An employer and an employee may enter into a contract of employment when the employee is hired to work in a business. If the business has clients or trade secrets it wishes to protect, the employer may require the employee to sign a non-competition agreement relating to what happens after the employee is no longer working in the business. The agreement is called a restrictive covenant and it prevents a former employee from soliciting the clients of the business or from using the trade secrets of the business.
There has been much litigation over restrictive covenants. A business often seeks an injunction to stop a former employee from soliciting its clients or using its trade secrets. The former employee may defend such a lawsuit on the basis that the restrictive covenant is not enforceable as a matter of public policy because it is an unreasonable restraint on trade.
Courts scrutinize the meaning and effect of restrictive covenants. To enforce a covenant, a business must show that it has a proprietary interest requiring protection. Trade secrets are commonly protected. Clients of a business may also be protected where there is a significant degree of customer loyalty in the business. If the restrictive covenant goes beyond the immediate protection of the proprietary interest to restrain competition generally, the covenant is most likely to be struck as unenforceable because the employee has the right to use the personal skill and knowledge acquired in the former employment elsewhere.
The covenant, in addition, must be reasonable between the employer and employee in regard to geographical space and time. Covenants prohibiting client solicitations within a 20 mile radius of a business for one or two years have been upheld by the courts. An example is a local insurance broker and its clients. Unequal bargaining power is another factor considered by the courts.
Before entering into an employment contract, it is prudent for each party to the contract to obtain the advice of a lawyer on the enforceability of a restrictive covenant contained in it.