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In the employment context, restrictive covenants are something that limit the business conduct of an employee or independent contractor, during and, usually, after the employment or business relationship ends. Typical forms of covenants contain limitations on sharing or using confidential information and trade secrets; recruiting or soliciting customers, suppliers, vendors, strategic business partners, and/or co-workers; and working for a competitor. They are often, but not always, contained in employment contracts, but can also be found in equity agreements, stock and option grants, and/or employee handbooks. Employers typically require employees to agree to such restrictions at the time of hiring or thereafter.
● Non-Compete Covenant. A restrictive covenant that precludes a person from competing with an employer is known as a “non-compete” or “non-competition” agreement.
● Non-Solicitation Covenant. A covenant that precludes a person from soliciting any of the employer’s employees, customers, clients, vendors, or other strategic business partners to end their relationship with the employer is known as a “non-solicit” or “non-solicitation” covenant.
● Confidentiality and Non-Disclosure Covenants. Confidentiality and non-disclosure covenants preclude a person from using or sharing confidential information or trade secrets of the employer during and after employment. Types of information typically covered by confidentiality and non-disclosure covenants include business plans, trade secrets, pricing, product development, designs, client lists, and other strategic business information.
● Other Covenants. Other covenants include no-hire covenants that preclude companies from hiring employees; no-moonlighting covenants; and training covenants that seek to recover the cost to
train an employee.
Restrictive covenants may be enforceable in New Jersey and elsewhere. However, there are limits to their enforceability. Both the law of New Jersey and of New York limit the scope of the restrictive covenant as to time, geography, or type of work that is restricted. To be enforceable, a covenant must protect a “legitimate interest” of the employer, such as trade secrets, customer relations, client lists, strategic business plans and information, and confidential information. The restriction on the employee must also be reasonable in time and geography. Finally, it must not place an undue hardship on the employee or violate public policy. If the covenant meets these requirements, courts may enforce the restrictive covenant.
Litigation generally occurs because an employer has evidence that the employee violated a restrictive covenant and needs to enforce the covenant. Employers generally seek injunctions to stop the breach or can recover money damages after a breach occurred. The Courts determine the extent to which the restriction is enforceable, and whether the employee breached it. Even if the covenant is unreasonable, a court may exercise the “blue pencil” doctrine or revise a covenant to remove the unreasonable provision while upholding the remainder of the covenant.
The attorneys at Epstein Ostrove, LLC, negotiate and draft restrictive covenants and other agreements intended to protect confidential information and trade secrets.
Our attorneys help employers draft and update restrictive covenants to ensure that the provisions are enforceable and comply with the ever-changing legal landscape. Drafting and enforcing covenants can be fraught with difficulty because of the different enforcement limitations that exist on a state-by-state basis. More recently, President Biden issued an Executive Order that directs the Federal Trade Commission to review what may be done to limit the use of non-competition covenants. Therefore, assessing the need and scope for restrictive covenants should be done regularly.
Our attorneys help employees negotiate restrictive covenants when presented to them. Our attorneys review non-compete covenants and counsel employees on their rights and obligations, and on the limits to enforceability. Consulting with our attorneys before, not after, executing a restrictive covenant can often prevent problems. We also represent employees if litigation is filed to enforce the covenants. Sometimes the covenant agreement requires that the employee pay for the employer’s attorney’s fees. It is often possible to avoid litigation or reduce its cost by negotiating a mutually acceptable scope of covenant that protects the employer while permitting the employee to work.
Litigation to enforce covenants can be very costly and happens quickly – many times immediately upon a suspected breach of a covenant. Employers file a court action seeking injunctive relief or a temporary restraining order, which, if granted, would prevent a person from working for a new employer, opening a new business, or dealing with other business partners. Consulting with our attorneys before, not after, leaving an employer can often head off this kind of lawsuit.
The New Jersey Trade Secrets Act of 2012 (the “Act”) helps businesses protect their trade secrets and complements and is in addition to New Jersey’s broad common law that protects confidential information. A trade secret is any design, prototype, formula, program, invention, pattern, or information secret which gives a business an advantage over its competitors that is not generally known.
Companies must promptly seek protection under the Act for their most closely guarded trade secrets. A trade secret has no term and lasts as long as the information remains secret. A business must take reasonable efforts to protect its trade secret, including access restrictions, security measures, and confidentiality agreements.
If litigation is required, a business must promptly file an action in New Jersey within three years from discovery. Under the Act companies may seek monetary damages, punitive damages, royalty payments, and/or
injunctive relieve to stop or prevent use and disclosure.
In addition to the Act, companies have other statutes that provide protection to trade secret information such as the federal Defend Trade Secrets Act (“DTSA”), New Jersey Computer Related Offenses Act
(colloquially known as the “anti-hacking” statute), and general common law.
Given the ever-changing work environment, work-from-home situation, and the increasing modality of communication methods and collaborative tools, keeping key information secret is complicated, but imperative. A trade secret attorney can help your company develop a plan for maintaining and monitoring reasonable efforts to maintain secrecy.
The attorneys at Epstein Ostrove can help protect you. We have experience working with a variety of employment contexts, with businesses, from startups to publicly traded companies. If litigation is unavoidable, you’ll benefit from our years of knowledge and experience. We’ll offer strategies that align with your business goals to resolve any dispute and aggressively advocate for your goals every step of the way. Contact the business lawyers at Epstein Ostrove today to learn more.
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