Restrictive Covenants – How Restrictive Are They?
Restrictive covenants in employment agreements are a critical tool utilized by employers to impose post-employment restrictions on their employees. Restrictive covenants are enforceable to preserve and protect the employer’s confidential information, business relationships and the business’ profitability. While restrictive covenants are valid and aim to protect employers, they are often challenged for imposing a significant burden on an employee’s freedom to contract and limiting the employee’s rights to freely transition to other employment opportunities. Properly drafted restrictive covenants balance this issue.
The use of non-compete agreements has fostered ongoing debates in many states. Deciphering between fairly imposed restrictions – that protect businesses and fundamental freedoms of employed individuals – and those that are simply an abuse of bargaining power and restrict employees from changing employment within a close radius to the former employer, is the core of the dispute. Recently, the Illinois Legislature unanimously passed a comprehensive reform of non-compete and non-solicit law, which is a compromise between employers and employees. According to the reform, employers are permitted to continue implementing restrictive covenants in employment agreements to preserve confidential information, business relationships and maintain their practices. Employees, however, are also ensured protection of due process, through imposed compensation thresholds and various procedural protections, which did not previously exist. Furthermore, the compromise seeks to clarify qualifications for legitimate business interests, sufficient to warrant enforceable restrictive covenants and qualifications for adequate consideration by both contracting parties.
On May 11, 2021, Flowonix, a New Jersey corporation engaged in the development, marketing, and sale of medical devices, filed a lawsuit against Medtronic, Inc., Medtronic USA, Inc. and Eric Brandenburg, Flowonix’s former employee, alleging breach of the non-solicitation and non-competition provisions of Brandenburg’s Employment Agreement. Brandenburg was initially employed as a salesperson for Flowonix, and then subsequently left and joined Medtronic. Medtronic is also engaged in marketing and sale of products in the pain therapy and device market and are allegedly direct competitors of Flowonix. Brandenburg’s Employment Agreement with Flowonix, restricted him from joining a competitor company for a 12-month period following termination and imposed a duty not to compete, solicit or make introductions for any future employer to customers he previously contacted. Flowonix sent a notice to Brandenburg and Medtronic, reminding them of the binding post-employment obligations. Brandenburg and Medtronic confirmed their knowledge of, and agreed to abide by, the restrictive covenant. Flowonix alleges Brandenburg nonetheless breached the agreement when he joined Medtronic and allegedly contacted Flowonix customers, driving away business from Flowonix to the competitor.
Why is this relevant?
The New Jersey lawsuit will ultimately come down to a critical interpretation of the terms of the Employment Agreement. The court will likely dissect the terms of the non-compete provision and weigh the employer’s legitimate protectable interest versus the reasonableness of the restriction terms of the employee. The details of employment agreements hold the highest value in disputes of this nature, and until New Jersey follows Illinois’ non-compete and non-solicit laws reform it is crucial to ensure these provisions are drafted and negotiated in a manner that can most ensure enforceability.
How Frier Levitt Can Help
Frier Levitt has a dedicated team of attorneys specializing in the drafting, reviewing, and defending the enforceability of restrictive covenants in employment agreements. In the healthcare and life sciences domain, protecting the legal interests of our clients and their companies is of the utmost importance. Contact us today to learn more about how you can properly protect your rights as an employer or employee, as they pertain to restrictive covenants and their enforceability.