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Restrictive Covenants And Their Enforceability

The attorneys at Block & Landsman actively represent individuals and employers who are either contemplating or challenging restrictive covenants, including non-compete and non-solicitation terms in an employment agreement or contract. Recent case law highlights the difficulties in drafting effective and enforceable covenants.

In the recent case Assured Partners v. Schmitt, the First District Court of Appeals affirmed the circuit court's ruling which found the restrictive covenants included in Schmitt's employment contract were not enforceable. The disputed covenants consisted of a non-compete clause, a non-solicitation provision, and a confidentiality clause.

Schmitt has worked in the insurance industry for years, specializing in selling lawyers' professional liability policies. Through a series of job moves, promotions and acquisitions, Schmitt became employed by the plaintiff, Assured Partners. While with the plaintiff, Schmitt signed an employment agreement that incorporated the three aforementioned restrictive covenants. After Schmitt resigned he immediately began to compete with the plaintiff, who then sought a Temporary Restraining Order ("TRO") to stop Schmitt from competing against it. The circuit court denied the Plaintiff's request and the appellate court affirmed.

The basis for the circuit and appellate courts' rulings was that the restrictive covenants were too broad - - they could not pass the "rule of reasonableness test" which states that a restrictive covenant is not valid if it is broader than necessary to protect the employer's legitimate business interests.

In this action, both courts found the restrictions overly broad; both the geographic area identified and the types of insurance products he was restricted from selling were far beyond what was needed to protect the employer's business. The types of information that the employer sought to protect as "confidential" was also defined too broadly to enforce. Finally, while some courts will "blue pencil" (a/k/a rewrite to narrow their application) the covenants to give effect to the contract terms, "the deficiencies here [were] too great to permit modification. Thus, the non-competition, non-solicitation and confidentiality clauses in Schmitt's employment agreement were rendered unenforceable.

The upshot of this case is that any type of restrictive covenant is only enforceable when it balances the need to protect the employer without being overly broad. Hence, 'one size does not fit all', and employers must analyze their true needs to negotiate and draft an enforceable agreement. Similarly, employees must understand the impact of what restrictions are contained in their employment agreements or contracts.

Block & Landsman assists employers and employees in the review, drafting, negotiation and enforcement of restrictive covenants in employment agreements, independent contractor agreements, and sales transactions. If you have any questions regarding the enforceability of a restrictive covenant, contact Block & Landsman.

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