Types of Restrictive Covenants in Employment Contracts

Generally, there are three types of restrictive covenants that are used in employment contracts, namely, noncompete, nonsolicitation and nondisclosure provisions.

Nonsolicitation provisions  are a restrictive covenant that precludes an employee who has severed employment with the employer whether voluntarily or involuntarily from soliciting the employer’s customers, customers or other employees on behalf of the employee’s new employer or on behalf of the employee himself or herself. However, such a provision does not prohibit the employee from working for a competitor.

A court is more likely to enforce a nonsolicitation covenant than a covenant not to compete. A court will likely enforce a nonsolicitation covenant which is reasonably tailored to protect an employer’s business interest with its customers and former employees when the employer has a permanent relationship with its customers or when the employer has a new relationship with a customer where the employee was the point of contact with the customer for said employer. Courts are likely to loosen the geographic limitations of a nonsolicitation covenant compared to a noncompete covenant and permit a wider geographic scope if it is to protect an employer’s legitimate business relationship with existing customers.

Nondisclosure provisions  protect employers against an employee or former employee’s disclosure of trade secrets and other confidential information to third parties even though it may already be protected by common law or statutory rights the employer has over said information.

For example, Illinois has adopted the Uniform Trade Secrets Act (765 ILCS 1065/1 et seq.), which has been adopted in most states and which defines “trade secret” as information, including formula, pattern, compilation, program device, method, technique, or process, that: (1) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who could obtain economic value from its disclosure or use, and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Illinois has added financial data, or list of actual or potential customers or suppliers to information that can be considered trade secrets and protectable by statute.

However, even without a nondisclosure provision the employer may be protected through a legal theory referred to as inevitable disclosure theory. This theory allows employers to curtail the employment activities of a former employee in some instances due to the fact that the trade secret at issue is so imbedded in the employee’s head that the employee cannot avoid relying on them with respect a new position at a new employer. The Seventh Circuit has enjoined former employees from being employed by a competitor based on this theory.

Noncompete provisions  protect employers against former employees from directly competing with the employer’s business interests. A covenant not to compete in an employment agreement is a restraint on trade and it affects former employees from a potential livelihood. Some states such as California, North Dakota and Oklahoma have made it illegal and unenforceable for employers to impose noncompete restrictions in most instances. Of the restrictive covenants, those against competition are the hardest provision to enforce against a former employee and disfavored by courts. However, if it meets the requirements set forth in the common law in Illinois, for example, it should be enforced by the court.

In Illinois, a noncompete covenant is enforceable if it is (1) ancillary to a valid contact, (2) necessary to protect an employer’s legitimate business interest and (3) reasonable in terms of activity, duration and geographic scope. Generally, a business interest of an employer must be protected where customer relationships are near permanent in nature and, but for the employee’s job with the employer, the employee would not have had any contact with the customer. The business interest is also protectable where the former employee acquired trade secrets or other confidential information through his or her employment and could subsequently use it for his or her benefit and to the detriment of the employer.

In determining whether customers are near permanent in nature, Illinois courts consider these factors: (1) the length of time required to develop the customers; (2) the amount of money invested to acquire customers; (3) the degree of difficulty in acquiring customers; (4) the extent of personal customer contact by the employee; (5) the extent of the employer’s knowledge of its customers; (6) the duration of the customers’ association with the employer; and (7) the continuity of employer-customer relationships.

In determining whether the scope of the activity is subject to the noncompete, there is a greater degree of likelihood that courts will enforce the restriction of a particular activity if it is narrowly tailored. Fox example, the restriction of a former employer from performing a particular job for a competitor or from the solicitation of certain customers or resources is more likely to be enforced by a court than a blanket prohibition that a former employee cannot engage in any competition with or work for an employer who competes with the former employer.

In determining reasonableness of the geographic limitation, courts consider the boundaries of the restrictive area as set forth in the noncompete provision in relation to where the employer is currently doing business or has realistic expansion plans. Courts are unlikely to enforce a covenant against competition that has geographic boundaries outside of the area where the employer has business interests and where the former employee would not actually be competing or interfering with the former employer’s actual business interests.