Restrictive Covenants in the USA

Definition and Types of Restrictive Covenants

The following restrictive covenants are recognised and may be enforceable under the law: 

• Non-compete clauses; 

• Non-solicitation of customers; 

• Non-solicitation of employees. 

Enforcement of Restrictive Covenants – Process and Remedies

Federal initiatives and a state-level trend away from enforceability of restrictive covenants create ongoing changes in the law of restrictive covenants in the U.S.  Generally, unless state law limits or prohibits restrictive covenants, state courts may hold that a covenant restricting the activities of an employee upon the termination of his or her employment with the employer will be enforced if it protects a legitimate business interest, is reasonably limited in scope, time and place, and is supported by consideration, and is reasonable. In other words, it should afford only a fair protection to the employer’s interest and not be so broad in its operation as to interfere with the interests of the public or prevent an employee from engaging in his or her livelihood. 

Use and Limitations of Garden Leave

Garden leave – a period during which a departing employee is paid his or her salary, but is not permitted to work – is not a typical concept in the U.S., to the surprise of some foreign employers. As the effect of garden leave is not only to prevent the employee from competing with the employer or taking confidential information, but also to carry out work of any kind for any other employer, U.S. courts may question whether there is a valid business interest in such a broad restraint, even if it is fully compensated. As it is not a common arrangement in the U.S., garden leave is governed primarily by state contract law rather than comprehensive statutory regulation and each situation will be examined independently. Unlike in many countries, however, it should not be assumed that an extended garden leave (beyond a period reasonable for normal transition) would be valid in the U.S. if it does not satisfy restrictive covenant requirements.