Restrictive covenants in employment and agency relationships

The bill Restrictive covenants.

This bill repeals current law relating to covenants not to compete and instead creates a new provision relating to restrictive covenants in employment and agency relationships. Under the bill, "restrictive covenant" means an agreement that restricts or prohibits competition by an employee or agent of a business or professional practice during the term, or after the termination, of the employment or agency relationship, but does not include an agreement that does not restrict or prohibit competition by an employee or agent of a business or professional practice, including any of the following:

1. An agreement restricting or prohibiting an employee or agent from disclosing business or professional information that is valuable and confidential to the employer or principal, but that is not valuable and confidential to a competitor of the employer or principal or useful to the employee, the agent, or a competitor in obtaining a competitive advantage over the employer or principal.

2. An agreement restricting or prohibiting the solicitation or hiring of an employee or agent who is not privy to valuable and confidential business or professional information of the business or professional practice, who does not have substantial relationships with existing or prospective customers, patients, or clients of the business or professional practice, and who has not received unique, extraordinary, or specialized training provided by the business or professional practice or otherwise obtained as a result of the employment or agency relationship with the business or professional practice.

Reasonableness and valid consideration.

Specifically, the bill provides that a restrictive covenant is enforceable if the restrictive covenant is reasonable as to time, area, and line of business and is supported by valid consideration (generally, any payment or other thing of value given in exchange for entering into the restrictive covenant). The bill requires a court to determine that a restrictive covenant is supported by valid consideration if the court finds that any of the following situations exists:

1. In the case of a restrictive covenant that was executed at, or within a reasonable time after, the commencement of the employment or agency relationship, that the offer of employment or agency, or of continuation of the employment or agency relationship, was contingent on the execution of the restrictive covenant.

2. In the case of a restrictive covenant that was executed at or about the time of termination of the employment or agency relationship, that the restrictive covenant was supported by valid consideration acceptable to the employee or agent above and beyond any compensation due the employee or agent and any consideration provided for any other covenants, releases, or promises made by the employee or agent.

3. In the case of a restrictive covenant that was executed at any other time, that at or about the time of execution of the restrictive covenant the employee or agent received in connection with the execution of the restrictive covenant valid consideration, including a) monetary consideration; b) a bonus or incentive payment;

c) additional paid time off; d) access to a bonus or other incentive program or pool through which the employee or agent receives additional compensation; e) continuation of the employment or agency relationship at a rate of pay and benefits that is equal to or greater than the pay and benefits received before the execution of the restrictive covenant, if continuation of the employment or agency relationship is contingent on execution of the restrictive covenant; or f) a promise to provide any payment or other thing of value during the term of the restrictive covenant as specified in a written agreement setting forth the circumstances under which that payment or other thing of value will be provided, including a promise to provide paid leave at the end of the employment relationship (commonly referred to in the business community as "garden leave").

Legitimate business interest and reasonable necessity.

The bill also provides that a restrictive covenant is enforceable if the person seeking enforcement of the restrictive covenant proves the existence of a legitimate business interest justifying the restrictive covenant and that the restriction or prohibition on competition specified in the restrictive covenant (restraint) is reasonably necessary to protect that legitimate business interest.

The bill defines "legitimate business interest" to include: 1) a trade secret or any other business or professional information that is valuable and confidential but that does not qualify as a trade secret; 2) substantial relationships with specific existing or prospective customers, patients, or clients; 3) customer, patient, or client goodwill associated with a specific geographic location, a specific marketing or trade area, or an ongoing business or professional practice; or 4) unique, extraordinary, or specialized training provided by a business or professional practice or otherwise obtained as a result of an employment or agency relationship with a business or professional practice.

In determining whether a restraint is overbroad, overlong, or otherwise not reasonably necessary to protect the legitimate business interests justifying the restrictive covenant and, if so, how to modify the restraint so that the restrictive covenant provides only such restraint as is reasonably necessary to protect those interests, the bill requires a court to consider all of the following:

1. The duration, scope, and nature of the relationship between the person seeking enforcement of the restrictive covenant and the person against whom enforcement is sought prior to the commencement of the enforcement action.

2. The duration, scope, and nature of the potential harm to those legitimate business interests that might result from a violation of the restrictive covenant.

3. Any conduct by the person against whom enforcement of the restrictive covenant is sought, beginning on the date of execution of the restrictive covenant, that is relevant to a determination of the proper duration, scope, and nature of the restraint and to enforcement of the restraint.

4. Evidence of common practice with respect to the duration, scope, and nature of restraints in the specific industry of the person seeking enforcement of the restrictive covenant.

Rebuttable presumptions.

In addition, the bill requires a court, in determining the reasonableness of a restrictive covenant, to apply the following rebuttable presumptions:

1. In the case of a restrictive covenant that applies after the termination of an employment or agency relationship, that a restraint of six months or less is presumed to be reasonable and a restraint of longer than two years is presumed to be unreasonable.

2. In the case of a restrictive covenant the consideration for which consists of a promise of garden leave during the term of the restrictive covenant, that the restrictive covenant is presumed to be reasonable.

Third-party beneficiaries, assignees, and successors.

Under the bill, subject to certain conditions, a court may not refuse to enforce a restrictive covenant on the ground that the person seeking enforcement of the restrictive covenant is a third-party beneficiary of the restrictive covenant or is an assignee of or a successor to a party to the restrictive covenant.

Enforcement considerations.

The bill also requires a court, in determining the enforceability of a restrictive covenant, to consider the effect of enforcement of the restrictive covenant on the public health, safety, and welfare and to consider all pertinent legal and equitable defenses, except that the court may not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought, unless that person shows that exceptional personal circumstances exist, and the court may consider as a defense to the enforcement of the restrictive covenant the fact that the person seeking enforcement is no longer in business in the area or line of business that is the subject of the action to enforce the restrictive covenant only if the discontinuance of business is not the result of a violation of the restrictive covenant.

Construction of restrictive covenants.

Moreover, the bill requires a court to construe a restrictive covenant in favor of providing reasonable protection to all legitimate business interests established by the person seeking enforcement of the restrictive covenant and not to employ any rule of contractual interpretation that requires a restrictive covenant to be construed narrowly, against the restraint, or against the drafter of the restrictive covenant.

Public policy.

Further, the bill prohibits a court from refusing to enforce an otherwise enforceable restrictive covenant on the ground that the restrictive covenant violates public policy unless the court specifically articulates the public policy and finds that the public policy substantially outweighs the policy underlying the bill and the need to protect the legitimate business interests established by the person seeking enforcement of the restraint.

Disputes resolved by agreement.

Additionally, the bill permits parties that reach an agreement resolving a pending or threatened action for enforcement of a restrictive covenant to file that agreement with the court and request the court to adopt the agreement as the resolution of the parties' dispute. If the court finds that the agreement is reasonable and consistent with the policy underlying the bill, the court may incorporate the terms of the agreement into an order resolving the action.

Remedies; costs and attorney fees.

Finally, the bill provides: 1) that if a court determines that a restrictive covenant is enforceable, the court must enforce the restrictive covenant by any appropriate and effective remedy, including a temporary or permanent injunction (injunctive relief); 2) that the court may not require a party seeking enforcement of a restrictive covenant to post a bond as a condition to obtaining injunctive relief, but may order that party to provide to the party enjoined security against any damages that he or she may sustain by reason of the injunctive relief in an amount that is sufficient to protect his or her interests; 3) that if a restrictive covenant contains a contractual provision authorizing the award of costs and attorney fees, a court must award costs and attorney fees in accordance with that contractual provision; and 4) that, in the absence of a contractual provision authorizing the award of costs and attorney fees, a court may award costs and attorney fees to the prevailing party.