A Restrictive Covenant is a specific type of covenant in which someone agrees to be restricted by a contract. The most common type of restrictive covenant is one in which a former employee is restricted from working in his or her field for a specific time and within a specific area after leaving employment. Restrictive covenant agreements often contain "tolling" provisions which extend the duration of the covenants by the time of any discovered violation. However there are occasions where employers do not include tolling provisions in their restrictive covenant agreements, but nevertheless subsequently request that a court use its discretion to extend the duration of those covenants by the time of the discovered violation. A recent decision from the U.S. Court of Appeals for the First Circuit highlights the danger in not including a tolling provision in a restrictive covenant agreement.
In EMC Corp. v. Arturi, ___ F.3d ___ (1st Cir. Aug. 26, 2011), EMC requested a preliminary injunction prohibiting its former employee from using its confidential information, from competing with EMC and from soliciting EMC customers. The trial court issued a preliminary injunction prohibiting the disclosure of confidential information. However, the trial court refused to issue an injunction prohibiting the former employee from competing or soliciting EMC's customers because the one-year time periods in the restrictive convenants in the employment contract had already elapsed and there was no tolling provision to extend them. On appeal, the First Circuit affirmed the trial court's refusal to extend the non-compete and non-solicit provisions absent a tolling provision. The court explained that under governing state law, "when the period of restraint has expired, even when the delay was substantially caused by the time consumed in legal appeals, specific relief is inappropriate and the injured party is left to his damages remedy." The First Circuit also specifically pointed out that "EMC could have contracted...for tolling the term of the restriction during litigation, or for a period of restriction to commence upon preliminary finding of breach. But it did not."
Thus, this case serves as a cautionary reminder to employers to include tolling provisions in their restrictive covenant agreements if they want to increase the likelihood that a court will subsequently extend the duration of those restrictive covenants by the period of any violation.
If you are interested in receiving a copy of this decision, you may contact me at miamipandi@comcast.net or motero@houckanderson.com.
In EMC Corp. v. Arturi, ___ F.3d ___ (1st Cir. Aug. 26, 2011), EMC requested a preliminary injunction prohibiting its former employee from using its confidential information, from competing with EMC and from soliciting EMC customers. The trial court issued a preliminary injunction prohibiting the disclosure of confidential information. However, the trial court refused to issue an injunction prohibiting the former employee from competing or soliciting EMC's customers because the one-year time periods in the restrictive convenants in the employment contract had already elapsed and there was no tolling provision to extend them. On appeal, the First Circuit affirmed the trial court's refusal to extend the non-compete and non-solicit provisions absent a tolling provision. The court explained that under governing state law, "when the period of restraint has expired, even when the delay was substantially caused by the time consumed in legal appeals, specific relief is inappropriate and the injured party is left to his damages remedy." The First Circuit also specifically pointed out that "EMC could have contracted...for tolling the term of the restriction during litigation, or for a period of restriction to commence upon preliminary finding of breach. But it did not."
Thus, this case serves as a cautionary reminder to employers to include tolling provisions in their restrictive covenant agreements if they want to increase the likelihood that a court will subsequently extend the duration of those restrictive covenants by the period of any violation.
If you are interested in receiving a copy of this decision, you may contact me at miamipandi@comcast.net or motero@houckanderson.com.
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