United States: You Get To Write The Script For This Story…

Last Updated: August 17 2016
Article by Michael Tamvakologos and Justine Giuliani

Effective restraints of trade protect businesses which rely heavily on human capital from damage that sometimes can't be undone. These restraints – usually sitting in an employment contract – can be a key business asset.

Others might think about it as an insurance policy. The capacity to preserve customer connections, protect confidential information and discourage key executives from setting up their own business or moving to a competitor can be critical to information rich businesses operating in a competitive market. As we pointed out in our previous blog piece on post-employment protections The difference between winning and losing restraint litigation is often good housekeeping, ensuring the currency of your restraint provisions is an important exercise in risk management.

Our experience in this area is that one key distinction separates cases where restraints are successfully upheld and those where compromise outcomes are required. When seeking to enforce a restraint, an employer will need to demonstrate to the court there is a protectable interest capable of supporting the restraint. In successful cases, typically, the restraint provision has been drafted quite neatly around the key protectable interests. This is the first limb of the test for enforceability. The scope, duration and geographical operation of the restraint are logically tied to the protectable interest (see our map below). An employer will need to make out each of these elements to meet the second limb of the test.

This success can be attributed to the practice of regularly revisiting the questions of which key executives or employees should be subject to restraints, and how those restraints should operate. Think about their knowledge and relationships (their human capital) as key business assets that have to be protected – or protected against. The yearly promotion, pay rise or management re-shuffle cycles are perfect opportunities to update restraint provisions. Often, this is when operational changes (such as the make-up of roles) become effective, so restraints can be tweaked to align with these changes. A promotion or pay rise can be tied to a new contract or restraint provision.

Instead of adopting a one-size-fits-all approach when an employee first joins the business, employers can increase the likelihood that a restraint will be enforceable by showing it was the subject of specific negotiation during the employment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Michael Tamvakologos
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