RESTRICTIVE COVENANTS April 24, 2012

1. RESTRICTIVE COVENANTS April 24, 2012 Jessica Golden Cortes Partner 212-468-4808 jcortes@dglaw.com

2. RESTRICTIVE COVENANTS Restrictive Covenants

3. TYPES OF RESTRICTIVE COVENANTS • Non-Compete • With and without guaranteed severance for termination with out cause • With and without salary continuation at employer’s choice • Industry-wide vs. limited by product or competitor • Varying lengths Restrictive Covenants

4. TYPES OF RESTRICTIVE COVENANTS • Client non-solicitation and Client non-service • Can apply to all Company clients; or • Limited to clients employee serviced (greater likelihood of enforceability) • Employee non-solicitation (non-raid) Restrictive Covenants

5. OTHER CREATIVE SOLUTIONS WITH SIMILAR IMPACT • Notice Period/Garden Leave • Employee obligation to give fixed notice of resignation • Employee remains an employee during notice period – duty of loyalty continues • Salary and benefits continue • Employer right to shorten; sideline employee Restrictive Covenants

6. OTHER CREATIVE SOLUTIONS WITH SIMILAR IMPACT • Deferred Compensation – future vesting of cash payments in exchange for continued employment and/or restrictive covenant; forfeited by resignation • Restricted Stock Options – equity-based incentive; vests over time; forfeited by resignation • Forfeiture for Competition – benefits contingent upon compliance with restrictive covenant; not subject to same scrutiny by the courts because of employee choice Restrictive Covenants

7. REMEDIES • Injunctive relief • expedited process to prevent “irreparable harm” that cannot be quantified in money damages; • Expensive; time consuming; can be difficult to prevail given general disfavor of courts on restricting freedom to earn living • Liquidated damages • i.e., 1 year’s revenue from the “stolen” client; 33% of “poached” employee’s salary, representing headhunter fee to replace employee Restrictive Covenants

8. NEW YORK • Legitimate employer interests: • Protect against misappropriation of trade secrets/use or disclosure of confidential information • Protection from competition by employee whose services were unique or extraordinary • Protection of customer relationships and goodwill Restrictive Covenants

9. NEW YORK • Arakelian v. Omnicare, Inc. (E.D.N.Y. 2010) • restrictive covenants unenforceable where employee terminated without cause; • “Enforcing a noncompetition provision when the employee has been discharged without cause would be ‘unconscionable’ because it would destroy the mutuality of obligation on which a covenant not to compete is based.” Restrictive Covenants

10. CALIFORNIA • For most part, restrictive covenants are unenforceable and illegal in California, unless incident to sale of a business; • Employee non-solicitation provisions still valid; • Provisions prohibiting use and/or disclosure of confidential/proprietary Company information valid Restrictive Covenants

11. ILLINOIS • Similar to New York • Legitimate employer interests under the totality of the circumstances. Factors considered: • Strength/permanence of the relationship w/ the client • Possession of confidential/proprietary information • Time/territorial restrictions. • Restriction must not unduly burden employee or be injurious to the public Restrictive Covenants

12. TEXAS • Marsh USA v. Cook (TX Supreme Court, Dec. 2011) • Previously, continued employment not sufficient consideration for restrictive covenant; exchange of confidential information required. • After Marsh, customer relationships/good will protectable • Stock options/compensation can be consideration Restrictive Covenants

13. RESTRICTIVE COVENANTS: TIPS • How to Tailor: • Geographic limitations • Product Competitor Limitations (e.g., if worked on Coke account, cannot work on Pepsi account at competitor for one year) • Client service limitations (those employee worked with) Restrictive Covenants

14. RESTRICTIVE COVENANTS: TIPS • When should an employee sign an agreement? • At inception of employment (continued employment is consideration); • Note: if after commencement of employment, in some states, continued employment alone is not sufficient consideration; • IL – not sufficient unless employee continues to work for a “substantial period” after signing agreement (Illinois) • IL courts have held 7 months not enough, 2-3 years enough • Sign along with discretionary bonus/raise/other tangible consideration Restrictive Covenants

15. RESTRICTIVE COVENANTS: TIPS • Ask candidates for employment whether they are subject to post-employment obligations of a current or former employer • Add language to offer letter stating that candidate represents and warrants that she is not subject to any post-employment obligations that will prevent her from performing services for new employer Restrictive Covenants

16. QUESTIONS? Restrictive Covenants