Restrictive Covenants in Employment Contracts: Enforceability of Non-Competition, Non-Solicitation, Confidentiality & Fiduciary Obligations (Rev 1)

by E. Wayne Benedict

This paper discusses how employees owe their employers certain obligations or duties while the employment contract remains extant; and although some of those obligations or duties may continue to be owed by a former employee to her former employer, other obligations or duties will terminate upon the termination of the employment contract. Some obligations are contractual, while others find their roots in equity or at common law. Examples of the former include express contractual “restrictive covenants” such as non-solicitation, non-dealing, non-competition and confidentiality terms; examples of the latter include equitable fiduciary obligations, or contractual terms implied as matters of fact or law. Some obligations will be enforced by the courts; others will not, depending on the factual circumstances in light of the law.

Part II of this paper discusses obligations or duties that are, or may be, owed by employees to their employer while the employment contract is extant. Part III of this paper discusses obligations or duties that are, or may be, owed by former employees to their former employer following termination of the employment contract. Part IV of this paper discusses the enforceability (or unenforceability) of these obligations or duties.

Part V concludes this paper with the observations that employees owe their employers certain obligations or duties both during, and following termination of, the employment contract. Such duties may include: express or implied contractual duties of fidelity, good faith and loyalty, confidentiality, non-competition, non-solicitation, and/or non-dealing; common law obligations of confidentiality; equitable fiduciary obligations. In order to enforce these obligations in court, a former employer will face various hurdles, including: rebutting the presumption of illegality of contractual restrictive covenants by showing the terms are not ambiguous, are necessary to protect proprietary interests, and are reasonable as between the parties and in relation to the public interest; avoiding the General Billposting Rule; establishing good and valuable consideration supporting the contract in which the restrictive covenants are found; establishing that the breach caused the losses complained of to establish damages; mitigation of damages; coming to court with “clean hands”; and meeting any argument that the former employer waived its right to enforce the restrictive covenants, or is estopped from enforcing them. In order for a former employer to obtain interim or interlocutory relief from the court by way of injunction, the applicant will need to show a strong prima facie case that it will be able to meet all of the aforementioned hurdles. It will also have to show “irreparable harm” and that the “balance of convenience” weighs in its favor. Third parties to the obligations owed between employers and their employees—present or former—can incur liability (directly or vicariously) arising from their breach.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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