Restrictive Covenants in Flux: What Employers Need to Know on Both Sides of the Atlantic

Miriam Bruce

Hello there. Welcome to our series Employment & Benefits Unpacked, where we dive into the many employment benefits and mobility issues facing organisations across jurisdictions. Each episode will be hosted by a different Mayer Brown lawyer from our Global Employment and Benefits Group. We'll be offering a fresh perspective and insight for employers, HR professionals, and in-house counsel. You can subscribe to this series on all major platforms.

I'll be your host for today's episode. I'm Miriam Bruce, a partner in Mayer Brown's London office. I'm delighted to be joined by Katherine Fox, who's counsel, also based in London, and also Andy Rosenman and Meghaan Madriz. Andy's co-leader of Mayer Brown's Global Employment and Benefits Group and co-leader of our US Employment Litigation and Counselling Practice, based in our Chicago office. Meghaan is a partner in our Houston office. Welcome everyone.

So today we're going to be unpacking the topic of restrictive covenants from a UK and US perspective. As those of you tuning in today will know, this has been a hot topic recently as governments in both jurisdictions try to boost labour mobility and competition with proposed sweeping reforms in this area. Those reforms or proposed reforms have resulted in strong pushback from business.

As we all know, restrictive covenants have long been a standard feature of employment contracts wherever you do business in the world, used to protect trade secrets, client relationships, and confidential information. Of course, the topic of enforceability and what's enforceable in each jurisdiction will vary, but there's been a clear trend from the courts towards narrowing the scope and duration of restrictions. As I mentioned at the start,

Reform is a hot topic in this area. And so we're going to be covering that later on. But we're going to kick off by looking at the current legal position. We'll then look at some key trends in both jurisdictions. We'll come back to reform as I mentioned and we'll finish off with some practical guidance for business. So without further ado, let's get going. And Katherine, perhaps you can kick us off by summarising the current position on restrictive covenants in our jurisdiction, England and Wales, and the topics that employers need to think about when it comes to enforceability.

Katherine Fox

Absolutely, thanks Miriam. So as a starting point, restrictive covenants in employment contracts are void as restrain to trade unless the employer shows the restriction is reasonably necessary to protect a legitimate business interest.

So, what's a legitimate business interest? Well, that can include trade secrets, confidential information, client and customer connections, and so on. The courts will apply a strict, reasonable test as at the time the covenant is entered into. It will scrutinise its duration, the geographical scope, the breadth of the restriction, all by reference to the employee's role.

Non-competes are generally the hardest post-termination restrictions to enforce. Non-solicitation, non-dealing provisions are generally viewed more favourably as they are less restrictive on the individual's ability to earn a living. I think it's worth mentioning garden leave at this point, as garden leave can support post-termination restrictions. However, the duration of time the employee spends on garden leave should be deducted from the restrictions period in a non-compete. Now, not having the offset period does not automatically make the covenant unenforceable, but it's certainly something that the courts may take into account. There's currently no statutory cap on duration of covenants, but enforceable non-competes in England are typically 6 to 12 months, and a period beyond 12 months is very difficult to sustain outside of transactional documents or LTIP awards.

Miriam Bruce

Thanks, Katherine. That's a comprehensive overview, I think, of the position in England and Wales. Andy, maybe you could kick us off before handing over to Meghaan. What's the position in the US?

Andy Rosenman

Sure. So the legality and enforceability of restrictive covenants, which typically is like Katherine said, non-competes, customer non-solicitation and employee non-solicitation covenants, is governed by individual state laws, whether that's common law or statutes, depending on the particular jurisdiction. The federal government a couple of years ago tried to set a national enforceability standard through the Federal Trade Commission, but the FTC's federal ban was challenged and a federal court in Texas blocked that law and it never took effect.

Meghaan Madriz

And as Andy said, it's governed in the US by each state's particular law, and it is a patchwork among states in terms of enforceability of restrictive covenants. There are states that prohibit non-competes altogether with employees. There are states that have put in place income thresholds in order to have a non-compete and/or a customer non-solicitation covenant with employees. And then there are states that are more, I would say, generous to employers and allowing restrictive covenants as long as they pass a reasonableness test based on state common law.

Andy Rosenman

To Meghaan's point, the first three states that prohibited non-competes were California, Oklahoma, and North Dakota. But in recent years, Minnesota has joined that list. There are also states that prohibit non competes for particular industries or professions, and doctors and other healthcare industry professions are certainly one of the focuses of that kind of restriction.

Meghaan Madriz

Yep, definitely over the last few years there's been an increase among states in terms of putting in place either complete bans or restrictions on non-compete for physicians and other healthcare professionals. And on top of that, in addition to this, the complete ban, as we had mentioned, there are states such as Colorado, Illinois, Maine, Maryland, New Hampshire, Rhode Island, Virginia, Washington State and Washington DC that all have salary thresholds in order for employees to be subject to non-competes. But I do want to know while Washington State has an income threshold currently, as of June of next year, non-competes are going to be completely banned in Washington State as well.

Andy Rosenman

And in addition to the substantive restrictions on competition, many states also include procedural requirements. So those include notice requirements to employees in advance of hire or in advance of implementation of the non-compete consideration requirements. Some states have requirements related to the time period that an employee must be given, as well as notice to seek counsel in advance of entering into the non-compete, and then presumptions as to what's considered a reasonable geographic scope, temporal scope, or scope of activity restriction. Those are the three primary criteria.

Meghaan Madriz

Another thing that differs among states is how they approach restrictive covenants that are overbroad in terms of the way that they're drafted. When you get to litigation and you're trying to enforce a restrictive covenant and it's being argued that the covenant is overbroad, there are some states that will allow what's called blue penciling, where the court can only essentially strike clearly divisible provisions that are severed from the agreement itself.

There are some courts, like where I live in Texas, that have the ability to reform an overbroad restrictive covenant, meaning they can essentially rewrite the covenant for you. And then there are other states that if the covenant is not enforceable as it is drafted, it is not enforceable at all. So that's definitely another distinction that differs depending on the jurisdiction in the US that you're in.

Andy Rosenman

Yeah, so the three criteria that I mentioned earlier, the reasonableness of the geographic scope, scope of activity, and duration, that's kind of the general test in most states. But it's really important, as Meghaan mentioned, that an employer look at the particular state law nuances for that particular state, because it's relevant not only to the enforcement of the provisions, but most importantly in advance of that in terms of how to draft them.

Meghaan Madriz

Right, exactly. Like for example, in Texas, where I live and primarily practice, non-competes and non-solicitation covenants generally with employees should not exceed two years. Non-competes geographically should be limited to where the employee worked for the employer as opposed to the employer's entire scope of business operations. And customer non-solicitation covenants should be limited to customers that the employee actually had contact with or worked with or received confidential information about. But even then, while that's a general guidepost, what's considered reasonable is going to depend on the employee's level within the company, their position, the geographic scope of the company's operations, the nature of the company's operations, and various other factors. And as Andy mentioned in terms of, you know, talking about the drafting of restrictive covenants and understanding the nuances of state laws. In Texas, for example, while I mention courts do have the power to reform overly broad restrictive covenants, if a court reforms an overbroad covenant, it can cut off the employer's right to receive damages for any, you know, flowing from a breach of the covenant before reformation, which can be a pretty big impact in litigation, essentially cutting off your right to damages.

Miriam Bruce

Well, I think even from that overview it's clear that a one-size-fits-all approach, even in one country, the US, is not going to cut it given the state approach. And certainly although it sounds like there's some key similarities in the general approach to covenants (i.e., you've got to look at the reasonableness of duration, geography and scope), there are some very different variations when compared across the two jurisdictions. So a lot to think about there if you're an employer with operations in both the UK and the US and also operating across different states. You're going to have to take that nuanced approach, so now we've got an understanding of the position or the foundations in both jurisdictions. Let's think about the trends and what we're seeing in practice from a UK perspective. Certainly in the last few years I've seen an increase in the cross-border aspect of restrictive covenants, particularly in the team move space where entire teams are recruited from one jurisdiction perhaps to operate elsewhere. And so covenants drafted under one legal system potentially need enforcing in another jurisdiction. That obviously can create some real challenges for employers. Let's start with the UK again. Katherine, what have you seen in this area in terms of trends and the sort of global approach to doing business?

Katherine Fox

So we're certainly seeing competitors increasingly recruiting whole teams, sometimes with the explicit aim of acquiring a particular client book or a specific business line. And the first 24 hours after a team raid are critically important for stabilising the business, but also devising the legal strategy. And there are so many competing priorities post-raid to consider. There's the impact on client relationships, the vulnerability of the remaining employees, the protection of confidential information from those departing staff. And as you mentioned, Miriam, there's the jurisdictional challenges where the move is cross-border. You may find yourself in a situation where you've got English law covenants that need enforcing, say, in a US court or vice versa. And the choice of law clause and the jurisdiction clauses in contracts are going to be critical when it comes to looking at those kinds of issues and cross-border enforcement brings, of course, a number of challenges. There's the additional cost, the unfamiliar legal systems, and the difficulty obtaining and enforcing injunctions internationally. So lots of things to grapple with.

Miriam Bruce

I agree. And perhaps we're all going to be working even more closely together than we already do with this developing trend. Andy, Meghaan, are you seeing a similar trend in the US? Are there other trends that you think employers need to have in mind?

Meghaan Madriz

We’re seeing similar trends in the U.S. Also, we're seeing an influx of trade secret misappropriation claims that are packaged with restrictive covenant breach claims. In our experience, certain judges are more likely to provide a temporary restraining order or a preliminary injunction on the non-compete or non-solicitation covenants when there's evidence of potential trade secret theft by the departed employees.

Andy Rosenman

And that's led a lot of employers to undertake forensic review through vendors early in the investigation and fact-finding processes to help identify and analyze the departed employees' work computers, sometimes phones too, in order to look for evidence that the departing employee has sent information to himself or herself, either through personal emails or to thumb drives or to the cloud or other external sources. And gathering and assessing that evidence as quickly as possible is really critical in terms of an employer's best practices.

Meghaan Madriz

And also with the influx of the trade secret claims being brought with the breach of the restrictive covenant claims, it's also requiring strategic decisions by counsel and their clients on where they're going to actually file the lawsuit. Typically, claims for breach of a non-compete or breach of a non-solicitation covenant are brought in state court, which is a traditional forum, just because generally you're dealing with state law claims.

But with the trade secret misappropriation claims being added, it opens up the ability to file in federal court under the Defend Trade Secret Act. So it's now causing even more strategic decisions up front.

Andy Rosenman

I would say another trend that we're seeing is an increase in general hostility among many courts to enforce non-compete, even in those states that use a common law test of reasonableness, as I mentioned earlier. The Delaware Chancery Court is one example where there's been a lot of press about recent decisions where courts have refused to enforce non-compete in what has otherwise been a jurisdiction that's deemed a helpful place for employers to incorporate and seek enforcement of their covenants. And I think in light of that increasing scrutiny that courts are giving to these kinds of covenants, it's important to your point earlier, Miriam, that employers try to avoid using a one-size-fits-all approach because especially in the US where you're dealing with 50-plus state laws, the federal standards and so forth, it's really difficult to use a one-size-fits-all approach, even though it may be much easier for the employer to administer.

Meghaan Madriz

And also, we're seeing, you know, tortuous interference claims are sometimes being invoked by employees as counterclaims to their former employers' attempts to enforce non-competes. I know Andy, I think you've had experience with this yourself, right?

Andy Rosenman

Yeah, we had a case last year that we tried successfully, where a former employee had invoked tortuous interference as a defense to the employer's attempt to enforce its non-compete and we were successful in persuading the judge that the tortuous interference claim was baseless.

Miriam Bruce

Excellent. So a number of trends and common themes there. I would agree that in the UK too, you know, the importance of early forensics is often the key to success and the increasing focus on early strategic decisions about where to issue proceedings seems to be relevant for all of us today. So we've looked at the basics, we've looked at trends. Let's turn to reform now because reform has been on the agenda in both the UK and the US for a number of years recently. And it's hard, I think, for employees to really know with potentially shifting sands in this area what to do. But before we look at some practical tips about what employers should be doing, let's find out where we are at the moment. Let's start again with the UK. Katherine, what's the latest? Are we ever going to see reform being implemented in the UK?

Katherine Fox

Very good question.

So the UK government issued a consultation on reforming non-compete clauses. This was part of a broader strategy to boost economic growth, innovation, and the labour market mobility. That consultation has now closed and we're waiting for the outcome. The consultation paper invited views on potential reform options, including introducing statutory limits on the length of non-compete, banning non-competes in employment contracts altogether, banning non-compete clauses below a certain salary threshold, and a combination of those two. So a ban below a certain salary threshold with a statutory limit on length too.

The UK government estimated that around five million workers could be affected by these proposals. And the proposals stem from concerns that non-compete might deter job mobility and entrepreneurship, even where they're potentially unenforceable. And the policy aim is understood to be to free up talent, improve competition, and increase wages and innovation. But on the flip side of that, the government is expected to also consider the potential trade-offs too as part of the consultation. For example, whether limiting non-compete could reduce employer investment, say in training, if it could harm competition or drive heavier use of other types of restrictive covenants like the non-solicitation provisions. Unfortunately, there's currently no timeline for when reform, if any, is expected to be announced, but businesses should be ready to react though. If a salary threshold is introduced, businesses will need to know which roles genuinely need that protection. And if duration limits are to be imposed, then confidentiality clauses, non-solicitation provisions, and IP protections will need to be really tightly drafted. So some steps can be taken now by businesses to assess those covenants with those points in mind, but I know we'll come onto that in a bit.

Miriam Bruce

And it may be from sort of hearing at the reforms that the UK is looking at, there's some similarity there, I think, from what Meghaan and Andy were discussing in terms of some of the state approaches where you've got salary thresholds and outright ban. So we may be looking to the US to see how that's managed in practice. But what is the latest position, Andy, Meghaan, in the US? Obviously, it really has been a hot topic in the last few years. What's the latest position?

Meghaan Madriz

Yeah, so as Andy had mentioned at the top of the podcast, there was an attempt a few years ago to create a federal rule banning non-compete throughout the entire US, but that failed. The FTC, which was the governmental agency that had passed that rule banning non-competes, is still targeting overbroad, anti-competitive, non-compete agreements on a case-by-case basis.

And there have been some major enforcement cases over the last year and a half by the FTC. For example, just recently in April of this year, the FTC ordered the parent company of Orkin and Home Team, which is one of the US's largest pest control companies, to stop enforcing their non-compete agreements against over 18,000 employees nationwide.

Andy Rosenman

And with respect to legislation in the US, on the state level at least, I think the question that you mentioned earlier, Miriam, about whether the UK will ever reform could be recast in the US to ask whether we can go a month or two without some new state law addressing non-competes or non-solicitations in one form or another. Meghaan obviously mentioned earlier one of the newer laws that will take effect in Washington. When the Illinois statute was passed in 2022, the legislature indexed the salary thresholds to go up every five years. So beginning in January of 2027, there'll be a new minimum threshold for non-competes. And Illinois is a little unique in that there's also a salary threshold for non-solicitation covenants. So state lawmakers continue to be particularly interested in including and adding to restrictions on these types of covenants, particularly so in the healthcare industry as well.

Meghaan Madriz

However, not all states are doubling down on limiting or banning non-competes. Florida, for example, is probably the most notable example in the last few years. They passed new legislation last year called the Florida Choice Act, which was actually designed to increase the enforceability of post-employment restrictive covenant.

Andy Rosenman

And I think much of the focus of various legislatures in states other than Florida has really been on low-wage workers and the perceived imbalance of power between employers and employees. That was part of the impetus for passage of the Illinois Freedom to Work Act in the first place.

Miriam Bruce

So lots to think about there. And I suppose turning to how employers might deal with this practically, aside from potentially moving to operations to Florida, which seems to be the pro-business for restrictive covenants, what should employers be doing? As I said earlier, I think there's sort of shifting sands when it comes to covenants maybe on a monthly basis in certain US states.

Is there anything employees can be doing now to protect themselves? Let's continue the them and kickoff with the UK, Katherine.

Katherine Fox

I think international employers can take some comfort from the fact that the practical steps that are available are equally valid in both the jurisdictions that we're talking about today. I think some of the key ones include refreshing your covenants at key moments. So on promotions and role changes, pay raises, equity grants, all give opportunities to review your covenants. And ensuring that there are suitable notice periods in place can measure to the employee's role. Businesses can also use a layered approach to restrictions, so by combining non-compete with non-solicitation, non-dealing, and non-poaching clauses, can operate as a safety net. They can also consider separate restrictions, perhaps with group companies in LTIPS for more senior employees.

Businesses can also ensure that departing employees are aware of their restrictive covenant obligations upon exit. That's always going to be important. And whether that's through reminding the employee in their exit interview or the HR or in-house legal teams providing a copy to the employee upon termination. Employers can also require employees to provide copies of their restrictions to the new employers so they know what restrictions they're under.

And businesses can also take steps to train managers in advance on how to deal with a team move scenario and what the immediate steps to take are. As Andy mentioned earlier, you know, quick action and evidence gathering is key early on.

Andy Rosenman

From a US perspective, I would echo all the points that Katherine made. One other thing that we recommend too is that an employer include a covenant that permits the employer to provide notice to new employer to the employee's new employer without having to get prior approval from the employee. That's a step that the employer can take in the US to, you know, take quick action upon an employee's departure. Certainly auditing existing covenants is critical. I mean we see it all the time where, you know, there are years-old, template-based restrictive covenants that are designed in a one-size-fits-all approach. For the reasons we've already talked about, we don't recommend that.

And those types of agreements are a recipe for disaster with respect to enforceability, especially in those states that have more recently enacted laws where the ever-changing landscape of judicial decisions continues to evolve.

Meghaan Madriz

Yeah, and on top of that, I mean, in addition to updating your agreements to not rely on stale templates, you also want to assure at a minimum that you have enforceable confidentiality protections in your agreements, which can be a very powerful tool. I mean, you might not be able to stop the employee from working for the competitor or soliciting customers per se, but you can use the confidentiality provision in a way to get some protections that are necessary and also potentially recover your attorney's fees as well for the litigation. But even then be careful in ensuring that your confidentiality provisions are complying with state law requirements because some courts are being very discerning of confidentiality covenants as well in agreements with employees.

Andy Rosenman

One other point I would add is to build a sort of carrot-and-stick approach, which can be done through long-term incentive and other equity types of agreements to include restrictive covenants there, in addition to any that may exist in an existing offer letter or employment agreement.

Meghaan Madriz

And just to piggyback on that, if you are going to be providing employees some type of incentive equity through an equity grant agreement, consider whether you have dual mechanisms in the agreement for both forfeiture for competition, where there is a forfeiture of the equity upon a breach of the restrictive covenant that is separate and apart from the actual restrictive covenants that you would try to enforce through injunctive relief and that's because at least in Delaware, for example, there has been case law over the recent years allowing for forfeiture for competition provisions that are not analyzed under the reasonableness standard of restrictive covenants. So it provides some flexibility for the employer in terms of the remedies that it may seek against the employee and which will be enforceable.

Miriam Bruce

So, I think there are some excellent sorts of proactive tips there to protect business. What happens though if you're in a reactive situation, you're facing a potential breach of covenant and need to take action? What are the things that should be front of mind in that scenario?

Meghaan Madriz

Sure, I mean in the US, speed is everything. The longer you wait, the harder it can be to obtain injunctive relief. So particularly if the goal of the client is to obtain injunctive relief, you have to show a reparable harm. And so moving quickly for your TRO or your preliminary or temporary injunction, it is very important to be able to meet the burden and the longer you wait, the more it can become just a damages case and you don't cut off the bleeding quick enough.

Andy Rosenman

And the scope of claims is pretty extensive too. The one thing I would add to what Meghaan mentioned is the point I made earlier about seeking a forensic vendor. Because you want to gather that information as quickly as possible. And it may be critical to a temporary restraining order, for example, which is only going to usually last 14 days and with one possible extension. But the types of claims that the employer can bring against the departing employee and/or new employer are pretty extensive. So everything from breach of contract, tortious interference, depending on the circumstances, breach of fiduciary duties. If, for example, the employee was acting against the employer's best interest. Before he or she departed the company. Misappropriation of trade secrets, which Meghaan mentioned earlier, is another excellent theory on which to rely. Unfair competition, unjust enrichment. In the US, there's a whole range of claims that can be brought depending on the circumstances, as well as against the new employer, because it often has deeper pockets and is a vested interest in trying to keep its new employee employed.

Katherine Fox

I think that's similar here in the UK too. I think it's key for employers to consider the full range of claims. So not just a claim against the departing individuals, but also against the new employer. So in the UK, potential claims can include breach of contract, breach of duties of fidelity, good faith, confidentiality, breach of fiduciary duties, and account of profits.

The typical urgent relief route involves an interim injunction in the High Court applying the American Cyanamid test, namely whether there is a serious question to be tried, will damages be an adequate remedy and weighing up the balance of convenience. So essentially, which side suffers more if that temporary order is granted? I think employers will also want to always consider whether springboard relief is relevant. Which restrains former employees from gaining an unfair head start through their wrongdoing, even after the covenant period has expired.

Andy Rosenman

That sounds pretty similar to what we do here in the US, Katherine, in terms of, you know, typically seeking a TRO first, a company with a request for preliminary injunction. And in most instances, when we're prosecuting these kinds of claims will also file a motion for expedited discovery, essentially asking the court to shorten the timelines of what is otherwise an often slow process and litigation in the US to enable the employer to gather the information quickly, have an evidentiary hearing, sort of like a mini trial, and then try to obtain, you know, injunctive relief that way.

Meghaan Madriz

Also in the US, you know, pre-action correspondence can be very important as well. You know, a well-crafted C synthesis letter can sometimes resolve the matters without having to go to court. But also, you know, as Andy mentioned, the importance of trying to do forensics. Doing the letter writing campaign, it provides you a little bit of time to get your ducks in a row, to get your forensics done, to get your pleadings drafted, but to be able to show the court that you were making efforts to try to address the issue. So when, you know, if it takes you a couple of weeks to get to court, you still hopefully can meet your burden to get your TRO and your preliminary injunction.

Miriam Bruce

That is an excellent point on which to end, unfortunately. We could speak at further length, I think, about this topic. But Katherine, Andy, Meghaan, thank you so much for joining me today to shed some light on the challenges arising from restrictive covenants in the US and the UK. For our viewers and listeners, there are more episodes to come. Please check out our Employment & Benefits Unpacked page on the Mayer Brown website or your preferred streaming platform.

If you'd like to discuss any of the issues we've covered today, please get in touch. We'd be delighted to hear from you. And if you've got suggestions for future episodes, please send them to unpacked at mayerbrown.com. Until next time, thanks for joining us.