Key Issues in the Enforcement of Restrictive Covenants and Employee Departure

A Hospitality Perspective

By Matthew Grosack Associate, DLA Piper | August 10, 2014

Kamal Sleiman, Associate, DLA Piper co-authored this article

Given the current state of the economy and the need for both hotel franchisors and franchisee owners to protect their respective interests and maintain a competitive advantage in the marketplace, one of the most active areas in hospitality industry today is the enforcement of restrictive covenants. A restrictive covenant is a contractual provision entered into between contracting parties that prevents one or both parties from engaging in certain conduct during and after the business relationship.

It is critical for participants in the hospitality industry to take appropriate (and proactive) measures to protect their business interests. While the hospitality industry at-large embarks on its return to market stability following the economic downturn of the last few years, savvy companies will ensure that their legitimate business interests are adequately protected throughout this transition.

One of the most effective means of protecting such interests, is to ensure that your company is utilizing a carefully drafted and properly tailored restrictive covenant. In the hospitality industry, commonly used restrictive covenants include non-compete agreements, non-solicitation agreements and confidentiality agreements. As the industry stands, many hotel management agreements (HMAs) and other agreements contain some form of a non-competition clause or other similar restrictive covenant. Hotel management organizations, franchisors, and real estate investment trusts (REITs) typically attempt to restrict or substantially limit former employees or executives from actively engaging in business with competing brands.

Given that the enforcement of restrictive covenants in the hospitality industry is an often litigated issue, it is important to understand the contours of the applicable law and responsible entities need to understand the practical implications of the current state of non-compete law. Though courts will typically deem such covenants valid and enforceable, relying on either statute or case law, participants in the hospitality industry must be mindful that courts will only enforce those covenants that are "reasonably" drafted and narrowly tailored (in terms of scope and duration) as necessary to protect the company's "legitimate business interest."

Protection of Confidential Business Information and Trade Secrets

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