Kristen Prinz: Hi everybody. My name's Kristen Prinz. Today we're going to be talking about restrictive covenants. The legal trends, how to negotiate them, and hopefully I'm going to give you some drafting tips.
As I said, my name's Kristen Prinz. I am the founder and managing partner of the Prinz Law Firm. We are a boutique law firm that focuses on employment law, and we typically represent both employers and employees.
Let's start with an overview of non-compete agreements. I do want to say throughout most of this program, I will be using the non-compete and non-solicitation interchangeably. When I'm speaking specifically about one or the other, I will reference the specific agreement.
So a non-compete or a restrictive covenant clause prohibits an individual, usually from working for a competitor. A non-solicitation clause prevents an individual from soliciting a company's employees, clients, vendors, or other important business contacts.
While we're primarily going to be focused on employment agreements, these clauses can be seen in equity documents, which I consider part of the employment agreements and in non-employment situations. So in master services agreements sometimes, vendors are trying to prohibit their customers from soliciting employees. We see them in merger or acquisition agreements, and in those cases they can oftentimes be a bit broader. So they are applicable beyond employment situations.
There is no federal law regarding restrictive covenants. Each state really treats them pretty differently. A few states actually prohibit them all together. Federal agencies do attempt to limit businesses from engaging in anti-competitive behavior. So if a restrictive covenant crosses that line, it could implicate federal law.
Let's start by talking about non-competes in employment contracts. So, as I said, a non-compete agreement is an agreement that attempts to limit an employee from going to a competitor. It really tries to limit where an employee can work. It is estimated right now that one in five labor force participants are bound by a non-compete. It's meant to protect the employer's interest in its employees, but also in its customers and confidential information.
If it becomes too broad, it could be considered a contract that restrains trade. I mean, by its very nature, a restrictive covenant is a restraint on trade. So a restraint on trade is void because it injures the public. But so long as it's reasonable and supported by consideration, in most states it will be enforceable. We will talk about some of the states where it will not be enforceable today, but most states do still enforce them.
And as we said earlier, sometimes when an employee is starting employment, they say, "Oh, I don't have a non-compete because it's not in the actual employment contract or in the offer letter." I would always advise a client to ask for the equity documents, if they're getting any equity grant, because many times we see these kind of buried in the equity agreements.
So let's talk about some state restrictions. As we said, non-competes are restraints on trade and can be void against public policy if they do not meet court requirements. Most courts are going to require that a non-compete is supported by independent consideration. Non-competes are often looked at as independent contracts. So even though they would be part of an employment contract or an equity agreement, it is considered a bit separately. And so you would be doing your employer clients a favor, making sure that consideration is carved out in exchange for the restrictive covenant.
Many employers and historically most employers had provided employment in exchange for the non-compete, but because most states are at will, employment started to look pretty elusory. So restrictions have been put in place to ensure that there is real consideration given in exchange for the non-compete. For example, Illinois recently passed a law that requires either two years of continuous employment after the agreement assigned. So even if the employee was employed many years prior, the employment consideration has to be post signing the restrictive covenant.
And if that doesn't happen, there has to be some other benefit. Because you're unsure how long employment will last at the beginning, both sides are unsure, it would benefit employers to make sure that there is some other benefit being provided, and it's specifically carved out.
It's very easy to do this. You don't even have to necessarily change the compensation level. If the employer budgeted $100,000 for an employee, $5,000 of that can be carved out in exchange for the non-compete. And it can be paid consistent with regular payroll practices, but it has to specifically say it's in exchange for the restrictive covenant.
Massachusetts requires providing garden leave or some other mutually agreed upon consideration. So we're seeing more and more states moving in this direction.
The next thing is a legitimate business interest. Many courts in the states that do enforce non-competes conduct what they call a reasonableness analysis. So they say, is this restriction reasonably in place to protect a legitimate business interest? While that can vary state to state, typically you would want, in addition to consideration, you would want the restrictions to protect, excuse me, to protect a legitimate business interest.
You also want to make sure they're not imposing an undue burden, so usually we do include some acknowledgements that the employee is acknowledging the restrictions are not overly broad. The restrictions won't prevent the employee from finding future employment, things like that. Because you want to make sure that later the employee doesn't say, "Well, this is overly broad. And this puts me completely out of the marketplace."
Putting in those kinds of acknowledgements helps offset those arguments down the line. You also need to make sure the restrictions don't harm the public. And that means you can't be diverting all employees from an industry. You can't be doing something that makes it impossible for an employee to work or make advancements in any particular industry.
Usually most times courts look at all the circumstances. So you wouldn't say one factor is most important, but a company should be trying to protect their confidential information or trade secrets or longstanding customer relationships. For both of these things or for all three of them, you really want to show that there's significant investment. For confidential information, you have to show significant steps were taken to protect that information. Very limited access was given to employees towards accessing confidential information. The employee at issue had access to that confidential information.
For protecting customer relationships, an employer should show a significant investment in building those relationships, also showing that the relationships are not transient. If you're in an industry where customer relationships are very transactional and short term, it's a little bit harder to show that you really need to protect those relationships because those relationships are not long standing, and they're really not necessarily loyal relationships either.
Most non-compete agreements really should be applicable to highly skilled employees. And it's moving towards states are looking closely at whether an employer is trying to restrict a lower level or entry level or mid-level employee from continuing to grow their career.
This came about in response to the fact that Jimmy John's was requiring employees to sign a non-compete that prevented them from working for other sandwich shops. These were low or even minimum wage jobs, and yet they were restricting movement within the marketplace. That inspired many states to pass laws barring non-competes for low wage workers. And even as recently as the Obama administration, there were about 14% of employees who were making less than $40,000 a year, were subject to a non-compete. So it still is pretty prevalent, but states now are passing laws with higher compensation thresholds.
The idea for courts when you're looking at highly skilled employees, is you would assume that highly skilled employees would be more likely to have access to confidential or sensitive information, and depending on the industry, direct customer interaction.
Now clearly for Jimmy John's, the employees probably did have direct customer interaction, but again, direct customer interaction the way the courts are looking for it, means with customers with whom there is a long standing relationship. So they're really getting access to information about customers and relationships that could be taken to a future competitor.
When we're looking at reasonableness, the courts are also going to be looking at the time, geography and scope. And those restraints must be reasonable and must be industry based. So reasonable obviously depends on the specifics of the industry. In certain industries, prohibiting employments within 50 miles might be unreasonable, in others, a global restriction might be reasonable.
So, for example in... It's also dependent on the geography where you're located. For example, in highly dense city, a 50 mile radius, it could take hours to get, 50 miles might seem overly broad, whereas it might be more applicable to have a five mile radius. Whereas in a more rural area, a larger mile restriction might be more appropriate.
Courts in the past have enforced employment restrictions of up to five years, but I'm seeing most of the states that do allow for non-competes in employment settings, really cap out on the restrictions at two years. So, sometimes clients want to have a broader restriction. Sometimes there's a reason for it, but especially with how, especially with the fact that the pace of change is increased rapidly, a restriction beyond two years is unlikely to be enforceable and probably going to defeat the purpose of having the restriction in the first place.
So even though these restrictions do intend to limit competitive activities, you can't go beyond that. So you can't have restrictions to non-competitive activities. For example, sometimes I see companies saying, "Well, I don't know what the company is going to be doing in five years. So I want to make it broad." It's fine to make it broad, in that it's going to adapt within the employment period, but you can't make it so broad that you're trying to restrict activities which the company was not even involved in.
You really don't want to count on a court modifying or blue-penciling restrictions. Even though some courts in some states will still do that, it's less and less common. Generally speaking, most judges don't really like non-competes and they're not about to redo your work for you. So if you are drafting an overly broad agreement, don't count on a judge modifying it to make it enforceable, regardless of what language you include in that.
So, as I mentioned before, many states are imposing minimum income requirements. In fact, Illinois new law does have minimum income requirements. The states oftentimes look at things like, is this an exempt or non-exempt employment classification? They might apply state minimum wage requirements or some percentage of those. Poverty guidelines are used or just state imposed dollar amount income levels.
California, I think most people are pretty familiar with the fact that California prohibits employee non-competes and non-solicitation agreements. You really can't have those kinds of restrictions except in sales of a business, and even then, it's extremely limited. So don't try to enforce. So if you have a client who has employees all over the country, make sure that there are exceptions for California.
North Dakota and Oklahoma also generally prohibit employee non-competes, but unlike California, they do allow for non-solicitation agreement.
Certain states are requiring payment to enforce a non-compete if an employee is terminated. So if an employee quits, that's one thing, but if the employee is terminated, Massachusetts and Washington, statutorily require some sort of garden leave payments. There are ways to contract around though.
Nevada requires continued salary if there's a reduction in force, a reorg or restructuring. So they will allow for non-competes if it's a termination without cause or resignation, not in connection with a reduction in force.
Arkansas, Maryland, New York and Illinois have all held that a non-compete is not enforceable if the employee is terminated without cause. Other states like Kentucky, Mississippi, and Pennsylvania consider this as a factor. Now that's why if you are in these states and you are terminating, or your client is terminating an employee without cause, it's probably a good idea if they really are concerned about competition, to provide some sort of severance to acknowledge and be able to enforce these types of agreements.
You can also contract around on the front end, for example, if you're going to promise some sort of continued payment or some sort of garden leave. We see this a lot in the financial sector where there is a garden leave and the employer actually does not even designate the full restricted period at the start of employment. What they do is say, it can be up to two years or up to 18 months.
Be careful. Don't expect a court to help you enforce an agreement if you don't take action right away. So for your employer clients, make sure that if they are concerned about an employee who has left and has either taken confidential information or is immediately starting with a competitor, don't play the game of waiting and seeing what happens, or if you're going to play that game, make sure that your client understands they are unlikely to get a temporary restraining order if there is a delay between when they find out the employee went to a new competitor and when they actually filed.
So in this case Bridgeview Bank versus Meyer, the employer knew that the employee was soliciting and was taking confidential information and waited months, I think about four months until December 8th and then filed for a TRO. And the judge essentially said, "The delay implies, it's not really an emergency."
As I mentioned at the beginning of the presentation non-competes are found oftentimes in partnership agreements, shareholder agreements, business transactions, and other non-employment contexts. Many companies, but not all, want in their shareholder agreement, especially if it's a closely held company, they will have restrictions and restraints on conflicts of interests, which typically would be a non-compete.
Now in a sale of business to protect the goodwill or prevent people from diverting business opportunities, you do oftentimes want to have some sort of non-compete, or at least a non-solicitation agreement.
In commercial agreements, I most often see non-solicits of employees. So if you're hiring a vendor, the vendor oftentimes will say to themselves, so especially in things like software development, they don't want you kicking out the middle man and going right to the employee and hiring that employee directly. So more often than not, we're seeing some sort of non-solicitation provision within those types of agreements.
I will say, I typically don't see great enforcement in those agreements. And so it's almost like a promise without any teeth. So if you are advising clients and they do really have strong concerns about protecting their employee relationships in a business transaction context, make sure there's some teeth there to it. Whether it's, injunctive relief or attorney's fees, some people want some sort of penalty, whatever it is, first of all, make sure that it's allowable in your state because many states don't allow for liquidated damages, but make sure it has some teeth.
So just having that, "Oh, don't solicit my employees." Is great, but it's even better if there's something that you can get if the agreement is breached. I will say that not so much in these commercial agreements of between a vendor and a customer, but in business sale agreements or in M&A agreements or asset purchase agreements, courts generally give those non-competes a lot of deference, because the whole point is you're buying a business from someone, you really don't want them to turn around and start a competing business, especially if they were been the face of the business and they really solicit and built up the business. So those provisions will get more deference than the agreements in employment agreements or employment context.
And part of that is just because of the power differential. It's assumed that if you were a business owner and you're selling your business, you should have a more sophisticated understanding of these provisions. And so if you choose to agree to a five year non-compete, you did so hopefully with some legal advice, but certainly within understanding of what you were getting in exchange for that restriction.
So moving on to the recent legal development and trends. I think I've tried to at least imply this throughout the presentation, but the trend is these are becoming harder to enforce.
As I mentioned earlier, Illinois just recently passed a law that will limit the enforceability of non-compete agreements. Now, to some extent, this was very much a bipartisan law because businesses felt that, okay, they're getting some clarity here on what the restrictions are. So the intent was to reduce litigation in the future, but they do make them less applicable.
So non-competes will be prohibited for employees who make less than $75,000. That's going to increase each year, and by 2037, the cap will be 90,000. There's a lower cap for non-solicitation agreements, that will be 45,000 per year, starting in January, 2022. And again, it will increase each year. It will go up to 52,500 by 2037.
So for it to be enforceable, this consideration issue came into play again. Now it doesn't define what alternative consideration you could provide, but either the employee has to work for at least two years after signing or receive some other benefit. Otherwise, the non-compete or the non-solicitation, neither of them would be enforceable.
Then if an employer files a lawsuit against an employee and the employee wins, the employee will recover attorney's fees. This is really critical because many times employer do want to have a provision in that they'll get fees. Now I would say it should be almost mandatory. If you're drafting these agreements for an employer, you absolutely must put a prevailing party's fee provision in, because if you don't, the employee will recover fees if the employee wins, but your client will not recover fees if your client wins, if you represent the employer.
Employers also must provide employees with 14 days to consider and review any non-compete or non-solicitation agreement. So if your employer client is hiring employees and wants employees to sign one of these agreements prior to start, make sure that they are getting the agreement in advance of the start date. Also, make sure that the agreement specifically says the employee acknowledges that the employee has had 14 days to consider and review the terms of the non-compete or non-solicitation agreement. That will help you a lot in the long run, because otherwise it will be a he said, he said, she said, she said, whatever, sort of argument, because many people will say they didn't get that time allotted.
Some other states that have in the past couple years past laws include, Oregon. Oregon had a compensation threshold, but then passed a law that went into effect January, 2020, that requires employers to provide terminated employees with a signed copy of the non-compete within 30 days of termination. We think it's just generally good practice to upon termination, if your client is the employer and the client is terminating an employee, at the time of termination, provide all that paperwork. So provide a copy of the non-compete and remind the employee of the employee's obligations. It's just that it's good practice and follow up with it in writing so that there is evidence of providing that.
Maine also passed a law recently that became effective in September, 2019. It bans non-poach agreements between employers. So this is certainly a restraint on trade employers banning together and saying, "Okay, I won't poach your employees, please don't poach my employees." It really prevents movement within the marketplace. And those are not going to be enforceable, certainly not in Maine because they're explicitly banned.
It also banned non-competes for... It imposed an income threshold. Employees have to make more than 400% of the federal poverty level for it be enforceable and must be given at least three days notice to review them.
Maryland also passed a law that became effective in October, 2019. And that's an income threshold. So employees earning less than or equal to $15 an hour or 31,200 per year cannot be subject to an enforceable non-compete.
So this doesn't mean employers aren't still requiring them to be signed because the fact is, they're scary for employees and they also are expensive for an employee to get a lawyer and defend against it if the employer wanted to scare the employee or make things difficult. Now, some states have actually taken steps to even prevent that, like Washington State, and we'll get into that shortly.
New Hampshire passed a law that became effective in September, 2019 that also put an income threshold. So employees have to make more than 200% of the federal minimum wage for a non-compete to be enforceable.
Rhode islands law took effect in January, 2020, and it prohibits non-competes for employees under 18. Also, if employees are non-exempt, so if they are FLSA non-exempt employees, or if they earn less than 250% of the federal poverty level. The law doesn't imply to independent contractors, it doesn't apply when there's a sale of business, or if the employees provided severance agreement and the restrictions are in the severance agreement. It also doesn't affect non-solicitation or confidentiality agreements. So a lot of times employers are using non-solicitation and excuse me, and confidentiality agreements to restrict employment, and a well drafted non-solicit can have that same impact.
So, as I mentioned, Washington State also has a fairly new law. It went into effect January 2020. It really strongly deters overly broad agreements. It actually has a lot of penalties for employers that draft overly broad agreements. And the income thresholds are high, so $100,000 per year for employees, 250,000 for contractors. Restrictions cannot be greater than 18 months, and they do require some sort of garden leave or salary continuation.
There's a penalty of actual damages or $5,000 if an agreement is overly broad and doesn't comply with this law and a court or arbitrary arbiter has to rewrite the agreement or only partially enforce the agreement. And as I said, the income thresholds make the agreements void. If they don't meet the income thresholds, the same salary must be paid to the employee. So sometimes people give severance and use that to help make the post-employment restrictions enforceable. And it's not necessarily equivalent to the same salary, but in these cases in Washington State, you do have to continue to pay the employee the same salary.
And you can't have... We often use forum selection clauses for obvious reasons or mandatory, excuse me, mandatory forum selection clauses. Washington State says, you have to allow employees to adjudicate a non-compete in the State of Washington.
The District of Columbia also passed one of the most worker friendly non-competes, there are penalties as well. It nearly bans all non-competes. Employers cannot require or request employees sign a non-compete. And if an employer does and an employee refuses, you cannot retaliate. So the employer cannot say, "This is a requirement of employee." Instead, actually workers are required to receive written notice of their rights. And then there's these substantial penalties, payments of $500 to $2,500 and over 3000 for subsequent violations.
Now the ban is not retroactive, so if you have an employer in D.C. who has non-competes in place, they may be enforced... Oftentimes courts look to where the law has moved. And even if the law is not retroactive, it will probably influence some litigation surrounding prior agreements.
The ban, the law doesn't go into effect yet. So it's likely to go into effect in October of 2021. And it doesn't cover volunteers, workers engaged in religious functions or casual babysitters. And medical specialists, oftentimes doctors that earn more than 250,000 will have limited rights, but must be granted at least 14 days to review a non-compete. Now confidentiality agreements would still be permitted so make sure if you're in the District of Columbia, you are drafting really strong and enforceable confidentiality agreements for your employer clients.
And also if you're in the District of Columbia and you represent individuals, make sure they understand their rights and the limitations that are put on employers in connection with trying to get these agreements signed.
So any restrictive covenant we draft these days will have a section on the federal Defensive Trade Secrets Act. This is because this is a strong tool for employers. There's a civil cause of action under federal law related to the misappropriation of trades secrets. The claim has to be related to a product or service that's in interstate or foreign commerce. So if it's just a local business and there is no interstate commerce, it might not be as applicable.
But this Act does have some strong remedies for employers and the statute of limitations is three years. You have to make sure that you're acknowledging in any agreement that employees have some whistleblower immunity. You do that by saying that they can take information that it can be disclosed to an agency. And that's for the employer, excuse me, for the employer to take advantage of Defensive Trade Secrets Act remedies, they have to be very clear in the agreement that employee disclosures to government entities that are whistleblower disclosures are exempt from the trade secrets restrictions.
Now be clear with your employer clients that under the Defensive Trade Secrets Act, an injunction, so they could get an injunction, but the injunction can't prevent the employee from entering into a new employment relationship. So it might not have the same impact that your client wants.
Also notify employees and employers of the inevitable disclosure theory. Not all states allow for inevitable disclosure, but where it is applicable, which is oftentimes in federal court, most federal judges will consider it at least. Inevitable disclosure theory is that this employee had such a high level of access to trade secrets and confidential information that if a court allows this employee to go work for a direct competitor, it is inevitable the employee will misappropriate or will disclose the trade secrets or confidential information to the competitor.
And that's a pretty broad argument and could be very restrictive for an employee. Now, I really have only seen that happen where the employee was in a very high level with high access to confidential information.
So next let's talk about drafting and negotiation. I think oftentimes it gets lost for lawyers to think about what's the goal. We're so trained to think about, what's the law, what's enforceable, what's not enforceable, that we sometimes forget to who ask the most important question of the client. And that is, well, what's the goal?
Obviously the goal for the employee would be to be able to continue employment and more likely than not, to stay within their field of expertise. But for employers, goals can be varying. Are they just concerned about competition generally, is something happening in the market that makes them concerned? Do they have specific clients that are maybe, you know what? Most businesses really do fall into that 80/20 rule, which is 20% of the clients bring in 80% of the business or generate 80% of the revenue.
So do they have a strong concern about any specific clients? Is the industry highly competitive for employees? Many businesses, especially these days are most concerned about the loss of talent. And so ask your customer, excuse me, ask your client, what is their concern? Do they have some specialized information that they're really trying to protect and they're coming up with the next big thing in the industry?
I also see many clients just want an overall deterrent. They really are not so concerned about enforcement. They just want enough in there to deter the employee from doing anything.
Also look at the key industry factors. Is it a highly competitive industry? You want to be able to advise your client, should they really be concerned about the thing they are concerned about? I've had clients who were concerned that their employees are going to go work for private equity backed companies. And I've said, well, generally private equity backed companies, yes are oftentimes high growth, but also have very high expectations, and many employees have heard negative stories. So maybe that shouldn't be the concern.
Which employees would be required to consent? So making sure that you understand who's going to sign this, is it just the sales people? Because you do want to write a slightly different agreement based on the type of role and the access to information that the employee has. And where are the restrictions located? How broad does this need to be? That should influence how you draft the restrictions as well.
It's just, I feel it's so important to be asking the client what the goals are. And I do think that sometimes we get in our own head knowing how to do these things that we don't ask. So my first drafting tip is always going to be, what's the goal of the agreement? And the only person that can answer that is your client.
Next. What do the restrictions say about your client's business? I do think you should have this conversation with your clients. So sometimes clients want to draft these overly broad restrictions because they want to keep their employees, but I've often found that the punishing aspects are not what keep employees engaged. So talk to your client about really, is this going to achieve that goal? And maybe we want to make this seem a bit friendlier and really reflect the culture of the organization. Because I know when I represent an executive, I'm looking at these agreements and wondering about the culture of an organization when the agreement is written so overly broad or so distrustful of the employee, it raises a question of, is this a good environment for my client?
Sometimes it's not just about the money, and oftentimes it's not because employees, executives, they do want long-term relationships. Unless it's just a quick turnaround and sell the business type of situation, most of the times they want to get in and really build their career there. So what do the restrictions say about the culture of the business? To have that discussion with your client.
So I know it sounds funny, but sometimes the goal is not to have an enforceable covenant. Sometimes the goal is have it scary enough that they don't do anything. But if the goal is, have an enforceable covenant, make sure you understand the jurisdiction that the employee is in, especially for consideration purposes. And even if the employee is not in a jurisdiction that requires specific carved out consideration, it's always good idea to be overly cautious in terms of, if you really want to have the agreement enforced.
Carefully draft the agreement. Really don't try, if the client wants to have an enforceable covenant, don't draft an overly broad covenant.
Avoid janitor rule issues, which means don't draft an agreement that could apply to anyone or any position in an organization. You really want the restriction to apply to roles that are similar or have similar client access as the employee had. So you could say the same or similar, or had the similar, like I said, the similar level of access. Because many states do have this janitor rule that says, if you're telling an employee that they can't go to a competitor in any capacity, essentially you're restricting them from even being a janitor. So if they were the sales manager and now they're going to go be the janitor or go be just an operations person and not have any customer access, is it really protecting any business need to enforce that agreement?
Limit activity restraints to customers with whom there was interaction. So I see oftentimes these agreements written where the employee can't have any interaction with any customers of the business. For a large scale business, the employee might have only engaged with like 2% of the company's customers. So how would they even know every customer the business engaged with?
So really you want to limit and say any customer that this employee had any interaction or access to information about within the year prior to termination.
And then consider garden leave clauses because the courts are moving more and more in this direction of requiring some ongoing support after or in exchange for the restrictions, consider whether that might be a good idea for your client.
And then be consistent, make sure clients really do take steps to enforce the agreements after the fact, even if it's sending cease and desist letters, reminding employees upon separation, that they have these restrictions.
In your drafting, always include strong remedies. As I said in the beginning, I see sometimes where there's, restrictions are in place, but there's no remedies. Consider having attorneys fees, either one sided or prevailing party. If you're the drafter of the agreement, make sure you include a bond waiver so that the employee waives requirement of a bond for the injunction.
And then tolling too. So if the employee violates the agreement and they're on litigation and the employee's continuing to work for the competitor, you want your client to be able to get back that time. So you toll the agreement.
Include representations from the employee that the covenants are narrow. That the employee received valid consideration in exchange for the agreements. That the restrictions won't prevent the employee from finding adequate employment in the future. Because again, remember these agreements cannot just be restraints on trade. So you want to make sure the employee is acknowledging that they can continue working either within some industry or some... Their skills can be applicable and they can continue earning money.
Consider exclusive forum selection clauses. We definitely do this. You want to make sure that your client, if your client is the employer, knows where they would have to litigate these issues. I've noticed that sometimes employers have arbitration agreements in their employment agreements, but then don't carve out some sort of court equitable ruling or injunctive ruling. I would say you want to make sure you carve out for enforceability of certain sections, that you can go to court and you can select a specific venue and you can get an injunctive relief.
Also, as we said earlier, or as I said earlier, include the Defensive Trade Secrets Act disclosures. Make sure you do that if your client wants to have a little bit of teeth to coming after and protecting its trade secrets and confidential information.
And then also include return of language because many times these days when you're talking about confidentiality, the agreement comes down to, did the employee take information from the business? And this will ensure that you're protecting the employer that they gave notice to the employee, that the company's information, the company's property, must be returned upon termination. Include that in not only a severance agreement, but in the employment agreement.
Exit strategies for employers. So when an employer is terminating a key employee, it's almost always a good idea to get a separation agreement. Now, if the employee is resigning, in those cases, at the exit interview, it's very good practice to require employees to sign acknowledgements of their continued post employment obligations. And in those obligations, you also want the employee to acknowledge that they have returned all company information. So you want both of those written acknowledgements signed.
Now it could be one piece of paper, but you really want them both signed. And I would say probably because they are two separate obligations, at least have the employee initial next to each of them and sign at the bottom.
Oftentimes we include these acknowledgements as an exhibit to the employment agreement. So it's already disclosed at the start of employment. So there's no question that the employee understands that this is a requirement upon separation.
Now for employees, obviously you want to get the scope of the restrictions as narrow as possible. As narrow in terms of time and geography. Many, many times I see executives later, at the end of employment. And they tell me, "Oh, well I had a lawyer look at this. And the lawyer said, 'This agreement is so broad. I don't have to negotiate it.'" And I say, "Okay, well, that's fine. But do you want to pay to find out if a court will enforce this?" Because the fact is whether it's enforceable or not, can be irrelevant when the cost is so high for an employee to figure that out. That's why the best thing to do is if possible, negotiate it on the front end. Ask for severance in exchange for the restrictions. So in line with the period, if it's a 12 month post-employment non-compete, then ask for 12 months post-employment severance.
Make sure if there's strong trade secrets or confidential information in there, carve out exceptions for information that the employee had prior to starting. And this includes relationships. If the employee is being hired as a top salesperson and has strong relationships in the market, the employee does not want to come into a new job and then basically make those relationships the property of the employer. So carve that out if possible. Also, try and carve out whether the restrictions would be applicable if employment is terminated by the employer.
As I said earlier, in Illinois now that there is case law that says that these agreements are not enforceable if the employer initiates the termination, but everybody is better off if you negotiate that language within the agreement.
Make sure the attorney's fees provision is mutual. Regardless of what jurisdiction you're in, you want it to be very clear what the intent of both parties is, and then include qualifying language for return of company property clauses.
And that means to the best of your knowledge or the best of the employee's ability, because as an employee who works for a company for 10 years, it's almost impossible to find every piece of, excuse me, every digital document or every piece of paper, all of that. So you don't want to be in a situation where your client is inadvertently violating an agreement. So if possible, include some qualifying language there.
And then also make sure that there's some language that the employee can get a waiver and the waiver would not be unreasonably withheld. Meaning that the employer will allow for carve outs if it's not a specific competitor.
Now for employers, I would say that we typically require that the employee has to disclose to any prospective new employer, that they have the restrictions. And that helps the employer with the ability to go after a new employer or a competitor that hires the employee.
So again, for employees. After the employee signs, share post termination obligations with new employer and make sure that you'd be indemnified in any action by a former employer. So if your employee client has left an employer and is going to a competitor, make sure that competitor will defend the employee if there ever is any sort of litigation over the restrictions.
Try and get the employers to negotiate directly. We have a lot of situations where an employer is representing an employee, but they kind of want to keep it arms length. Which is understandable, but if possible, if you represent the employee, try and negotiate that the employer will take on the entire defense.
And consider if there's some claims that your client can use against the former employer. So if sometimes you want to do a little bit of a turnaround. If there was some sort of breach by the employer prior to the separation, that's the time to bring it up. Try and be the plaintiff even. Oftentimes we file actions for declaratory judgment so we can get an order that the agreement is unenforceable on the front end. Now those are expensive cases again. So it's not appropriate in every situation, and you really want to be mindful of your client's limitations before you start advising a client to become the plaintiff.
But it is a good strategy and in many jurisdictions, many courts favor the plaintiff who filed first in this case, especially when many courts are not big fans of non-compete agreements. So, if you can position the case as much as possible and frame the arguments before the judge first, you can maybe get your employee client in a better position.
So just to review. Non-compete agreements are tools to protect a business and protect its relationships with its employees, with its customers, with its vendors. You really need to understand what your client is trying to achieve before you start drafting agreement. Do not use a form agreement for a client. Okay? I cannot stress that enough. Form agreements are fine if the only purpose of the agreement is just to get something out there in writing. A good attorney is going to be thinking about what their client actually needs and trying to achieve that for the client.
To do that, you have to ask your client the right questions. And that would be, again, what are you trying to achieve? What relationships are you really trying to protect? If the most important relationships they're trying to protect are customer information, you might just want a non-solicit. Oftentimes non-solicitation agreements are easier to enforce. Courts are imposing and states are imposing less restrictions on non-solicitation agreements than what is being imposed on non-compete agreements.
You do want to know if the true thing they're trying to protect is confidential information. If that's what their concern is, then focus on protecting the confidential information. Don't put an overly broad non-compete in place when that's not the customer, excuse me, then that's not your client's primary concern. Because when you go into court, some judges who don't like these agreements, who don't like when attorneys draft overly broad agreements, will basically say the entire agreement is not enforceable. So if one part of it's not enforceable, the entire agreement can become unenforceable. And you're putting your client in a precarious position.
Also, make sure that you remind clients that if they are not consistent with how they enforce these agreements, that could also be a factor a court might consider in deciding whether or not the agreement should be in force. Consistency is key, like in raising children, consistency is key.
Make sure that they take steps to find out where employees are going and then enforce the agreements to the best of their ability. Because otherwise, that's actually one of the first things I do when I'm representing an executive and they get a cease and desist letter, is I start researching, have they enforced the agreement? So I start looking into the court system. I also start looking in LinkedIn and see how many former employees or former executives have gone to competitors. And how soon after their employment ended with the prior employer, did they go to the competitor? The more often you see an employee go to a direct competitor, probably the less enforceable the agreement will be.
And again, now switching to the employees, when you are negotiating these agreements for employees, please, please, please do not tell an employee, "This is overly broad and not enforceable, so you can sign it." When an employee or anybody is signing an agreement, the assumption is they're reading the agreement and they believe that they will abide by its terms. Nobody wants to pay the money, the substantial amount of money to find out whether an agreement is enforceable. So instead of doing that, advise a client to negotiate the agreement on the front end. Ask for more narrowed restrictions, ask for specific customers to be named for whom the restrictions would be applicable.
Make sure as many of the terms as possible are negotiated on the front end. Ask for the agreement to not be enforceable if the employee is terminated.
If your client is going to sign an agreement, make sure it's an agreement that you want your client to sign and also that your client is willing to comply with. It's much easier, and then your client will understand what the restrictions are and where they can go in the future.
Now, sometimes that's impossible. Oftentimes we get the cases at the back end and the only option is to litigate. And if that's the case, if you represent the employer, act quickly. Now, yes. Do most of these cases settle after the TRO stage? Yes, that's true. But if you drafted a great enforceable agreement on the front end and an employee breaches, then you have a high likelihood of getting an injunction and getting a favorable outcome for your client.
So make sure that you act quickly. If you're going to send a cease and desist notice first, give a very short turnaround, usually two days at most, and then have the complaint prepared and the motion for temporary restraining order ready to go?
Thank you all for having me here today. Hopefully you learned a little bit about non-competes, the trends that are going on right now, where this area of law is moving and how to best protect your clients. If you have questions, I'm happy to always chat. Just reach out to me. You can contact me via phone or email, or of course, on all the social channels. Thank you. Have a great day.