What Are Restrictive Covenants?
What Are Restrictive Covenants?
Restrictive covenants are contractual provisions that restrict what a party can do after a transaction closes or a business relationship ends. They are most commonly found in business sale agreements, employment agreements, and partnership or operating agreements. The three most common types of restrictive covenants in the business context are non-compete agreements, non-solicitation agreements, and confidentiality obligations.
Russo Law LLC drafts and negotiates restrictive covenants for buyers and sellers in business transactions throughout New York and New Jersey, including in connection with business acquisitions, business sales, asset purchase agreements, membership interest purchase agreements, and stock purchase agreements.
The Three Main Types of Restrictive Covenants
Non-compete agreements prevent a party – typically a seller in a business sale or an employee leaving a company – from starting, acquiring, or working for a competing business within a defined geographic area for a specified period. In the business sale context, non-competes protect the goodwill the buyer paid for.
Non-solicitation agreements are typically narrower than non-competes. Rather than restricting competition broadly, they prevent a party from specifically targeting the customers, clients, or employees of the business after closing or departure. Business sale agreements commonly address both customer and employee non-solicitation.
Confidentiality obligations require a party to keep the business’s trade secrets, customer information, financial data, and other proprietary information strictly confidential after closing. Post-closing confidentiality provisions in purchase agreements protect the buyer’s ongoing interest in the confidential information of the acquired business.
Enforceability of Restrictive Covenants in New York and New Jersey
The enforceability of restrictive covenants varies significantly between New York and New Jersey, and depends heavily on the context in which they arise, how the provisions are drafted, and the specific facts involved. In the context of a business sale, courts in both states have generally been more willing to enforce non-compete and non-solicitation agreements than in other contexts – particularly where the seller received substantial consideration in the form of the purchase price. What is considered reasonable in scope, duration, and geography varies depending on the nature of the business and the specific terms. Russo Law LLC advises buyers and sellers on structuring restrictive covenants in connection with business transactions throughout New York and New Jersey.
Frequently Asked Questions
Can a non-compete be included in an asset purchase agreement?
Yes – and buyers frequently negotiate for non-compete protections in asset purchases. In an asset purchase, the buyer is often acquiring the goodwill of the business. A non-compete is designed to protect that investment. See also: Cornell LII: Covenant Not to Compete.
Are non-solicitation agreements easier to enforce than non-competes?
Courts in New York and New Jersey have often been more receptive to enforcing non-solicitation agreements than broad non-compete provisions, in part because non-solicitation agreements are typically narrower in scope. However, enforceability is always fact-specific, and a poorly drafted non-solicitation provision may still face challenges.
Schedule a Free Consultation
If you need restrictive covenants drafted, reviewed, or enforced in connection with a business transaction in New York or New Jersey, call 929-262-1101 or schedule a free consultation with Russo Law LLC.
The information on this page is general in nature and does not constitute legal advice. The enforceability and appropriate scope of any restrictive covenant depends on the specific facts, the jurisdiction, and how the provision is drafted. No strategy or recommendation can be made without a full review of your circumstances.