The effects and conditions of restrictive covenants in a down economy

1. Restrictive Covenants in a Slumping Economy Michael King

2. Restrictive covenants Main Types Non Compete Agreements Non Solicitation Agreements Non Disparagement Clauses – severance pay Highly used in Hi-tech and Financial Industries

3. Purpose Employer Protection Trade Secrets Customer relationships Special Training

4. Motive Massive Lay Offs Desperation to Protect Information Fierce Competition among rival corporations Fear of losing some competitive advantage

5. Economic Conditions Down Sizing Mass Lay Offs Dissolved Companies Unprecedented unavailability of employment opportunities Severance vs. Unemployment Benefits Some clauses still enforceable under both NDA’s and Non Disparaging comment clauses usually attached to severance packages

6. Non Competes – Enforceable? Geographic Reach Duration – 3 years is usually extreme Define what is confidential information Must not be generally known Starting your own business? Where was the lawsuit filed? Already known information? Victoria’s Secret v Mays Dept Stores

7. Non Solicitation Often paired with a NCA Client relationship is long The connection with the employee rests solely with the employment of the company Can 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 Considerations Value of the information to the company The amount of effort creating the trade info Goodin and Goodin v. Jolliff, et al., ___ S.W.3d ___ (Tex.- App. Fort Worth, 2008)

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

10. THE states Not enforceable in California California 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 employees Employers can work around by effecting pensions and distributions as allowed by ERISA – will it supersede California law?

11. The states Texas – still a question Alabama – upholds the strict statues according to reasonableness.

12. Legal Hurdles Courts value the right to earn a living Need a good business reason Calling it a trade secret is not cause Not to punish the employee for leaving Must not last 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 Competes National companies will have to recognize this precedent, i.e. Edwards vs. Arthur Andersen

14. Final Advice Used only when Business interests are at stake Not broader than necessary to protect those interests Signed before employment begins or with additional consideration provided –promotion, etc.