This is the third article in a continuing series, “The Restricting Covenant.” In restrictive covenant cases, a company’s trade secrets are sometimes referred to as its “secret sauce” or “secret recipe.” The “secret formula” of Coca-Cola soda is an analogy used to help explain the uniqueness of a company’s protectable interest and the need to prevent unauthorized disclosure, misappropriation or unlawful competition. This talk about secret sauces and recipes not only made me hungry, but it also relates to the subject of this article – restrictive covenants, trade secrets and the food and restaurant industry.
This is the second article in a continuing series, “The Restricting Covenant.” In this article, I discuss a topic that is near and dear to me – my hair and my long-time relationship with my barber. I have used the same barber to cut my hair since high school, even after moving many miles away. I sit in his chair, he cuts my hair with expert precision, and I am a satisfied customer. This got me to think about one of the most basic reasons why employers want to impose non-compete and non-solicitation obligations on their employees – the value and strength of a long-term customer relationship. Courts have long recognized that protecting customer relationships is a legitimate protectable business interest that can support the enforcement of a restrictive covenant if it satisfies standards of “reasonableness.” So if my barber was to leave his current location, could his employer enforce a post-employment covenant that would prohibit him from cutting my hair? Yikes!
Restrictive covenants are private agreements that restrict an individual’s business activities within a specific geographic area for a period of time, in return for wages, access to information, or some other type of tangible benefit. Like the spots of a leopard, they come in all shapes and sizes. Their enforceability varies from state to state, from occupation to occupation, and from industry to industry. Many states have quirky or arcane rules or regulations tailored to specific occupations. Some industries have specific rules and practices that dictate the parties’ course of dealing and determine the “reasonableness” of the restrictions. Some employers prefer non-competes, while others prefer non-solicitations or non-disclosures, or some combination of each. In any event, before agreeing to be restricted, or before asking someone to be restricted, this legal landscape should be explored and understood because litigation in this area of the law can be financially and emotionally draining. This article discusses restrictive covenants and psychologists and psychiatrists.
Larry Del Rossi published an article for Today’s General Counsel titled, “Recent Scrutiny of Non-Competes.” Larry provides an overview of non-compete agreements (also known as restrictive covenants) and discusses a recent uptick in government activity that may regulate or challenge private businesses’ use and enforcement of non-competes.
Larry says “one major challenge for national companies is that enforcement of non-competes varies from state to state, so that there is no uniform standard.” In May 2016 the White House issued “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses,” a document intended to identify areas where implementation and enforcement of non-competes may present issues, put forward a set of best practices, and serve as a call to action for state reform.
For more than 400 years, private businesses have used non-compete agreements in one form or another to protect their legitimate business interests, such as long-standing customer relationships, investment in specialized training, or development of trade secrets. They are commonplace in many employment contracts in a variety of industries ranging from retail, insurance, healthcare, financial services, technology, engineering, and life sciences. Some state legislatures and courts have curtailed their use in certain industries or professions. California, for example, prohibits them unless limited exceptions apply. Cal. Bus. Code §16600. Most states prohibit them for legal professionals. Many courts can modify or “blue pencil” them if the restrictions are found to be broader than necessary to protect an employer’s legitimate business interests.
Historically, federal and state agencies have generally stayed out of the mix in terms of regulating or challenging private businesses’ use and enforcement of non-competes. However, a recent uptick in government enforcement activity suggests a new wave of challenges is on the horizon for employers.