RESTRICTIVE COVENANTS

April 24, 2012

Jessica Golden Cortes

Partner 212-468-4808 [email protected]

RESTRICTIVE COVENANTS

1 Restrictive Covenants

TYPES OF RESTRICTIVE COVENANTS

Non-Compete • With and without guaranteed severance for termination with out cause • With and without salary continuation at employer’s choice • Industry-wide vs. limited by product or competitor • Varying lengths 2 Restrictive Covenants

TYPES OF RESTRICTIVE COVENANTS

Client non-solicitation and Client non-service • Can apply to all Company clients; or • Limited to clients employee serviced (greater likelihood of enforceability) Employee non-solicitation (non-raid) 3 Restrictive Covenants

OTHER CREATIVE SOLUTIONS WITH SIMILAR IMPACT

»

Notice Period/Garden Leave

Employee obligation to give fixed notice of resignation Employee remains an employee during notice period – duty of loyalty continues Salary and benefits continue Employer right to shorten; sideline employee 4 Restrictive Covenants

OTHER CREATIVE SOLUTIONS WITH SIMILAR IMPACT

»

Deferred Compensation

– future vesting of cash payments in exchange for continued employment and/or restrictive covenant; forfeited by resignation »

Restricted Stock Options

– equity-based incentive; vests over time; forfeited by resignation »

Forfeiture for Competition

– benefits contingent upon compliance with restrictive covenant; not subject to same scrutiny by the courts because of employee choice 5 Restrictive Covenants

REMEDIES

» Injunctive relief expedited process to prevent “irreparable harm” that cannot be quantified in money damages; Expensive; time consuming; can be difficult to prevail given general disfavor of courts on restricting freedom to earn » Liquidated damages living i.e., 1 year’s revenue from the “stolen” client; 33% of “poached” employee’s salary, representing headhunter fee to replace employee 6 Restrictive Covenants

NEW YORK

» Legitimate employer interests: Protect against misappropriation of trade secrets/use or disclosure of confidential information Protection from competition by employee whose services were unique or extraordinary Protection of customer relationships and goodwill 7 Restrictive Covenants

NEW YORK

»

Arakelian v. Omnicare, Inc.

(E.D.N.Y. 2010) restrictive covenants unenforceable where employee terminated without cause; • “Enforcing a noncompetition provision when the employee has been discharged without cause would be ‘unconscionable’ because it would destroy the mutuality of obligation on which a covenant not to compete is based.” 8 Restrictive Covenants

CALIFORNIA

» For most part, restrictive covenants are unenforceable and illegal in California, unless incident to sale of a business; » Employee non-solicitation provisions still valid; » Provisions prohibiting use and/or disclosure of confidential/proprietary Company information valid 9 Restrictive Covenants

ILLINOIS

» Similar to New York » Legitimate employer interests under the totality of the circumstances. Factors considered: • Strength/permanence of the relationship w/ the client • Possession of confidential/proprietary information • Time/territorial restrictions.

Restriction must not unduly burden employee or be injurious to the public 10 Restrictive Covenants

TEXAS

»

Marsh USA v. Cook

(TX Supreme Court, Dec. 2011) Previously, continued employment not sufficient consideration for restrictive covenant; exchange of confidential information required.

After

Marsh

, customer relationships/good will protectable Stock options/compensation can be consideration 11 Restrictive Covenants

RESTRICTIVE COVENANTS: TIPS

» How to Tailor: Geographic limitations Product Competitor Limitations (

e.g.,

if worked on Coke account, cannot work on Pepsi account at competitor for one year) Client service limitations (those employee worked with) 12 Restrictive Covenants

RESTRICTIVE COVENANTS: TIPS

» When should an employee sign an agreement?

At inception of employment (continued employment is consideration); Note: if after commencement of employment, in some states, continued employment alone is not sufficient consideration; • IL – not sufficient unless employee continues to work for a “substantial period” after signing agreement (Illinois) - IL courts have held 7 months not enough, 2-3 years enough • Sign along with discretionary bonus/raise/other tangible consideration 13 Restrictive Covenants

RESTRICTIVE COVENANTS: TIPS

» Ask candidates for employment whether they are subject to post-employment obligations of a current or former employer » Add language to offer letter stating that candidate represents and warrants that she is not subject to any post-employment obligations that will prevent her from performing services for new employer 14 Restrictive Covenants

QUESTIONS?

15 Restrictive Covenants