The Process of Enforcing Restrictive Covenants

So, what happens when an employer decides to enforce a restrictive covenant against an employee ? The first step is likely to be mailing is what attorneys call a “Demand Letter.” There is nothing in the law requiring the employer to send out a demand letter, and, in some cases, I am sure there may be no demand letter. A demand letter carries no legal force. You don’t have to respond to it.

A employer would usually want to send a demand letter in hopes of avoiding the cost and messiness of litigation. You might look at a demand letter as a suggestion and an invitation. The suggestion is for the employee to consult an attorney. The invitation is to call, and talk settlement.

When the initial demand letter gets no response, the employer might try a second and even third letter, and maybe a couple of telephone calls. However, if none of these efforts works, the employer might take the next step of commencing a lawsuit. In starting a lawsuit, the employer is often primarily interested in getting injunctive relief.  That is, what the employer really wants is an order requiring the employee to stop doing what the employer believes is in violation of the covenant, such as taking customers or other employees. The employer may also seek damages in the form of, for example, lost profits from the loss of customers, or expenses for replacing lost employees. Although in some cases, it is possible to bring the lawsuit in federal court, in most cases, the lawsuit will be brought in state court. Because the lawsuit will likely seek injunctive relief, in New York, the lawsuit will probably be brought in New York State Supreme Court in the county where the employee lives or the employer does business.

In bringing this type of lawsuit, the employer sues the employee, and frequently also sues the business that the employee may have started or the employee’s new employer. Although this does not always happen, the new employer may fire the employee because the new employer has no desire to become embroiled in a lawsuit. This fate can often be avoided if the employee warns the new employer beforehand. (The firing may be avoided, but the new employer may decide not to hire the employee, but certainly not always.)

At the same time that the employer begins the lawsuit, the employer may also file a motion for interim relief in the form of a request for a temporary restraining order (“TRO”) and a preliminary injunction. A motion is a request to a court to issue an order providing some form of relief, that is, some type of solution to a particular problem.

In suits on restrictive covenants, the employer will usually bring the motion by use of an “Order to Show Cause” (“OSC”). The OSC will give the employee notice that a motion has been made, advise the employee of the date by which the employee must respond to the motion (“the return date’), often advise the employee of the date of a hearing, and sometimes grant a TRO.

TRO’s are supposed to be short lived things. They are only supposed to last long enough to hold things in the “status quo,” that is, keep things the way they were before the threatened breach of the restrictive covenant, long enough to have a hearing and allow the judge to decide whether to grant a preliminary injunction (sometimes called a “PI”).

Preliminary injunctions are also meant to be temporary, lasting only long enough to allow the lawsuit to proceed to conclusion. However, it may take two, three or more years for a lawsuit to reach conclusion. On the assumption that an employer is able to get a TRO and preliminary injunction effectively putting the employee out of work altogether (not something which is anywhere near assured), because most employees will not be in a position to remain unemployed until a lawsuit is concluded, the issuance of a preliminary injunction will often effectively end the lawsuit in the employer’s favor. Because of this, in lawsuits on restrictive covenants, much of the fight and effort is in the earliest part of the lawsuit process.

If successful in the lawsuit, the employer might be able to get a permanent injunction, which may not necessarily be permanent. Most restrictive covenants by their own terms last only a few years. (A permanent restrictive covenant would more than likely not be enforceable.) The employer at most is entitled to enforcement only for the duration of the restrictions set in the employment agreement. The lawsuit will not likely have the effect of extending the duration of the restrictions. If anything, a court may well shorten the duration of a restrictive covenant.

If the employee is still in business after the preliminary injunction stage, the lawsuit pretty much proceeds like any other lawsuit. The parties engage is discovery, and eventually the matter is tried.

If the employer has managed to obtain a preliminary injunction which still permits the employee to continue in business (or continue employment), the employer might attempt bringing a motion for a finding of contempt. A person is in contempt when that person violates a court order. Conceivably, a contempt finding could result in a person being jailed, fined or both.

You really don’t want a court order in any way restricting your behavior primarily because the person obtaining the order might end up using it at the drop of a hat, causing you to waste time and a lot of money in attorney’s fees. However, it is really difficult for a court to write an order which precisely covers the concerns that the employer wants covered without unduly restricting the employee. It is not unusual for an employer to find that the preliminary injunction order that cost so much time and money is basically unenforceable because its wording does not cover the behavior causing the employer to seek a contempt finding.

One thing that may come up anytime during the process is the issue of settlement. This is the basic purpose of the demand letter. In the early stages of the litigation, the judge may make a number of efforts to settle the matter. And it will almost certainly come up at other points.

When an employer is genuinely trying to protect a legitimate business interest, as opposed to trying to intimidate a former employee, there is a real chance to settle the case. In these cases, the question becomes: What is the employer really worried about? In many cases, the parties and the court discover that the employer’s concern is a fairly narrow one, which can be addressed effectively without placing too much of a burden on the employee.

Simply because a restrictive covenant exists does not mean the employer will actually enforce it. In many cases, the employer does nothing. In many other cases, the employer goes no further than sending a demand letter. The employer will do a cost/benefits analysis, and, in many cases, especially considering the fact that, in New York, the employer has an uphill battle in attempting to enforce a restrictive covenant, the employer concludes that it is not worth the effort. Employees also need to do a cost/benefit analysis, remembering that taking a restrictive covenant case all the way may cost a lot in terms of time and money. Employers will usually conduct this analysis with the help of an attorney. Employees would also do well to seek the assistance of an attorney in doing, at the very least, the initial analysis..

Leave a Reply

Your email address will not be published. Required fields are marked *