February 21, 2020

What You Need to Know About Using Restrictive Covenants to Protect Your Business

by Mindi Wells, Wells Law LLC

What is your organization doing to protect its marketing strategies, proprietary systems, inventions and even your customer list from unauthorized use or disclosure?

Now’s the time to consider protecting your business by using a “restrictive covenant agreement” – an agreement that restricts or prevents one of the parties from doing something specific. Whether you are hiring new employees, bringing on partners, terminating an employee or thinking about selling your business, you should consider including restrictive covenants in your business agreements.

Here are common restrictive covenants and how they are used in employment and/or severance agreements:

  • Non-compete clauses or agreements: These agreements prevent a former employee from engaging in similar types of business in a particular geographic area for a specific amount of time after leaving your business.
  • Non-disclosure agreements: Under Ohio law, these agreements prevent a former employee from disclosing information about the business upon leaving the company, including trade secrets.
  • Confidentiality agreements: Similar to an NDA, these prevent a former employee from disclosing confidential information about the business.
  • Non-solicit of clients/employees/business partners: This type of clause is similar to a non-compete clause and prevents a former employer from attempting to engage in competition with your business by stealing clients, employees or other business partners.
  • Non-disparagement clauses: This type of agreement prohibits a former employee from saying anything that is negative about your business or its practices.
  • Six-month limit on bringing claims: This kind of clause is a type of statute of limitations in an employment agreement, giving a former employee only six months to file a claim.
  • Arbitration clause: With an arbitration agreement, you can require an employee or former employee to go through arbitration instead of filing a lawsuit for any potential claims.

Each of these clauses or agreements outlives the employment relationship (and employee handbook!) and is a binding contract. Employers can enforce these agreements even after the employer-employee relationship comes to an end. These clauses or agreements can be issued in employment contracts, and continued employment is sufficient consideration in Ohio. It is not necessary to provide additional compensation for these clauses to be valid. Having them in place can also be considered in valuation of the business in the event that you are planning to sell your company. Restrictive covenants can also be found in partnership agreements and as part of a sale of a business.

An attorney well versed in Ohio contract law can assist with drafting restrictive covenants that are tailored to protect your business and its unique interests. Avoid generic agreements that don’t cover enough of your company’s specific information or don’t place the right restrictions on how people can use the information or property.

Each of these clauses or agreements outlives the employment relationship (and employee handbook!) and is a binding contract.