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Are there tests of a restrictive covenant’s reasonableness?

Regardless of their size or chosen industry, organizations will largely rely on well-constructed agreements to drive their growth, profitability and relations. Unfortunately, it is not uncommon for the organization to slant the contract too far toward their own benefit, putting employees or vendors in a difficult position. Fortunately, elements of the agreement can be used to impugn its own reasonableness.

Any type of restrictive covenant must be reasonable to all invested parties. Whether the restrictive covenant is a clause in an employment contract, severance package or vendor services agreement, the strong language might make the terms unreasonable, thus difficult to enforce. Generally, these covenants are in place to prohibit an individual from competing against the organization after he or she has left the business. Certain factors can be examined to determine the restrictive covenant’s unreasonableness:

  • Protectable interest: Generally, the restrictive covenant should be written to protect a tangible or measurable item. A food recipe, for example, or a process improvement could be considered protectable interests. Attempts to limit vague concepts of experience, knowledge or understanding will likely be considered unreasonable.
  • Temporal limits: Non-compete restrictions will almost certainly include language regarding duration. In general, the restrictive duration is around two years. Longer than that, or vague language might make the terms of the contract unreasonable.
  • Ambiguity: While the business will likely finely craft the language of the agreement to favor their own interests, they might rely on vague wording to protect themselves. In any business contract, clear language is the gold standard. A restrictive covenant that leans on ambiguous language will likely be seen as unreasonable.

Whether they exist in a franchise agreement, employment contract or services agreement, a restrictive covenant must be fair and reasonable. The business has every right to protect itself but must resist the temptation to insert terms into the contract that could be considered unreasonable.

When drafting a business contract, it is wise to seek the guidance of an experienced lawyer who can answer your questions and provide the direction you need.