Restrictive covenants like non-compete agreements are increasingly being used in industries like hi-tech and finance during economic downturns to protect employers from losing competitive advantages and trade secrets. However, courts consider factors like the information's value, creation efforts, and whether the restrictions are reasonable in terms of duration, geography, and prohibiting future employment or business opportunities. While some states like California do not enforce non-competes, others may if the restrictions are deemed reasonably necessary to protect legitimate business interests rather than punish employees. Overall, restrictive covenants work best when narrowly tailored to specific trade secrets rather than broadly prohibiting competition.

1. Restrictive Covenants in a Slumping EconomyMichael King

2. Restrictive covenantsMain TypesNon Compete AgreementsNon Solicitation AgreementsNon Disparagement Clauses – severance payHighly used in Hi-tech and Financial Industries

3. PurposeEmployer ProtectionTrade SecretsCustomer relationshipsSpecial Training

4. MotiveMassive Lay Offs Desperation to Protect InformationFierce Competition among rival corporationsFear of losing some competitive advantage

5. Economic ConditionsDown SizingMass Lay OffsDissolved CompaniesUnprecedented unavailability of employment opportunitiesSeverance vs. Unemployment BenefitsSome clauses still enforceable under bothNDA’s and Non Disparaging comment clauses usually attached to severance packages

6. Non Competes – Enforceable?Geographic ReachDuration – 3 years is usually extremeDefine what is confidential informationMust not be generally knownStarting your own business?Where was the lawsuit filed?Already known information?Victoria’s Secret v Mays Dept Stores

7. Non SolicitationOften paired with a NCAClient relationship is longThe connection with the employee rests solely with the employment of the companyCan not be broad (i.e., must not provide services to any client, current, past, and future potential clients?Frieburger v J U B Engineers, Idaho Supreme Court

8. Court ConsiderationsValue of the information to the companyThe amount of effort creating the trade infoGoodin and Goodin v. Jolliff, et al., ___ S.W.3d ___ (Tex.- App. Fort Worth, 2008)

9. AN exceptionA Houston Court upheld the non compete for a Vice President – Restricted all of North America.The employer actually named the prohibited competitors .

10. THE statesNot enforceable in CaliforniaCalifornia is a pro-employee state. The statute declaring noncompetition agreements invalid has been on the books since the 19th century.Can use non solicitation/NDA to protect trade secrets and client lists and employeesEmployers can work around by effecting pensions and distributions as allowed by ERISA – will it supersede California law?

11. The statesTexas – still a questionAlabama – upholds the strict statues according to reasonableness.

12. Legal HurdlesCourts value the right to earn a livingNeed a good business reasonCalling it a trade secret is not causeNot to punish the employee for leavingMust notlast too long cover too wide a geographic area, or prohibit a former employee from engaging in too many types of businesses.

13. Dissolved Companies California disfavors all Non CompetesNational companies will have to recognize this precedent, i.e. Edwards vs. Arthur Andersen

14. Final AdviceUsed only when Business interests are at stakeNot broader than necessary to protect those interestsSigned before employment begins or with additional consideration provided –promotion, etc.