Restrictive Covenants in Employment and Business Sales

A restrictive covenant is a contract provision that limits a party's freedom to engage in certain activities after a relationship ends. Employers and buyers of businesses use these clauses to protect valuable interests such as trade secrets, customer relationships, and goodwill. The most common are non-compete agreements and non-solicitation agreements. Because they restrain trade and a person's ability to earn a living, courts review them with caution. Paralegals who work in employment, corporate, and litigation practice frequently draft, track, and help enforce these provisions, and the exam may test your understanding of how they are evaluated.

Defining the Agreements

Non-Compete Agreements

A non-compete (also called a covenant not to compete) prohibits a former employee, owner, or seller from working in a competing business or starting one within a defined geographic area for a specified period. For example, a sales executive may agree not to work for a competitor within fifty miles for one year after leaving.

Non-Solicitation Agreements

A non-solicitation agreement is narrower. It restricts a former employee from soliciting the company's customers (customer non-solicit) or recruiting its employees (employee non-solicit or no-hire), but does not prevent the person from working for a competitor. Courts generally view non-solicitation provisions more favorably because they do less harm to the individual's livelihood.

Related Agreements

Non-disclosure agreements (NDAs): Protect confidential information and trade secrets.
Invention assignment agreements: Assign employee-created intellectual property to the employer.
Garden leave: Employee remains on payroll during the notice period but is kept from working for others.

General Enforceability Standard

Most states enforce a restrictive covenant only if it is reasonable. Courts typically ask whether the covenant:

Is supported by valid consideration, such as initial employment, a promotion, or a bonus. Some states treat continued at-will employment as insufficient on its own.
Protects a legitimate business interest, such as trade secrets, confidential information, specialized training, or substantial customer relationships. Simply avoiding ordinary competition is not enough.
Is reasonable in duration, geographic scope, and scope of activities restricted.
Does not impose undue hardship on the employee.
Is not injurious to the public interest.

Reasonableness Factors

Duration

Six months to two years is often upheld, depending on the industry and the employee's role. Periods longer than two to three years face greater scrutiny. Courts may consider how long it would take to hire and train a replacement or for client relationships to transfer.

Geographic Scope

The area must correspond to the employer's actual market. A restriction covering an entire nation may be reasonable for an internet company with nationwide customers but excessive for a local salon. Some courts accept customer-based restrictions instead of territorial ones.

Scope of Activity

The covenant should be limited to work similar to what the employee performed. A broad ban on working in any capacity for a competitor, such as a janitor or receptionist, is more likely to be struck down.

Judicial Remedies for Overbroad Covenants

When a covenant is unreasonable, courts take different approaches depending on state law:

Blue pencil doctrine: The court strikes the unreasonable language but enforces what remains only if the remainder is grammatically severable.
Reformation (judicial modification): The court rewrites the covenant to make it reasonable and then enforces it.
All or nothing: The court declines to enforce the covenant at all if it is overbroad.

Because the approach varies, drafters should write narrow, reasonable covenants to avoid the risk of total invalidation.

State Law Variation and Trends

State law governs most restrictive covenants and the differences are significant. California, Minnesota, North Dakota, and Oklahoma generally refuse to enforce employee non-competes, with narrow exceptions such as sale of a business. Other states impose income thresholds, notice requirements, or special restrictions for health care workers, low-wage employees, or broadcasters. Several states require that employees receive the agreement before accepting a job offer. Choice of law and forum selection clauses can be challenged where they attempt to evade the protective law of the employee's home state.

At the federal level, the Federal Trade Commission attempted to issue a nationwide rule banning most non-competes, but the rule faced court challenges, and the legal landscape continues to evolve. The FTC and National Labor Relations Board have also expressed concerns about these agreements. Legal professionals should check current federal and state law before advising on enforceability.

Sale of a Business

Courts apply more lenient standards to non-competes given by the seller of a business. The buyer paid for goodwill and is entitled to protection against the seller opening a competing shop down the street. Longer durations and broader territories are commonly allowed, provided they are tied to the area in which the business operated.

Enforcement and Remedies

Injunctive relief: The most common remedy, usually sought through a temporary restraining order or preliminary injunction to stop the employee from competing. The employer must generally show a likelihood of success and irreparable harm.
Damages: Lost profits caused by the breach, though they can be difficult to prove.
Attorney fees: Awarded where the contract or statute provides.
Claims against the new employer: Tortious interference with contract.
Tolling: Some covenants extend the restricted period for the length of any violation.

Best Practices for Drafting

Identify the specific legitimate interest being protected
Tailor restrictions to the role and seniority of each employee
Use reasonable time, geographic, and activity limits
Provide clear consideration and, where required, advance notice
Include a severability clause and a reformation provision where permitted
Pick the governing law carefully, understanding it may not be honored
Review agreements periodically as laws change

The Paralegal's Role

Paralegals prepare templates, compile signed agreements, track expiration dates, research current state law, and assemble exhibits and declarations for injunction hearings. In litigation, they gather evidence of the employee's new role, customer lists, emails showing solicitation, and device forensics. Maintaining an accurate agreement database can save a client from missing a short enforcement window.

Frequently Asked Questions

Is a non-compete enforceable in every state?

No. States like California largely ban employee non-competes, and others impose restrictions based on income or occupation.

What is the difference between a non-compete and a non-solicit?

A non-compete bars working for a competitor, while a non-solicit only bars contacting customers or employees.

Can a court rewrite a non-compete?

In some states yes, through reformation or blue penciling, but others refuse to modify overbroad agreements.

Does an employer need to pay for a non-compete?

Not generally, but valid consideration is required, and some states require additional consideration beyond continued employment.

Next Steps

Contract law concepts like consideration, reasonableness, and remedies appear throughout the exam. Study them with our contracts flashcards, create your free account, and explore the pricing page for complete exam prep.

Non-Compete and Non-Solicitation Agreements: Enforceability Explained