What Can a Business Do When a Former Employee Breaches a Restrictive Covenant?

– Christopher Butler, Esq.

 

It’s no secret that workplaces across the country are experiencing significant employee turnover. Many employees are leaving their jobs to take advantage of a favorable labor market, to pursue pay increases, or simply to join companies with more generous work-from-home policies. Understandably, employers are concerned and frustrated, and for good reason, particularly when their workers have already entered into certain restrictive covenants with the company.

 

In the employment context, restrictive covenants include confidentiality/nondisclosure agreements, nonsolicitation agreements, and/or noncompete agreements, among others. These types of restrictive covenants are designed to protect a business from former employees who might attempt to disclose the employer’s trade secrets with others, solicit the employer’s customers/clients or employees to benefit another company, or leave to directly compete with the employer. So, if an employee departs for a new opportunity, how does a business enforce a restrictive covenant against the worker? Using a noncompete clause as an example, we’ll highlight some potential options:

 

When Is a Noncompete Agreement Enforceable?

 

As an initial point, narrowly-drafted noncompete agreements are generally enforceable in Georgia and a significant number of other states (to the exception of California and Oklahoma). At a minimum, to be enforceable, a noncompete requires these three elements: 

 

• Consideration – Consideration is the value exchanged for something. A company’s offer of employment to a new hire will generally suffice as adequate consideration. However, for further consideration, a business might offer additional benefits to an existing employee (e.g., pay increase, signing bonus, etc.) in exchange for him/her signing a noncompete agreement;

• Valid Business Interest – A company must have a legitimate business reason in order to bind an employee to a noncompete agreement. Some examples of legitimate business interests include a company’s desire to safeguard trade secrets, preserve goodwill, protect customer/client relationships, maintain employment agreements, and so forth; and

• Reasonableness – A noncompete agreement must strike a balance between the restrictions to be placed on the employee and the protections sought by the employer. Toward that end, the scope of a noncompete agreement must be reasonable in terms of time and geographic scope. For instance, a noncompete clause prohibiting an employee from working for “any competitor in the whole world for 10 years” would certainly be deemed unreasonable, whereas a noncompete provision restricting an employee from competing against the former employer within a 25-mile radius for two years might be entirely reasonable.

 

Certainly, there are many other factors to consider when determining whether a noncompete agreement is enforceable, and it’s typically a highly fact-and-circumstance-specific analysis. 

 

Indeed, legal disputes over the enforceability of restrictive covenants are commonplace. In particular, when those disputes arise under Georgia law, courts apply the Restrictive Covenants Act (RCA), which provides a general roadmap for determining the validity and enforceability of workplace noncompete and nonsolicitation agreements. Not only does the RCA provide a framework for the applicability, language, and scope of a restrictive covenant, it also permits a court to specifically determine the enforceability of the terms of noncompete or nonsolicitation agreements, particularly with respect to the meaning and scope of protectable interests and the reasonableness of time and geographic limitations. Under the RCA, a court wields the power to strike (“blue pencil”) overbroad provisions or to otherwise reduce the scope of a restrictive covenant to render it “reasonable.”

 

Again, focusing specifically on a noncompete agreement, what steps can an employer take to enforce the terms of a reasonable and enforceable noncompete agreement against an employee who has abruptly quit to join a competitor (in violation of the agreement)? The most common path that employers traditionally pursue include:

 

• Informal Resolution – Attempting to informally resolve the dispute by notifying the former employee in writing of his/her breach and demanding assurances that the employee will immediately cease working for the competitor and/or otherwise comply with the remaining terms of the agreement. This is frequently accomplished by having the company’s lawyer send the employer a demand letter (“cease and desist”). At this saber-rattling stage, many disputes are ultimately resolved without resorting to litigation;

 

• Injunctive Relief – When informal efforts fail to resolve the dispute, bringing a lawsuit and seeking an injunction against a former employee is a common type of relief sought by (and granted to) a company to enforce the terms of a noncompete agreement. When pursuing an injunction, a business essentially asks the court to strictly enforce the terms of the noncompete agreement and require the former employee to comply and cease his/her competing activity for a defined period of time;

 

• Monetary Damages – In addition to seeking injunctive relief against a former employee, a company typically asks the court to award compensatory damages directly caused by the former employee’s breach of the noncompete agreement. Compensatory damages may be based on lost profits, compromised customer/client relationships, misappropriated information, and the like; and

 

• Liquidated Damages – On top of seeking injunctive relief and compensatory damages, companies often ask the court to award liquidated damages as a consequence of the former employee’s breach of the noncompete agreement. Liquidated damages don’t require a company to necessarily prove its actual damages, and they’re not intended to serve as a punishment to the former worker. Rather, liquidated damages are usually awarded only when the noncompete agreement itself contains a clause requiring a breaching party (employee) to pay the other party (employer) a predetermined or formulaic amount of money. 

 

The Takeaway

 

We’ve provided a generalization of what may happen when a former employee breaches a noncompete agreement. But, restrictive covenant litigation is seldom a game of certainties, and it’s a complex playbook. Facts are invariably unique, laws are conflicting, and court decisions can be unpredictable. Nevertheless, the tattered scoreboard is painted by the respective wins and losses of both employer and employee teams alike, and it’s about equal. Restrictive covenants serve an important purpose in a competitive marketplace, and a company often has legitimate and worthwhile interest in seeking to enforce the terms of a legally compliant noncompete or nonsolicitation agreement against a former employee. If your business is concerned that a former employee has violated (or will soon violate) his/her restrictive covenant – by misappropriating your trade secrets, soliciting your customers/clients or employees, or engaging in unfair competition – we have years of experience helping business-owners, executives, and professionals traverse the dynamic realm of restrictive covenant law, and perhaps we can help you too – contact Chris Butler with Agenzia today.