April 12, 2017
Food and beverage startups are transforming our lifestyles, from ingredients being delivered to our doorsteps, to three-step juice cleanses. Each startup has a unique brand – a distinctive product, ingredient, or business model – which preserves the company’s competitive edge and customer expectations. But what if the startup juice company’s Flavor Developer wants to leave for a job with Tropicana®? Or what if the juice company partners with an energy drink company to create a healthy buzz, only for their relationship to sour after disclosing key operational details? With the help of “restrictive covenants,” your company can restrict its employee’s post-employment competitive activities and protect its sensitive information.
Restrictive covenants are contracts that allow employers to shield their protectable interests, so employers commonly rely on restrictive covenants like non-compete or non-solicitation agreements to stay competitive amidst transitory employees and a globalized economy.
A non-compete agreement stops a former employee from competing with his prior employer within a proscribed location and period of time, while a non-solicitation agreement prevents a departing employee from soliciting customers or other employees to move to a competing entity. Restrictive covenants also protect startup companies or companies entering into collaborative relationships from losing customers or sensitive information.
Not all employees need to sign restrictive covenants. Lower-level employees do not typically have access to marketable relationships or confidential information, so they probably do not need to sign a restrictive covenant.
As an example, Jimmy John’s made news for requiring their low-wage employees to sign 2-year non-competes. Last year, the sandwich chain announced it would no longer include these provisions in their employment contracts after an investigation by the New York attorney general’s office.
The following are the types of employees a company may want to sign a restrictive covenant: corporate management employees who direct the business and know high-level information, employees with access to confidential information regarding business operations, product development or engineering employees and employees who develop key customer relationships – particularly with large organizations or buyers.
If you’re planning to draft restrictive covenants for your food and beverage business, here are three special ingredients to consider that can help protect your company.
The Key Ingredient: A Legitimate Business Interest
To implement a restrictive covenant, a company must have a legitimate business interest. A legitimate business interest also guides the specific scope of restricted activity. In the food and beverage industry, these interests are usually tied to confidential information, specific products, the potential for unfair competition, and customer goodwill.
When drafting a restrictive covenant, a company must consider its most valuable assets – such as a particular product or ingredient, the customer-base, or a unique business structure – and determine the extent to which those assets need to be protected.
Adapt For the Foreign or Local Palate
When drafting a restrictive covenant’s geographic restriction, employers should consider the company’s geographic reach and the employee’s specific role and location. Typically, an employee responsible for a specific geographic region should not be restricted from competing in other regions.
For nationwide companies in the food and beverage industry, it’s common to find restrictive covenants without geographic limitations, particularly if both the employer and the employee operate throughout or beyond the United States. Courts may uphold restrictive covenants without a geographic scope, but companies should purposely omit any mention of a geographic limitation or explicitly write that there is no geographic limitation as opposed to leaving the term blank.
Set an Expiration Date
To set a restrictive covenant’s duration, companies should consider the legitimate interests they want to protect and determine how long those interests hold value. Courts have upheld restrictive covenant time limitations of one to three years for companies in the food and beverage industry, a trend consistent with other industries.
A restrictive covenant involving the sale of a business may involve a longer restriction. The sale of a food or beverage business will often require the sellers to agree to longer non-competes, potentially up to five years.
While these three ingredients just skim the surface about what to consider when drafting restrictive covenant agreements, you still need to seek the assistance of legal counsel to ensure the specific needs of your company are addresses and your assets protected.
Read more about how to protect your company here at Tech.Co.
This article is not intended as legal advice. Please consult legal counsel to discuss your company’s needs and what type of restrictive covenant may work best for your company. The author wishes to thank and attribute Alexandra Buckingham, a summer associate and law student from Drexel University School of Law for assistance in drafting this article. This article was brought to you by Saul Ewing LLP, a full service law firm serving clients throughout the United States and internationally.
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