Drafting Enforceable Covenants Not to Compete
This article was contributed by the law firm of Cummings & Lockwood.
It is not intended to provide general information only. It is not intended as legal advice or as a solution to an individual problem. You are encouraged to consult with appropriate legal counsel prior to relying on this document in whole or in part.
A well drafted covenant not to compete can be an employer’s best defense against competition from former employees. Such a covenant is a more powerful tool than a non-disclosure agreement, which prohibits the disclosure of trade secrets or proprietary information, because a valid covenant can be utilized to prevent a former employee from working in competition with the employer.
Set forth below is an abbreviated overview of the law surrounding covenants not to compete and some suggestions for drafting enforceable agreements.
Under Connecticut law, three requirements must be met for a covenant not to compete to be enforced. The covenant must be: (1) reasonable; (2) entered into knowingly; and (3) for adequate consideration. Each requirement is considered below.
The Covenant Must Be Reasonable
This requirement is the most important and also the most troublesome for employers. The main problem is that there is no precise definition of a “reasonable” covenant that can be used in all cases. As a rule of thumb, a reasonable covenant contains only those restrictions that are necessary to protect the employer’s business interest.
Therefore, employers must be careful to avoid vague or overbroad covenants, and instead should tailor their covenants to their specific circumstances. What may be a reasonable restriction for one business may not be reasonable for another.
Connecticut courts employ a five factor test to determine whether a covenant’s restrictions are reasonable. These factors are:
- the length of time the restriction operates;
- the geographic area covered;
- the fairness of the protection afforded the employer;
- the effect of the restraint on the employee; and
- the effect of the restraint on the public.
All five of these factors must be met to enforce the covenant.
Length of Time
Time restrictions should not be over broad or arbitrary. The longer the restriction the more likely it will be found unreasonable. The length of time must be justified by the employer’s circumstances to be considered reasonable.
It is important for employers to consider the nature of their business and the employee’s job before drafting the restriction. Unless there are unusual circumstances, the restriction should not exceed two years, and even this time period may be regarded as excessive in certain circumstances. However, longer restrictions may be upheld in certain highly competitive fields or for unique employees.
Geographic restrictions should be limited to areas in which the business operates. An employer with offices throughout the country will be able to enforce a broader restriction than a local employer.
However, even an employer with offices throughout the country must consider whether a national restriction is really necessary to protect its interests. A key inquiry will relate to the employer’s market and to the employee’s relationship to that market.
The geographic restriction should be specifically worded so there is no confusion about the covered area. Employers should avoid boiler plate language such as “all areas where the company’s customers are located,” and overbroad restrictions such as “all areas where the company does or intends to do business.”
Rather, it is better to use language that states the exact geographic area covered by the covenant. Such examples include “in the states of Connecticut and New York,” or “within a thirty mile radius of the Hartford, Connecticut office.”
Finally, the lack of a geographic restriction can be fatal to the covenant’s enforceability. Such an omission will almost always make the covenant unreasonable. The only exception to this is when an employer substitutes an “anti-sales” or “anti-solicitation” provision.
Such provisions prohibit former employees from soliciting or transacting business with the employer’s customers, but do not prohibit the former employees from working for a competitor of the employee. These provisions are by their nature limited to a definite geographic area, and thus, are often upheld.
An employer must have an identifiable and protectable interest and must narrowly tailor the covenant to protect that interest. Examples of interests that can justify covenants include: protecting confidential business information, preserving customers, and retaining employees.
Yet, even where one of these interests is present, employers should be careful not to overreach. A broad covenant not to compete may not be reasonable for an employee who has minimal exposure to confidential business information or little to no contact with customers (of course, even if a non-compete covenant could not be enforced, the employer could still enforce a non-disclosure agreement).
In short, employers should not use the same language in all of their covenants. Instead, they should carefully tailor the language of each covenant to the duties and responsibilities of the particular employee.
Effect on Employee
Restrictions that prohibit an employee from working, in any capacity, for all competitors, are not reasonable. Taken literally such restrictions would prohibit the employee from serving as a janitor or landscaper for a competing employer.
These restrictions should be avoided, and one way to do so is to include an express provision in the covenant about the employer’s intent. Such a provision might read that, “It is understood that this Agreement is in no way intended to restrict the Employee, upon termination of his employment with the Corporation, from continuing to earn a living.”
Effect on Public
This final factor assesses the covenant’s effect on the public. The employer should take steps to ensure that the restriction does not impact a large section of the population.
For example, an anti-solicitation restriction is more likely to be upheld than an anti-competition restriction because of its narrower scope. An anti-solicitation restriction only applies to the current customers of the employer, while a non-compete agreement applies to all potential customers in the geographic area.
The employer must also avoid imposing any restrictions that might have the affect of creating or maintaining a monopoly or depriving the public of essential goods and services. Such consequences often cause harm to the public, and can make a covenant unenforceable.
Covenant Must Be Entered into Knowingly
Even if a covenant is reasonable, it will not be enforced unless the employee entered into it knowingly. This requirement rarely poses a problem for employers, but still must be considered.
The employer should explain the agreement to the employee, present it separately from any other paperwork, and give the employee adequate time to consider it. In addition, the agreement should explicitly state that the employee is entering into it knowingly and voluntarily.
Covenant Must Be Supported by Adequate Consideration
Lastly, even if a covenant is reasonable and entered into knowingly, the employer must also provide the employee with consideration for its signing.
The best way to provide consideration is to have the employee sign the covenant as part of the hiring process before any work is performed. In such a case, the job offer is sufficient consideration to enforce the covenant.
Failure to execute the covenant on or before the employee’s start date can result in enforcement problems, because continued employment alone may not be sufficient consideration to enforce the covenant. For covenants signed after employment has already begun, the employer must provide the employee with some additional benefit to satisfy the consideration requirement.
One way to do this is to provide the employee with additional financial compensation through a raise or promotion. This should satisfy the requirement. Another possible way to satisfy the requirement is to offer the employee increased medical or pension benefits, although such an offer may not be sufficient to support a highly burdensome covenant.
Finally, it should be noted that covenants can be drafted in such a manner as to allow a court to apply the contract so that reasonable restrictions are imposed even though the explicitly stated restrictions are regarded as unreasonable. Such a provision could provide at least some measure of protection to the employer
Summary of Suggestions
- Do not recycle the same covenant language. Each employee performs a different job and has different responsibilities. An effective covenant will be tailored to that job, those responsibilities, and to the business needs of the employee.
- Draft detailed covenants that minimize, to the extent possible, the need for interpretation. Be as specific as possible in defining the geographic area covered by the covenant.
- Draft clear covenants that a court can interpret in a reasonable manner.
- Do not overreach—It is better to have a less restrictive covenant that can be enforced, than a highly restrictive covenant that cannot.
- Avoid consideration problems—If possible execute the covenant prior to the employee’s first day of work.
- Have counsel review all covenants. An attorney can spot and address problems before the covenant is executed.
EXPLORE BY CATEGORY
Stay Connected with CBIA News Digests
The latest news and information delivered directly to your inbox.