Black Hats and White Hats: Narrow Restrictions

(Part Three in a Series)

Although the color of your hat depends on the cumulative effect of your actions, one of the surest indicators of its color is the scope of any restrictive covenants you have with your employees.

White Hats have narrowly drafted restrictions, closely tailored to their legitimate business interests; Black Hats seek expansive restrictions.  White Hats recognize that employees need to make a living after they leave; Black Hats are oblivious to anything except their own selfish interests.  White Hats focus on unfair competition; Black Hats want to stifle competition per se.

If you want an enforceable restriction, you must change the way you think about most negotiations.  Stand your thinking on its head.  Rather than trying to grab as much as possible, look for the minimum that you need to protect your business interests. Think small.

Americans believe in free enterprise and fair competition.  When you ask a judge to enforce your restrictive covenants and prevent someone from competing with you, you must be able to show her that your restriction is fair, reasonable, and limited. The judge will disallow anything that exceeds the Least Restrictve Means Possible.

Years ago, a man named George called me in a panic late one afternoon. He had just been served with a Complaint alleging that he was violating a non-compete agreement he signed with his former employer.  The court had scheduled a hearing on a temporary restraining order for the next day.

George came in the next morning so that we could prepare a response to application for injunctive relief.  His former employer was trying to enforce the most poorly drafted non-compete agreement I have ever seen.  When George told me his story, the agreement became even more absurd.

George had approximately 20 years experience in selling manufactured homes in retirement communities.  He is a veritable genius when it comes to filling in retirement communities and to helping his employer make large amounts of money.

The former employer recruited George because the employer had been unable to fill a retirement community he had developed.  The owner was on the verge of financial ruin.  George joined the company, brought his 20 years of knowledge and experience, and quickly filled the community.  When the employer reneged on his financial commitments, George left.

The employer operated several locations throughout the southwest where he sold manufactured homes.  The employer sought to enforce a restrictive covenant prohibiting George from working within 300 miles of any of these facilities for three years.  George felt the restriction was unreasonable.  He was right.

In preparation for the hearing, we prepared a map on which we drew a 300-mile radius around each of the locations.  Though George had worked at a single location in Central Arizona, the employer sought to restrict him from working in Arizona, the western half of New Mexico, northern Mexico, most of Utah, the most populous areas of Nevada, and California from the Mexican border to north of San Francisco.  The restriction at issue was patently unreasonable, even before we considered the three-year restriction.

When the employer’s attorney marched in the three-year, 300-mile restriction, the judge laughed him out of court.  The restriction was so overbroad that we had to say virtually nothing.

Black Hats like George’s former employer are obsessed with protecting everything that they end up protecting nothing.  Before you draft a restrictive covenant, ask yourself the following questions:

  •  What specifically am I trying to protect?
  • Why would it be unfair for the employee to compete in the protected area?
  • Do I really need this restriction?  Why?
  • What is the smallest restriction that adequately protects my business interests?

As we have noted previously, the law of restrictive covenants varies widely from jurisdiction to jurisdction.  Seek the advice of a seasoned attorney who understands how to protect your business interests through narrowly drafted restrictions.

Wear a White Hat.  Draft narrow restrictions that use the least restrictive means possible.

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