RESTRICTIVE COVENANTS April 24 2012 Jessica Golden Cortes

RESTRICTIVE COVENANTS April 24, 2012 Jessica Golden Cortes Partner 212 -468 -4808 jcortes@dglaw. com 0 Restrictive Covenants

RESTRICTIVE COVENANTS 1 Restrictive Covenants

TYPES OF RESTRICTIVE COVENANTS - Non-Compete • With and without guaranteed severance for termination with out cause • With and without salary continuation at employer’s choice • Industry-wide vs. limited by product or competitor • Varying lengths 2 Restrictive Covenants

TYPES OF RESTRICTIVE COVENANTS - Client non-solicitation and Client non-service • Can apply to all Company clients; or • Limited to clients employee serviced (greater likelihood of enforceability) - Employee non-solicitation (non-raid) 3 Restrictive Covenants

OTHER CREATIVE SOLUTIONS WITH SIMILAR IMPACT » Notice Period/Garden Leave - Employee obligation to give fixed notice of resignation - Employee remains an employee during notice period – duty of loyalty continues - Salary and benefits continue - Employer right to shorten; sideline employee 4 Restrictive Covenants

OTHER CREATIVE SOLUTIONS WITH SIMILAR IMPACT » Deferred Compensation – future vesting of cash payments in exchange for continued employment and/or restrictive covenant; forfeited by resignation » Restricted Stock Options – equity-based incentive; vests over time; forfeited by resignation » Forfeiture for Competition – benefits contingent upon compliance with restrictive covenant; not subject to same scrutiny by the courts because of employee choice 5 Restrictive Covenants

REMEDIES » Injunctive relief - expedited process to prevent “irreparable harm” that cannot be quantified in money damages; - Expensive; time consuming; can be difficult to prevail given general disfavor of courts on restricting freedom to earn living » Liquidated damages - i. e. , 1 year’s revenue from the “stolen” client; 33% of “poached” employee’s salary, representing headhunter fee to replace employee 6 Restrictive Covenants

NEW YORK » Legitimate employer interests: - Protect against misappropriation of trade secrets/use or disclosure of confidential information - Protection from competition by employee whose services were unique or extraordinary - Protection of customer relationships and goodwill 7 Restrictive Covenants

NEW YORK » Arakelian v. Omnicare, Inc. (E. D. N. Y. 2010) - restrictive covenants unenforceable where employee terminated without cause; • “Enforcing a noncompetition provision when the employee has been discharged without cause would be ‘unconscionable’ because it would destroy the mutuality of obligation on which a covenant not to compete is based. ” 8 Restrictive Covenants

CALIFORNIA » For most part, restrictive covenants are unenforceable and illegal in California, unless incident to sale of a business; » Employee non-solicitation provisions still valid; » Provisions prohibiting use and/or disclosure of confidential/proprietary Company information valid 9 Restrictive Covenants

ILLINOIS » Similar to New York » Legitimate employer interests under the totality of the circumstances. Factors considered: • Strength/permanence of the relationship w/ the client • Possession of confidential/proprietary information • Time/territorial restrictions. - Restriction must not unduly burden employee or be injurious to the public 10 Restrictive Covenants

TEXAS » Marsh USA v. Cook (TX Supreme Court, Dec. 2011) - Previously, continued employment not sufficient consideration for restrictive covenant; exchange of confidential information required. - After Marsh, customer relationships/good will protectable - Stock options/compensation can be consideration 11 Restrictive Covenants

RESTRICTIVE COVENANTS: TIPS » How to Tailor: - Geographic limitations - Product Competitor Limitations (e. g. , if worked on Coke account, cannot work on Pepsi account at competitor for one year) - Client service limitations (those employee worked with) 12 Restrictive Covenants

RESTRICTIVE COVENANTS: TIPS » When should an employee sign an agreement? - At inception of employment (continued employment is consideration); - Note: if after commencement of employment, in some states, continued employment alone is not sufficient consideration; • IL – not sufficient unless employee continues to work for a “substantial period” after signing agreement (Illinois) - IL courts have held 7 months not enough, 2 -3 years enough • Sign along with discretionary bonus/raise/other tangible consideration 13 Restrictive Covenants

RESTRICTIVE COVENANTS: TIPS » Ask candidates for employment whether they are subject to post-employment obligations of a current or former employer » Add language to offer letter stating that candidate represents and warrants that she is not subject to any post -employment obligations that will prevent her from performing services for new employer 14 Restrictive Covenants

QUESTIONS? 15 Restrictive Covenants