Restrictive Covenants as a Device to Protect Trade Secrets

Covenants as a
Device to Protect
Trade Secrets
Even when access to a company’s trade secrets is tightly restricted,
those trade secrets must necessarily be entrusted to some employ-
ees, and nondisclosure agreements do not always provide the pro-
tection required. The need for additional protection against the
disclosure of sensitive information may also arise when a business
is sold. In addition to confidentiality agreements, contract-based
mechanisms for protecting confidential and trade secret infor-
mation include noncompetition agreements (or “covenants not to
compete”), nonsolicitation agreements, and “no-hire” or employee
nonsolicitation agreements. These agreements are sometimes
refer red to coll ectively as “restrictive covenants.”
Nonsolicitation agreements restrict former employees or the
sellers of a business1 from contacting the businesss customers,
while “no-hire” or employee nonsolicitation agreements restrict
the hiring away of a company’s employees. Noncompetition agree-
ments more broadly prohibit former employees or owners from
competing with the business; this typically includes accepting
employment with a competitor. Each of these may play a vital role
Guide to Protecting and Litigating Trade Secrets
in a company’s enforcement of its trade secrets. In addition to serv-
ing as necessary evidence of the company’s efforts to protect its
trade secrets,2 they provide a superior avenue to prompt judicial
intervention when a former employee or the seller of a business
attempts to use a business’s trade secrets or confidential informa-
tion to his or her advantage.
Like trade secrets, these agreements are governed by state law.
Unlike trade secrets, with respect to which the Uniform Trade
Secrets Act (UTSA) has imposed some uniformity,3 no unifying
principle has emerged in the field of restrictive covenants and a
50-state survey displays remarkable variety in how receptive a
jurisdiction is to such agreements and in the rules governing their
creation, interpretation, and enforcement.4 A national survey is
beyond the scope of this chapter, which focuses on the law of five
jurisdictions whose disparate approaches highlight this diversity.
New York. An influential jurisdiction with a common law
approach to trade secrets, New York also continues to
embrace a traditional common law approach to restric-
tive covenants. Judicial determinations of the validity of
employee noncompetition agreements are governed by
what the New York Court of Appeals has termed a “pre-
vailing standard of reasonableness.
Illinois. While Illinois has embraced the UTSA, the enforce-
ment of restrictive covenants is subject to a highly fact-
specific common law inquiry. While generally inhospitable
to restraints on competition, Illinois courts will examine
the “totality of the circumstances” to determine if an
employer’s protectable interest is being advanced without
unreasonable limitations on competition.
Tex as . Although Texas courts have historically been hos-
tile to covenants not to compete, with recent case law, the
pendulum is swinging toward a more employer-friendly
approach. In 1993, the Texas legislature enacted a statu-
tory regime intended to provide the business community a
greater degree of certainty regarding the enforceability of
covenants not to compete, and in 2011, the Texas Supreme
Court issued a decision that appears to simplify Texas’s
previously complicated case law on enforceability.
Florida. Responding to an increasingly mobile work force
and fierce competition for customers, the Florida legislature
codified its law of restrictive covenants in 1996 to provide
Restrictive Covenants as a Device to Protect Trade Secrets
a comprehensive statutory mechanism for the enforcement
of restrictive covenants. Instead of forcing employers to
predict what a reviewing court might someday consider
a “reasonable” restriction, the statute provides “safe har-
bors” in the form of restrictions that are presumed to be
California. Subject to a handful of legislative and judicial
exceptions, restrictive covenants are void in California as
unlawful restraints of trade. A recent decision of the Cali-
fornia Supreme Court reaffirmed the state’s public policy
favoring freedom of competition and employee mobility,
sparking debate about the future of the one broad excep-
tion that California courts historically have embraced:
enforcement of restrictive covenants where necessary to
prevent trade secret misappropriation.
Despite this variety in approaches, a common set of issues
underlies almost every state’s treatment of restrictive covenants,
dictating whether and to what extent they will be enforced:
1. Does the restriction protect a legitimate business interest?
2. Are geographic and temporal restrictions reasonable?
3. Is the covenant supported by adequate consideration?
4. Does the covenant impose an undue burden on the party
5. Is the restriction in the public interest?
Whether you are drafting a restrictive covenant or deciding
wheth er to hi re an empl oyee who is bound by one, make sure
to focus on the law of the jurisdiction or jurisdictions (there
may be more than one!) that may be asked to enforce the
I. A Restrictive Covenant Must Protect
a Legitimate Business Interest
Because restrictive covenants restrain trade, they are looked upon
with disfavor. In those states that will enforce a covenant not to

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