Non-Competes in Fixed Term Agreements: Special Care Required

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Special caution is required concerning restrictive covenants that are ancillary to employment agreements for a fixed term (as opposed to an employment agreement for an at-will employee). Whether such covenants may be enforced could depend upon: (1) written renewal of the employment agreement upon expiration; and/or (2) the inclusion of language expressly stating that restrictive covenants contained in the agreement survive termination of the agreement. Consider the following hypothetical:

A senior executive signs an employment agreement providing her with a fixed term of employment for two years from the date the agreement was executed. The agreement contains a restrictive covenant that applies for one year following expiration of the agreement. Upon the expiration of the two-year term, the company is negotiating the terms of a new employment agreement with the executive. As sometimes happens, the negotiations drag on for a period of months, sometimes actively, and sometimes not at all. During this drawn out and ongoing period of negotiations, the executive continues to serve and is compensated according to the terms of the expired employment agreement. Everyone seems to be content with the status quo, and a year goes by. Ultimately, the negotiations fail, and the executive sets out for greener pastures with a competitor.

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