Navigating Restrictive Covenants

Note: Want to skip the guide and go straight to the free templates? No problem - scroll to the bottom.
Also note: This is not legal advice.

Introduction

Restrictive covenants are an important component of today’s employment contracts, and can have a huge impact on the rights of both the employer and employee. Here, the Genie AI team provides insight into why this type of clause is vital, as well as offering step-by-step guidance on how to ensure your agreement is legally binding and enforceable.

When included in an employment contract, restrictive covenants protect a range of interests for the employer - from confidential information to trade secrets and intellectual property. They also serve to stop misuse of resources or poaching of key staff, helping employers protect their reputation and guard against competition from ex-employees. The clauses also provide employees with assurance that their efforts will be recognised and respected - guaranteeing they are fairly compensated for their work, along with any proprietary information and ideas developed over time at a business.

However, such agreements may easily be open to exploitation if not drafted correctly - leaving both parties vulnerable in certain circumstances. To be legally binding and enforceable, restrictive covenants must meet certain criteria: they must be necessary to protect legitimate employer interests; reasonable in scope; clear in language; not excessively prohibitive; and compliant with relevant jurisdiction regulations (as different locations may have different rules). As such it is essential that these clauses are carefully considered upon introduction into any employment contract. Moreover, ongoing monitoring is also required to ensure compatibility between all interested parties over time as failing to do so could result in waiving future right to enforcement.

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Definitions (feel free to skip)

Restrictive Covenants: Agreements that seek to limit certain activities of one or more parties, commonly used by employers to protect their business interests.

Non-Compete Covenants: Agreements between employers and employees that restrict the employee’s ability to work for a competitor or start their own business in the same field.

Non-Solicitation Covenants: Agreements between employers and employees which restrict the employee’s ability to solicit clients or customers of the employer.

Non-Disclosure Covenants: Agreements between employers and employees that prohibit the employee from sharing trade secrets, customer lists, financial information, or any other confidential information of the employer.

State-by-State Regulations: Laws that differ from state to state that determine the enforceability of restrictive covenants.

Fairness Considerations: Requirements from courts that the terms of a restrictive covenant be reasonable in scope and duration in order to be legally enforceable.

Trade Secrets: Information kept confidential and giving the owner a competitive advantage.

Non-Disparagement Agreements: Agreements that prohibit employees from making negative or disparaging statements about the employer.

Compliance: Following the agreement of a restrictive covenant.

Litigation: Taking legal action to enforce the terms of the covenant, or to seek damages for any losses that result from the breach.

Contents

• Definition of Restrictive Covenants
• Types of Restrictive Covenants
• Non-Compete Covenants
• Non-Solicitation Covenants
• Non-Disclosure Covenants
• What the Law Says About Restrictive Covenants
• State-by-State Regulations
• Fairness Considerations
• Benefits and Considerations of Restrictive Covenants
• Pros
• Cons
• Drafting Restrictive Covenants
• Considerations for Scope
• Considerations for Duration
• Considerations for Geography
• Enforcement of Restrictive Covenants
• Legal Remedies
• Court-Ordered Injunctions
• Alternatives to Restrictive Covenants
• Trade Secrets
• Non-Disparagement Agreements
• Best Practices for Negotiating Restrictive Covenants
• Identifying the Need for a Covenant
• Understanding the Limitations
• Negotiating Terms
• Documenting the Agreement
• Monitoring Compliance
• Avoiding Litigation

Get started

Definition of Restrictive Covenants

• Understand the definition of restrictive covenants: These are contractual agreements between two or more parties that limit the actions of one or more of the parties.
• Learn the purpose of restrictive covenants: They are usually used to protect the interests of a party or parties, such as preventing competition or protecting trade secrets.
• Research the different types of restrictive covenants: Non-compete clauses, non-solicitation clauses, confidentiality clauses, and intellectual property clauses are all examples of restrictive covenant agreements.
• When you can identify the purpose and types of restrictive covenants, you can check this off your list and move on to the next step.

Types of Restrictive Covenants

• Understand the two main types of restrictive covenants: non-compete covenants and non-solicitation covenants
• Learn the differences between the two, such as non-compete covenants typically apply to all employers in a certain industry, while non-solicitation covenants typically apply to a specific employer
• Know how to interpret the language of each type of covenant to determine what activities are restricted and for how long
• Be able to identify any state or federal laws that may limit the enforceability of either type of covenant

You can check this step off your list when you understand the differences between the two types of restrictive covenants, can interpret the language of each type of covenant, and are aware of any state or federal laws that may limit their enforceability.

Non-Compete Covenants

• Understand the purpose of a non-compete clause, which is to prevent an employee from working for a competitor or starting a competing business
• Learn the elements of a valid non-compete clause, including the geographic area, the length of time, and the scope of the restriction
• Determine whether any state laws exist that would limit the enforceability of the non-compete clause
• Research the applicable jurisdiction’s laws and determine applicable case law for any non-compete clause
• Analyze the reasonableness of the clause and determine if there are any modifications that can be made to make the clause more enforceable
• When you are satisfied with the non-compete clause, you can check this off your list and move on to the next step, which is non-solicitation covenants.

Non-Solicitation Covenants

• Understand what a non-solicitation covenant is and what it entails
• Analyze the language of the non-solicitation covenant to determine any restrictions or prohibitions
• Identify any potential employees, vendors or customers that may be affected by the non-solicitation covenant
• Determine if any of the restrictions or prohibitions violate any applicable laws
• Consider any potential remedies that could be sought in the event of a breach
• When you have a full understanding of the non-solicitation covenant and what it entails, you can move on to the next step.

Non-Disclosure Covenants

• Understand the purpose of a non-disclosure covenant: to protect confidential information, such as trade secrets and proprietary information, from being disclosed to competitors or the public.
• Research applicable laws and regulations in your jurisdiction: confidentiality laws, trade secrets laws, and other laws that govern the disclosure of confidential information.
• Draft a non-disclosure covenant that is tailored to the specific circumstances of your business and complies with applicable laws.
• Make sure the covenant is reasonable in terms of its duration, geographic scope, and other elements.
• Have all parties sign the non-disclosure covenant and ensure that each party has a copy of the signed document.

You’ll know you can check this off your list and move on to the next step when the non-disclosure covenant is drafted, signed, and all parties have a copy of the signed document.

What the Law Says About Restrictive Covenants

• Research applicable statutes and case law related to restrictive covenants in your state
• Understand the principles of contract law and how they apply to restrictive covenants
• Familiarize yourself with the rules and regulations governing the enforceability of restrictive covenants
• Look into any relevant public policy considerations that may impact the enforceability of restrictive covenants
• Determine how the specific terms of the restrictive covenant may affect its enforceability

Once you have a good understanding of the applicable laws and regulations, you can move on to the next step: ### State-by-State Regulations.

State-by-State Regulations

• Research the laws in the state in which your business operates to determine the applicable restrictive covenant regulations.
• Review the state’s statutes, regulations, and case law related to restrictive covenants.
• Consult with a qualified attorney to make sure you understand the relevant state laws and how they apply to your business.

Once you have completed the research and consulted with an attorney, you can check this step off your list and move on to the next one.

Fairness Considerations

• Consider the geographical scope of the restrictive covenant. Make sure it is reasonable for the employer’s business needs.
• Consider the duration of the restrictive covenant. Make sure it is reasonable for the employer’s business needs.
• Consider the limitations on the type of position or business that is prohibited. Make sure it is reasonable for the employer’s business needs.
• Consider whether the employee is adequately compensated for the restrictive covenant.

You know you can check this off your list and move on to the next step when you have considered the geographical scope, duration, limitations on the type of position or business and whether the employee is adequately compensated for the restrictive covenant.

Benefits and Considerations of Restrictive Covenants

• Understand the basics of restrictive covenants and their purpose
• Learn how restrictive covenants can help protect businesses
• Identify potential advantages of including restrictive covenants in agreements
• Consider potential disadvantages of restrictive covenants
• Learn how to evaluate a restrictive covenant to determine whether it is fair and reasonable
• Evaluate the enforceability of restrictive covenants
• Analyze the scope of the restrictive covenant

When you can check this off your list:

• When you have a solid understanding of the basics of restrictive covenants and their purpose
• When you have identified potential advantages and disadvantages of restrictive covenants
• When you have evaluated the enforceability of a restrictive covenant and analyzed its scope

Pros

• Understand the benefits of restrictive covenants, such as protecting proprietary information and preventing competition.
• Recognize that restrictive covenants can provide economic benefits to both employers and employees.
• Evaluate the pros and cons of using restrictive covenants and consider whether they are the right fit for your business.
• Understand the laws in your jurisdiction that regulate restrictive covenants and any potential risks you may face.

Once you have evaluated the pros and cons of restrictive covenants, you can move on to the next step.

Cons

• Understand the cons of restrictive covenants, including:
• They can be difficult to enforce
• They can be difficult to understand
• They can be overly restrictive
• Research case law related to restrictive covenants in your jurisdiction to understand how they are likely to be interpreted.
• Once you have a better understanding of the cons of restrictive covenants, you can move on to the next step: drafting restrictive covenants.

Drafting Restrictive Covenants

• Understand the purpose of the restrictive covenant
• Research the applicable law and any relevant case law
• Draft the restrictive covenant in accordance with applicable law and any relevant case law
• Identify the parties subject to the restrictive covenant
• Consider the geographical scope of the restrictive covenant
• Consider the temporal scope of the restrictive covenant
• Consider the scope of activities that are restricted by the restrictive covenant
• Consider the potential remedies for breach
• Consider any potential defenses to the restrictive covenant

You’ll know when you can check this off your list and move on to the next step when you have drafted the restrictive covenant in accordance with applicable law and any relevant case law.

Considerations for Scope

• Identify the scope of the restrictive covenant that should be included in the agreement
• Consider the geographic scope of the restrictive covenant, such as whether it should apply to the entire country, a specific state, city, or county
• Determine the scope of the activities or businesses covered by the restrictive covenant, such as whether it should cover direct or indirect competitors
• Review any existing or proposed contracts that could impact the scope of the restrictive covenant
• Once all considerations have been taken into account, draft the restrictive covenant that meets all the requirements
• Check off this step when you have completed the drafting of the restrictive covenant and are ready to move on to the next step

Considerations for Duration

• Determine the appropriate duration of the restrictive covenant.
• Consider the nature of the business and the importance of the confidential information.
• Balance the interests of the parties to ensure the covenant is reasonable and enforceable.
• Discuss the duration of the covenant with the other party and agree to a timeline.
• Include the agreed-upon duration in the language of the restrictive covenant.
• Once the duration is determined and included in the covenant, you can move on to the next step.

Considerations for Geography

• Research the geographic scope of the restriction: Does it extend to a certain radius, or a certain area or state?
• Determine if the geographic scope of the restriction is reasonable: Is it clear and not overly broad or vague?
• Consider how the geographic restriction may impact the employee’s ability to work in the future: Will it unduly limit the employee’s ability to work for competing companies?
• Check applicable state law to make sure the geographic restriction does not violate any local restrictions or regulations.

When you can check this step off your list:

• When you have researched and considered the geographic scope of the restriction
• When you have determined if the geographic scope of the restriction is reasonable
• When you have considered how the geographic restriction may impact the employee’s ability to work in the future
• When you have checked applicable state law to make sure the geographic restriction does not violate any local restrictions or regulations

Enforcement of Restrictive Covenants

• Investigate the potential remedies available to enforce the restrictive covenant. Consider seeking a temporary restraining order or a permanent injunction to halt the activity in question.
• Consult with a knowledgeable attorney to understand the legal remedies available in your jurisdiction.
• Research any existing case law in your jurisdiction that is relevant to your situation and could help inform your decision.
• Determine the costs associated with enforcing the restrictive covenant.
• When you feel you have a good understanding of the remedies available in your jurisdiction, you can move on to the next step in the guide.

Legal Remedies

• Research the specific laws, regulations, and legal precedents that apply to the situation.
• Understand the possible legal remedies available to you, such as damages, injunctions, and specific performance.
• Contact a qualified legal professional to discuss your situation and available legal remedies.
• Review the applicable law to determine the most appropriate legal remedies to pursue.
• Consider reaching out to the party in violation of the restrictive covenant to see if they are willing to negotiate an out of court settlement.

You will know you have completed this step when you have researched the applicable laws, regulations, and legal precedents and have spoken to a qualified legal professional about the available legal remedies.

Court-Ordered Injunctions

• Determine if a court-ordered injunction is the most appropriate way to enforce a restrictive covenant.
• Research the requirements of a court-ordered injunction, such as filing a complaint, serving the other party with the complaint, and obtaining a court order.
• Consult an attorney to review the validity of the restrictive covenant in question and to ensure that the court-ordered injunction is properly filed and served.
• Prepare the necessary documents for filing, such as a complaint and a motion for a temporary restraining order.
• File the complaint and motion with the court, serve the other party with the complaint, and attend the hearing for the injunction.
• If the court grants the injunction, the court will issue an order that will be served on the other party.

You will know that you have completed this step when you have filed the complaint and motion with the court, served the other party with the complaint, and attended the hearing for the injunction.

Alternatives to Restrictive Covenants

• Research other non-compete clauses that may be enforceable in your jurisdiction
• Review existing contracts to determine which parts are in violation of the restrictive covenants
• Research available legal remedies for any violations of the restrictive covenants
• Seek advice from a qualified lawyer in order to understand the extent of your legal options
• When you have a thorough understanding of the legal implications of restrictive covenants, you can move on to the next step.

Trade Secrets

• Understand the benefits of protecting trade secrets, such as obtaining a competitive edge in the market
• Identify the trade secrets that need protection, such as confidential information, formulas, patterns, and processes
• Draft a trade secrets clause that is tailored to the business and clearly defines what is considered confidential information
• Include provisions that detail the ownership of trade secrets and the penalties for breach of the terms of the trade secrets clause
• Ensure that the trade secrets clause is included in any agreements with employees and contractors
• When possible, also include a non-disclosure agreement with any third-parties that are given access to the trade secrets
• When complete, you will have a comprehensive trade secrets clause in place to protect your confidential information.

Non-Disparagement Agreements

• Understand the language of the non-disparagement agreement: Make sure to read over the agreement and understand what it is asking of you.
• Research any existing laws that may be applicable: Before signing, check if there are any existing laws that may apply to your agreement.
• Negotiate the terms of the agreement: Discuss the terms with the other party and make sure they are reasonable.
• Sign the agreement: If you are satisfied with the terms of the agreement, sign it.

Once you have done the above steps, you can check this off your list and move on to the next step.

Best Practices for Negotiating Restrictive Covenants

• Understand the purpose of the covenant and its potential benefits and drawbacks
• Research and understand the applicable state laws and regulations
• Research and understand the jurisdiction in which the covenant will be enforced
• Consider the impact of the covenant on the parties involved and the potential risks
• Negotiate the terms of the covenant, including the duration, scope, and enforcement
• Draft the covenant to ensure all parties’ rights and obligations are accurately reflected
• Have the covenant reviewed by a lawyer to ensure compliance with applicable laws
• Execute the covenant when all parties are in agreement

Once you have completed these steps, you can move on to the next step in the guide.

Identifying the Need for a Covenant

• Determine the specific purpose of the restrictive covenant
• Assess whether a restrictive covenant is necessary to protect the interests of the parties involved
• Take into consideration the purpose, scope, and geographic area that the covenant should cover
• Consider the potential implications of the covenant on the parties involved
• Evaluate the potential enforceability of the covenant

When you have identified the need for a restrictive covenant and determined the purpose, scope, and geographic area that the covenant should cover, you can move on to the next step of understanding the limitations.

Understanding the Limitations

• Read through the covenant and identify the restrictions it puts on you
• Understand what the covenant says about how you can use the property, and how long the covenant will last
• Identify any potential risks or liabilities associated with the covenant
• Consider how the covenant may affect your business, and how it can be used to protect your interests
• Once you have a clear understanding of the limitations of the covenant, you can move on to the next step.

Negotiating Terms

• Identify common terms within the covenant that may need to be reviewed and renegotiated
• Engage in negotiations with the other parties, keeping in mind the interests of all parties
• Make sure to document any changes to the covenant, both verbally and in writing
• When terms have been agreed upon, both parties should sign the document to mark the agreement
• Once all parties have signed, you can check off this step and move on to documenting the agreement.

Documenting the Agreement

• Obtain a copy of the agreement from the other party, and review for accuracy
• Make sure all agreed-upon terms are clearly stated in the document
• Have all parties involved sign and date the agreement
• File a copy of the signed agreement for your records
• Once all parties have signed the document, you can move on to the next step of monitoring compliance with the agreement.

Monitoring Compliance

• Establish a regular monitoring system for restrictive covenants to ensure compliance
• Construct a timeline for review and keep records of the process
• Designate an individual or team to review and enforce the agreement
• Ensure that any violations of the agreement are documented, addressed, and corrected
• Implement a tracking system for any changes made to the agreement
• When all of the above steps have been completed, you can move on to the next step: Avoiding Litigation.

Avoiding Litigation

• Research the restrictive covenants in your state to identify and understand any laws or regulations governing them.
• Obtain legal counsel to help you determine if the restrictive covenant is valid and assess any potential risks associated with enforcing it.
• Consult with a qualified real estate attorney to review and explain the restrictions of the covenants to all parties involved.
• Negotiate possible modifications to the restrictive covenants to ensure that all parties are in agreement.
• Document any modifications to the restrictive covenants in writing and have all parties involved sign off on them.
• How you’ll know when you can check this off your list and move on to the next step: Once you have researched, obtained legal counsel, consulted with a qualified real estate attorney, negotiated, and documented any modifications to the restrictive covenants, you can be sure that you have taken the necessary steps to avoid litigation and can move on to the next step.

FAQ:

Q: Is an international restrictive covenant enforceable?

Asked by Jack on April 21st 2022.
A: Generally speaking, an international restrictive covenant is enforceable, however, this depends on the jurisdiction in which it is being enforced. Different countries have different laws and regulations governing restrictive covenants. To determine if a restrictive covenant is enforceable, one should consider the legal framework of the country in which the agreement was created and in which it will be enforced. Additionally, it is important to consider local case law and precedent to determine whether a restrictive covenant is enforceable.

Q: What are the differences between UK and US restrictive covenants?

Asked by Sophia on May 5th 2022.
A: The primary difference between UK and US restrictive covenants lies in the scope of what can be included in each type of agreement. In the United States, restrictive covenants are much broader in scope and can include provisions prohibiting competition or solicitation of customers or employees, along with other provisions such as confidentiality agreements. In the United Kingdom, however, restrictive covenants are limited to those prohibiting competition or solicitation of customers or employees. Additionally, US employers are able to enforce non-compete clauses for longer periods of time than UK employers, making them a more attractive option for employers who want to protect their confidential information and competitive advantage for a longer period of time.

Q: What should I consider when creating a restrictive covenant?

Asked by Emma on June 13th 2022.
A: When creating a restrictive covenant, there are several factors that should be considered. Firstly, one must consider the purpose of the agreement – is it to protect confidential information or trade secrets, prevent competition or solicitation of customers/employees, etc.? It is also important to consider the duration of the agreement – how long should it last? Additionally, one should consider any applicable laws that may limit or restrict what can be included in the agreement in order to ensure that it is legally enforceable. Finally, it is important to ensure that all parties involved understand the terms of the agreement and agree to them before signing off on it.

Q: What impact do restrictive covenants have on my business model?

Asked by John on July 8th 2022.
A: Restrictive covenants can have a significant impact on your business model depending on what type of business you operate. For example, if you operate a SaaS business then you may find that restrictive covenants can help protect your confidential information and trade secrets from competitors who may attempt to copy your product or services. Additionally, if you operate a technology-based business then having a restrictive covenant may help protect your intellectual property from being misused or stolen by competitors. Finally, if you operate a B2B business then having a restrictive covenant may help prevent competitors from poaching your customers or employees through unfair practices such as offering them better deals than you can offer them.

Q: How do I ensure that my restrictive covenant is legally binding?

Asked by Noah on August 20th 2022.
A: To ensure that your restrictive covenant is legally binding, there are several steps that you should take. Firstly, you should consult with legal counsel to ensure that your agreement complies with applicable laws and regulations in your jurisdiction. Secondly, you should make sure that all parties involved understand and agree to the terms of the agreement before signing off on it. Thirdly, you should include provisions for dispute resolution in case any disputes arise about the terms of the agreement after it has been signed and executed. Finally, you should register any applicable patents or trademarks associated with your agreement in order to ensure maximum protection against infringement from competitors.

Example dispute

Suing a Company for Breach of Restrictive Covenants

• Plaintiff must prove valid restrictive covenant existed between the parties
• Plaintiff must prove that the defendant has breached the terms of the restrictive covenant
• Plaintiff must prove that their business or competitive interests have been significantly damaged as a result of the breach
• Plaintiff must prove that they have suffered some financial loss (monetary damages) as a result of the breach
• Plaintiff must be able to demonstrate that they have taken all reasonable steps in attempting to resolve the dispute outside of court
• Plaintiff may seek an injunction to prevent the defendant from continuing to breach the terms of the restrictive covenant
• Plaintiff may seek damages in the form of compensatory or punitive damages, or both
• Plaintiff may seek an accounting of profits that the defendant has made through their breach of the restrictive covenant
• Plaintiff may seek specific performance of the restrictive covenant, requiring the defendant to comply with the agreement

Templates available (free to use)

Confidentiality And Restrictive Covenant Agreement
Declaration Of Environmental Restrictive Covenant For Conservation Purposes
Deed Of Release Restrictive Covenant
Restrictive Covenant Cease Desist Letter To Former Employee
Restrictive Covenant Cease Desist Letter To New Employer
Standard Notice Of Landlords Request For Details On Restrictive Covenants And Rights Of Way Required By Tenant
Standard Notice Of Tenants Request For Details On Restrictive Covenants And Rights Of Way Required By Landlord
Standard Restrictive Covenants For Commercial Contracts Including Non Compete Non Solicitation No Poaching

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