will edit or amend an overbroad agreement to bring it within permissible state law restrictions, the extent to which an employer may enforce an agreement against an employee terminated without cause, and whether the court will grant injunctive relief in addition to liquidated damages.

Consideration:  All agreements must have adequate legal consideration to be enforceable.  Courts in some states hold that consideration for a non-compete/confidentiality agreement does not exist—and therefore that the agreement is not enforceable—unless the employer provided separate monetary compensation or the parties entered into the agreement at or near the inception of employment.  On the other hand, courts in other states hold that continued employment by itself (even without separate monetary compensation) is an adequate form of consideration that will support enforcement of a non-compete/confidentiality agreement.

Editing an overbroad agreement:  Courts in some states will amend or edit an overly broad non-compete/confidentiality agreement to bring it into compliance with state reasonableness requirements, while courts in other states will not.  The approach can vary from state to state, with courts in some states following a strict blue pencial approach (i.e., striking unenforceable, severable language), while other states permit courts to exercise their equitable discretion to modify covenants.  Still yet, courts in other states may decline to enforce the entire agreement even if only one term or provision is slightly overbroad (e.g., geographic scope).

Termination without cause:  State law—and court temperament—varies on the issue of enforceability when an employer terminates an employee’s employment without cause.  Courts in some states refuse to enforce restrictive covenants against employees who have been separated from employment through no fault of the employee.

Injunctive Relief/Liquidated Damages:  Many non-compete/confidentiality agreements contain both liquidated damage and injunctive relief provisions.  Courts in some states will not grant injunctive relief if the agreement also contains an enforceable liquidated damages provision.  In this view, an adequate “legal” remedy exists in the form of monetary damages, and therefore equitable relief in the form of an injunction is not be available.

If you have employees in multiple states, and you want to effectively protect your legitimate business interests against employee defections to competitors, you should take steps to tailor your non-compete/confidentiality agreements to ensure that they will be enforceable to the greatest extent permitted in each state in which you do business.