Can a restrictive covenant be too restrictive?

No matter the type of contract or agreement, it is natural for a business to slant the provisions to favor their own protection. It is not uncommon, however, for a business to create a restrictive covenant including terms that challenge its enforceability.

Restrictive covenants generally take the form of various employer-employee contracts. A business drafts agreements such as a non-compete clause or nondisclosure agreement to protect the organization’s trade secrets, competitive edge or intellectual property. In the event an employee leaves, these contracts usually have two features that restrict the individual’s occupational opportunities – duration and region.

• The terms of the covenant must have a specific duration. For example, a non-compete clause might specify that the former employee cannot seek work at a direct competitor for a period of two years. The hope is that any advantage the new company might gain by hiring the former worker will be negligible. Periods longer than this or an unspecified duration might be unenforceable.
• The terms of the covenant must specify a geographic region. Preventing a former worker from seeking employment at a direct competitor in the same city or market area is generally a term in a non-compete clause.

The standard of reasonableness provides a guide in the enforceability of certain provisions in a business contract. If the restrictive covenant is considered reasonable, it is therefore considered enforceable. Typically, there are three questions to consider:

1. Are the terms of the contract no greater than what are required to protect the employer’s legitimate business interests?
2. Do the terms impose any undue hardship on the former employee?
3. Are the terms of the contract injurious to the public?

If the court deems the terms of the restrictive covenant unreasonable, it is likely also unenforceable. Unreasonable terms will likely invalidate various provisions in the employee contract. Effective contracts form the backbone of any successful organization. It takes skill to write a balanced agreement that not only favors the protection of the organization but is fair to the employee.