Tight labor market mandates review of restrictive covenant agreements

Posted by Charles Middleton on 09/18/2018

Q: Of what recent trends in labor and employment law should employers take note?

A: Unemployment is low with strong workforce participation, and wages continue to increase. This means the tight labor market likely will continue. As a result of the high demand for labor, employers nationwide have noticed greater employee mobility, and restrictive covenant litigation is increasing as a result. Additionally, some state legislatures have passed or are considering legislation limiting the use of restrictive covenants.

Q: What does the term “restrictive covenant” include?

A: The term “restrictive covenant” generally includes noncompete agreements, non-solicitation agreements, and nondisclosure/confidentiality agreements. The term also may refer to non-disparagement agreements made in conjunction with other restrictive covenants. Noncompete agreements are agreements not to go to work for a competitor or start a competitive business. Non-solicitation agreements are agreements not to solicit employees or customers following termination of employment. Nondisclosure/confidentiality agreements prohibit the disclosure or use of an employer's trade secrets or confidential business information following termination of employment.

Q: What does restrictive covenant litigation entail?

A: Unlike most litigation, restrictive covenant litigation usually requires significant activity and costs in the early stages. An employer whose former employee has violated a restrictive covenant typically will seek a temporary restraining order and a temporary injunction from a court. In plain English, an employer will ask the court to tell the employee to stop violating his or her contract. To obtain a temporary restraining order and a temporary injunction, an employer may be required to conduct significant (and expensive) information technology forensics to collect evidence that the former employee misappropriated trade secrets or solicited customers or other employees. From there, restrictive covenant litigation moves to the typical discovery and trial phases of litigation.

Q: Are restrictive covenants enforceable in Oklahoma?

A: To a large degree, yes. It's somewhat of a misconception that restrictive covenants generally are unenforceable in Oklahoma. Oklahoma courts won't enforce true noncompete agreements between employers and employees, which is a relic of the Progressive Era during which Oklahoma achieved statehood. But properly drafted non-solicitation agreements covering established customers, employees and independent contractors and nondisclosure/confidentiality agreements are enforceable in Oklahoma and will protect an employer's trade secrets, confidential business information, established customers, employees, and independent contractors. In other contexts, such as the purchase of a business, Oklahoma courts even will enforce properly drafted true non-competes.

Q: What steps can an Oklahoma employer take to avoid restrictive covenant litigation?

A: One of the best ways to avoid restrictive covenant litigation is a properly drafted, Oklahoma-compliant restrictive covenant agreement. Most prospective employers have access to an attorney who will review an applicant's agreements with his or her current or former employer. An enforceable restrictive covenant likely will prevent a competitor from hiring an employee who might otherwise unfairly compete with his or her former employer by poaching customers and employees or absconding with trade secrets and confidential business information.

Q: What makes a restrictive covenant agreement “Oklahoma compliant?"

A: An Oklahoma-compliant restrictive covenant agreement is a contract that meets the requirements of both the Oklahoma Statutes and Oklahoma common law. Oklahoma has a strong public policy against enforcing restrictive covenants that don't strictly comply with the law. For example, an agreement not to solicit customers must be limited to “direct solicitation” of “established” customers, otherwise an Oklahoma court won't enforce it. The Oklahoma Court of Civil Appeals confirmed this in a case earlier this year when it refused to enforce a non-solicitation agreement that covered an employer's “clients.” Often, a former employee will engage in truly egregious post-employment solicitation. Yet, the employer will have no recourse, because the employer used a noncompliant agreement obtained online or from an out-of-state attorney. In these situations, it's unlikely that an Oklahoma court will reform and enforce a noncompliant agreement. Employers should review their existing restrictive covenant agreements now, before they are confronted with litigation in this tight labor market.

PAULA BURKES, BUSINESS WRITER

Published The Oklahoman, September 18, 2018