With loan officers increasingly moving to other companies in search of new compensation plans, there has been a significant up-tick in non-competition and non-solicitation disputes. Many people mistakenly believe that such restrictive covenants are not enforceable. Excluding the very few states that have banned such covenants, this is largely a myth created by the fact that most people do not correctly develop restrictive covenants, relying upon a one-size-fits-all approach that often renders such covenants completely useless. Another myth is that the cost of enforcement outweighs the benefit. Again, a correctly developed restrictive covenant puts all of the loss on the employee and their new employer. As such, an employee or subsequent employer facing such litigation has significantly more at stake and more to lose, thus creating a significant deterrent to such violations in the first place. Accordingly, restrictive covenants can be extremely useful in deterring unfair competition. Below are a few helpful hints in drafting restrictive covenants:
• Develop Restrictions Based on Need: Developing a set of restrictive covenants should not be an “I wish” exercise. To the contrary, the restriction should be as narrow as possible to protect key aspects of your business. The narrower it is drawn and the clearer the relationship between the restriction and the business justification, the greater the chance of enforcement.
• Be Creative: There is no recipe for how to develop restrictions. A company can limit certain competitors, certain business lines, geographic territory, common products, size in terms of volume, sales or employees, locations of offices, etc. Again, the key is to carefully consider the types of competitive business that most concern the employer.
• Redundant Clauses: Often an employer can utilize multiple types of restrictions. Some may be more restrictive than others. If they are correctly drafted in a manner that allows them to be separately considered and enforced, it allows an employer to have multiple chances for success. Hence, instead of the restrictions boiling down to a single win/lose situation, an employer can be in a position to prevail on different levels and have multiple options for success.
• Forum Selection, Personal Jurisdiction, and Choice of Law: Simply agreeing in advance where litigation is commenced and what law to apply can be determinative of outcome. An employee who works in Oregon for a New York corporation could easily be required to obtain representation and appear in New York to defend under significantly more employer-friendly laws than their home state. The mere inconvenience to the employee can have an outcome determinative impact. On the other hand, a California-based multi-state corporation could chose to adopt an employee’s place of business so as to avoid California’s prohibition of such restrictions. The bottom line is that such choices at the outset can be important later.
• Trigger Clauses: An employer can limit the applicability of a restrictive covenant to certain situations. For instance, an employer could draft a restrictive covenant only to apply if the employee failed to give required notice of resignation, or was found to have breached a fiduciary duty to the company. Again, these are only a few examples and significant flexibility is possible.
• Liquidated Damages and Attorney’s Fees: If properly drafted, an employee can agree to pay the employer’s legal fees even without institution of a lawsuit. An employee can also agree to a reasonable formula automatically setting a minimum level of damages. If reasonable, such clauses place a substantial amount of pressure on a violating former employee.
• New Employer Liability: While an employee obviously cannot bind a subsequent employer, a restriction that requires an employee to show their agreement to a potential employer can effectively pit the employee against their new employer, if their new employer claims ignorance of the restriction. If the new employer admits to having seen the restriction, it could easily become responsible for aiding and abetting breaches of the contract depending on the applicable laws and facts of the case.
These are but a few of the considerations and strategies that can be used to effectively create restrictions protecting you from unfair competition. While this is not an exhaustive article, it hopefully illustrates that the reason most non-competition agreements are not enforced is because these types of issues are never considered.
