A Reminder of the Necessary Evil of Restrictive Covenants
Restrictive Covenants: The Need for Inclusion and Proper Drafting
Restrictive covenants are a necessary evil. We love them because they draw necessary lines in the behavior of employees during employment and post-employment; but we hate them because, as carefully as lawyers are in drafting them, their outcome is often unknown. Restrictive covenants are also hard to predict, until the judge validates them, invalidates them, or modifies them. Even worse, they may take on an entirely different meaning if the judge decides to apply a different law than what was agreed to by the parties in the agreement. Wait, there is more. Judges can also modify their terms and change their length.
Sutherland v. Sengupta, a Recent Case Analysis on Restrictive Covenants
Such was the case in Sutherland v. Sengupta, et. al., where an employee of Sutherland, a global outsourcing company, allegedly committed egregious violations of his restrictive covenants with Sutherland during his employment and after his separation from employment. That case involves a declaratory judgment sought by a major business process outsourcing company against a former employee and a competitor. While the case is ongoing as of this writing, the Magistrate Judge’s analysis of the facts and law are a great refresher of why we love and hate restrictive covenants.
In that case, Sengupta, the employee, had a tenure with Sutherland spanning over seven years in customer-facing VP positions. That is, positions that expose him to a great deal about a business’s customer lead and customer growth activities, to name just two basic, yet significant activities, in the services sector. Of course, Sengupta was subject to non-compete, non-solicitation, and confidentiality agreements with Sutherland covering the “normal” activities such as working with competitors, soliciting employees, and soliciting customers, during the term of employment and for a year after termination. The geographic coverage of the non-compete and non-solicitation covenants was fairly broad, covering “any employment, business, or activity in any country in which [Sutherland] then has operations.”
Sutherland filed a declaratory action in the U.S. District Court for the Western District of Texas (Austin Division) asking the Court to essentially declare that Sengupta was in violation of the restrictive covenants. The pleadings in the case tell the story that Sengupta accepted an offer of employment with Sitel, a direct Sutherland competitor, while still employed with Sutherland. Moreover, it was alleged that Sungupta sent Sitel files belonging to Sutherland, client lists, solicited Sutherland employees, and engaged in other activities that were in direct violation of the restrictive covenants. Any employer would call that a flagrant violation of the restrictive covenants.
The Magistrate Judge agreed with Sutherland. Applying New York law, the Magistrate Judge recommended that Sengupta not perform services for Sitel in a range of business activities. Interestingly, applying its equitable powers to modify covenants, the Magistrate Judge recommended extending the length of the covenants for an additional six months due to the timing of the filing declaratory judgment and the expiration of the covenants. The District Judge accepted the Magistrate Judge’s recommendations, effectively banning Sengupta from performing services for Sitel and from competing with Sitel, among other things.
Why Restrictive Covenants Are Necessary and Must Be Properly Crafted
This case exemplifies allegedly very egregious behavior by employees who get access to key company information and why it is important to put clear barriers on what is permitted and what it not permitted under employee-executed restrictive covenants. In general, to be valid, restrictive covenants must be reasonable because a covenant not to engage in a specific type of work can significantly restrict a person’s ability to earn his or her livelihood. On the other hand, restrictive covenants are useful and necessary for businesses to protect their trade secrets and other confidential information.
What is also important, however, is not just to have a properly drafted restrictive covenant agreement, but also to have a corporate culture that emphasizes those boundaries throughout the tenure of an employee with the company.
Key Takeaways on the Importance of Restrictive Covenants
While restrictive covenants can be difficult to enforce, they are important for companies to include in employment contracts, because they:
draw necessary lines in the behavior of employees during employment and post-employment;
help prevent egregious behavior by employees who get access to key company information;
protect company trade secrets and other confidential information; and
when properly drafted and explained to employees, should provide a fair tradeoff on expectations and employment opportunities.
For more information about employment agreements, see our Corporate Law & Commercial Transactions Legal Services and Industry Focused Legal Solutions pages.