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As the authoritative force in Employment Law, we are committed to ensuring that we live up to our word by keeping you in the loop, informed, and enlightened about various legal and non-legal issues related to labor law. Through our ongoing series, we have provided you with crucial information on how to enforce restrictive covenants and protect trade secrets. To ensure that we keep you in the loop, this blog is Part III of our abridged series titled “Fundamental Aspects of Restrictive Covenants.” In Part II (A&B), we provided you with a hands-on guide related to “Ensuring Restrictive Covenants are Adequately Considered for Incoming Employees.” As an essential update, we have provided you with an overview of “How to Determine the Employer’s Legitimate Protectable Interests” in this blog and Part III of the series.

How to Determine the Employer’s Legitimate Protectable Interests

Generally, while this is enforced by courts, only legitimate business interests are considered worthy of protection by restrictive covenants. Typically, courts do not enforce restrictive covenants that seem to be designed merely to help an employer gain unfair competitive advantage or restrain all competition against former employees. This means that while it should not seem to be an attempt to gain competitive advantage unfairly or restrain all competition, restrictive covenants should be drafted to protect the employer’s legitimate interest only. Under the law, examples of legitimate protectable interests include confidential/proprietary information or trade secrets, an employee’s unique knowledge or skills, specialized employment training programs, customer relationships & goodwill.

Let us look at each legitimate protectable interest in detail:

Confidential/Proprietary Information or Trade Secrets

The need for employers to protect their confidential/proprietary information and/or trade secrets is recognized in most states. Accordingly, in order to ensure that the definition of trade secret is uniform and as a way of codifying this protection, a version of the Uniform Trade Secrets Act (UTSA) has been adopted in most states. Under this law, a trade secret comprises information that is both (1) protected by reasonable efforts to maintain its secrecy and (2) has an attached value because others do know generally know about it. Thus, sensitive marketing information, inventory data, unit costs, customer contract terms, customer pricing, dealer discounts, and profit margins may include confidential information or trade secrets. It, therefore, goes without saying that an employer’s wish to protect confidential information is considered a legitimate business interest.

Employee’s Unique Knowledge or Skills

A departing employee may possess a unique ability, specialized knowledge, or particular skill. In such a case, an employer may wish to legitimately restrict competition from such an employee. When faced with such a situation, an employer should ensure that this employee’s exceptional knowledge or ability set is tailored to the covenant when an agreement seeking to protect against competition from such high-level employees is being drafted. In this regard, such high-level employees may include individuals responsible for a large number of accounts or clients, those with access to particularly sensitive information or data, or those in senior management (a chief executive or senior vice president)

Specialized Employment Training Programs

A protectable legitimate business interest may also comprise an employer’s investment in specialized training procedures, programs, or methods. However, an employer must be able to demonstrate the distinctiveness or specialty of such training procedures, programs, or methods so that a restrictive covenant intending to cover such unique and special training may be enforced by a court.

Customer Relationships & Goodwill

Similar to confidential/proprietary information and/or trade secrets, customer relationships and goodwill are generally considered legitimate business interests by courts. However, the protection of these client relationships is limited in some jurisdictions based on the nature of business. For instance, anti-competitive restrictions on the customers of an employer not personally developed by the employee will not be extended by some courts. Thus, every employer should make sure that the specific customer prospects or even current customers have been tailored with the restrictive covenant when covenants intended to protect against customer solicitation are being drafted. Further, it is less likely that restrictive covenants extending to the personal customers of an employee who, through independent recruitment efforts that were not financially supported by the employer, managed to bring and grow the employer’s business will be enforced in most jurisdictions.

In Part IV of this series, we will move the discussion under this series forward and provide you with an overview of “Understanding Reasonable Geographic Restrictions for Covenants.”

Until then, stay tuned and enjoy the series to come. In the interim, reach out to us with questions or comments on our website at the Contact Us page!

Always rising above the bar,

Isaac T.,

Legal Writer & Author.