Many businesses in competitive industries depend on highly experienced and talented employees to give them an edge. The knowledge and skills these individuals accumulate are attractive to competitors who might try to lure them away. To protect their interests, many companies include restrictive covenants in their employee contracts. These clauses place limits on the actions an employee can take after leaving, safeguarding sensitive information and preserving client relationships. However, recent changes in the law, particularly regarding non-compete agreements, have introduced significant new considerations.
Types of Restrictive Covenants in Employee Contracts
Several types of common restrictive covenants can apply to employees as they leave an organization.
Non-Compete Agreements
Traditionally, non-compete agreements have been used to restrict employees from working for competitors or starting a competing business within a specified geographic area and/or time frame after their employment ends. These agreements were particularly important for high-level employees with access to privileged information about trade secrets or market strategies. However, due to ongoing and frequent changes in the law surrounding non-compete agreements, their use and enforceability are evolving rapidly.
Non-Solicitation Agreements
Non-solicitation agreements remain enforceable. These agreements prohibit former employees from reaching out to the company’s clients, customers, or other employees after leaving the company. For example, under many circumstances, a popular salesperson cannot approach their former clients to poach their accounts. This type of covenant also prevents former employees from weakening the company by inviting colleagues to join them at a competitor.
Non-Disclosure Agreements
Confidentiality agreements, often referred to as non-disclosure agreements (NDAs), are designed to protect a company’s proprietary information. These agreements require employees to keep sensitive information confidential both during and after their employment. The duration of confidentiality obligations can vary, but they often extend beyond the term of employment to ensure that critical business information remains protected.
Non-Disparagement Clauses
Non-disparagement clauses prevent former employees from making negative statements about the company after their employment ends. These clauses are intended to protect the company’s reputation by limiting the spread of potentially harmful or false information by disgruntled former employees. Like an NDA, a non-disparagement clause cannot be used to prevent former employees from discussing illegal activity.
Recent updates to the law regarding non-compete agreements
April 23, 2024 – The Federal Trade Commission (FTC) Implements a rule banning most non-compete agreements nationwide.
The FTC’s rule prohibited employers from enforcing or entering into non-compete agreements with most workers. Exceptions were made by the FTC for senior executives and in cases involving the sale of a business. This proposed change issued by the FTC aimed to increase job mobility, wage growth, and innovation, but it also limited the tools companies could use to protect their interests.
August 20, 2024 – FTC’s Nationwide Non-Compete Ban Overturned by Texas Federal Court
A Texas federal court recently struck down the Federal Trade Commission’s (FTC) proposed nationwide ban on non-compete agreements, just weeks before it was scheduled to take effect. This ruling allows employers across the United States to continue using non-compete clauses as permitted by state laws. The court’s decision provides temporary relief for businesses that rely on non-competes to protect their interests. However, the ruling is not necessarily the final word on the matter, as the FTC could appeal the decision, potentially resurrecting the ban in the future. For now, employers do not need to comply with the previously anticipated September 4, 2024, deadline. This development underscores the ongoing legal uncertainty surrounding non-compete agreements, and employers are advised to stay informed about future legal challenges that may affect the enforceability of these contracts.
Restrictive Covenants in Business Agreements
Restrictive covenants are not limited to individual employees. Businesses also use them in other contractual relationships to protect their interests.
Exclusivity Clauses
Exclusivity clauses are often used in business agreements to prevent parties from entering into similar agreements with competitors. The purpose of the clause is to protect both parties by ensuring that their investments of time and capital are not undermined by unsanctioned agreements. For example, in industries like software development, exclusivity clauses can ensure that a business partner does not offer the same or similar products or services to a competitor.
Breach of Restrictive Covenants
When a restrictive covenant is breached, the injured party may take legal action to enforce the agreement. Common remedies include filing for an injunction to prevent additional breaches or seeking monetary damages for any harm caused.
The Role of Legal Counsel in Restrictive Covenant Suits
Both sides of a restrictive covenant suit are best served by working with an experienced attorney. From the start, lawyers specializing in contract law can provide guidance in drafting enforceable restrictive covenants and consultation on the risks of potential breaches. If the company believes a breach has occurred, an attorney’s expertise is invaluable in navigating the legal landscape and ensuring that the company’s interests are adequately protected.
Benefits of Working with an Experienced Legal Team
Restrictive covenants are a vital tool for protecting a business’s interests in an increasingly competitive marketplace. The FTC’s recent attempt to ban non-compete agreements and the Texas federal court’s ruling overturning the FTC’s attempted nationwide ban make it more important than ever to consult with legal experts to ensure that your business is protected. At Landsman Saldinger Carroll, we can help you navigate these changes, draft enforceable agreements, and provide strong legal representation in breach of contract disputes. Contact us to learn more about our services.
