C. Restrictive Covenants and Covenants Not to Compete

Reasonable, well-drafted restrictive covenants may protect your company from disloyal ex-employees who attempt to steal trade secrets and confidential information. Even when clearly and reasonably drafted, however, restrictive covenants are not always enforceable. In a number of states, it is illegal for a company to restrain an independent contractor sales rep, agent, broker, and professional (e.g., physician) from working for a competitor after the contract has expired or been terminated. Further, if a company requires an employee to sign a contract containing a restrictive covenant after he/she has begun working, some state courts (including Oregon) will not enforce it unless the company gives a corresponding benefit such as an increase in salary, bona fide promotion or change in job status. If the employee does not receive additional consideration, the covenant may not be enforceable. However, other states do not require additional compensation since the offering of the present job is deemed ample consideration. Thus, always check the law in your state before considering any action in this area.

Restrictive covenants that are unreasonable in terms of geographic scope or time limitation (e.g., five years) will not be upheld. No precise definition exists that states what makes a restrictive covenant reasonable. The relevant considerations in court when deciding to enforce a covenant are:

1. The hardship to the employee if enforced;

2. Whether any special skills or training were involved;

3. Whether the employee had access to trade secrets;

4. Whether the employee had access to confidential information such as customer lists, specific business methods, established routes, and credit information;

5. Whether the covenant is confined only to the employer's actual business or includes.findlaw a slew of allied activities;

6. Whether the covenant is confined only to those geographical areas where the company does substantial business; and

7. The bargaining power of the parties.

For example, unless a salesperson's services are special, unique, or extraordinary, some states will not enforce a written restrictive covenant. In one Texas case, the judge ruled that promotional material was publicly available and not a trade secret and that the skills of car salespeople did not qualify as special talents; therefore, the judge declined to enforce a one-year non-competition agreement.

If an employer is in breach of or violates an important contract term, then it lacks "clean hands" and may not be able to enforce the covenant. Thus, it is important that your company act accordingly and avoid any wrongdoing (such as not paying wages in a timely fashion or withholding commissions) that could justify a judge's decision not to enforce the covenant.

TIP: If an employee fails to protest a company's change in benefits and later claims the company breached an obligation owed, that silence may be deemed a waiver of his right to object to the employer's alleged breach of contract.

In some states, if the court finds the covenant to be overbroad in terms of geographic scope or time limitation, it has the ability to enforce the clause by merely reducing the time frame or territory; in other "all or nothing at all" states, the covenant will be stricken in its entirety without any modification. And when the employer prepares a restrictive covenant which is signed by the employee, the restrictions also apply to competing businesses conducted by the employee's family members (with background help from the employee) even though they did not sign any agreements.

TIP: Most courts will grant injunctive relief rather than damages on a company's application. This means that the court issues an order (i.e., injunction) prohibiting the employee from working for the company's competitor. If the employee fails to comply with the court's order, he/she may be held in contempt. However, during the pendency of the action, if the employee believes he is right, his attorney may request court permission to post a bond for the damages the employer might be awarded so that the employee can continue to work for the competitor.