What Are Restrictive Covenants?
Restrictive covenants are contractual provisions that limit what partners can do during and after the partnership. They protect the partnership from competitive harm, loss of clients, and disclosure of confidential information by restricting certain activities — particularly after a partner departs.
These provisions work together to form a protective framework around the partnership's most valuable assets: its client relationships, proprietary information, workforce, and reputation.
Types of Restrictive Covenants
Non-Compete Agreements
Non-compete provisions restrict departing partners from starting or joining competing businesses for a specified period and within a defined geographic area.
What they cover:
- Operating a competing business
- Owning an interest in a competing business
- Working for a direct competitor
- Providing services that compete with the partnership
Enforcement factors courts consider:
- Is the restriction reasonably necessary to protect legitimate business interests?
- Is the duration reasonable (typically 1-3 years)?
- Is the geographic scope proportional to the partnership's market area?
- Does the restriction allow the partner to earn a living in their field?
Common exceptions:
- Passive ownership of publicly traded companies (typically less than 5%)
- Activities in unrelated industries
- Geographic areas where the partnership doesn't operate
- Pre-existing business relationships that existed before the partnership
Non-Solicitation of Clients
Non-solicitation provisions are narrower than non-competes. They don't prevent a departing partner from working in the same industry — they just prevent them from actively pursuing the partnership's clients.
Types of non-solicitation:
- Non-solicitation of existing clients — Can't contact clients the partnership served during a lookback period (typically the last 12-24 months)
- Non-solicitation of prospective clients — Can't pursue leads or prospects the partnership was actively courting
- Non-service provision — Can't provide services to the partnership's clients even if the client initiates contact (more restrictive)
Key distinctions:
- Active solicitation (contacting clients) vs. passive acceptance (a client finds you on their own)
- Direct solicitation (personal outreach) vs. indirect solicitation (general advertising)
- Whether the restriction covers all partnership clients or only those the departing partner personally served
Non-solicitation provisions are generally easier to enforce than non-compete clauses because they're less restrictive. A departing partner can work in the same industry — they just can't take the partnership's clients with them. Courts view this as a reasonable balance.
Non-Solicitation of Employees
Prevents departing partners from recruiting the partnership's employees to their new venture. Losing key employees to a departing partner compounds the competitive damage.
Typical provisions:
- Cannot hire or solicit partnership employees for a specified period (1-2 years)
- Applies to employees who worked under the departing partner's supervision
- May extend to key contractors and consultants
- Often includes a carve-out for general advertisements (job postings) vs. targeted recruitment
Confidentiality and Non-Disclosure
Confidentiality provisions protect the partnership's proprietary information — the data, processes, and knowledge that give the business its competitive edge.
Information typically covered:
- Client lists and contact information
- Pricing strategies and fee structures
- Financial data and business performance
- Trade secrets and proprietary methods
- Marketing strategies and plans
- Vendor relationships and contracts
- Employee compensation information
- Strategic business plans
Duration: Unlike non-compete and non-solicitation provisions, which have limited time periods, confidentiality obligations typically last indefinitely for trade secrets and sensitive business information.
Obligations include:
- Not disclosing confidential information to anyone outside the partnership
- Not using confidential information for personal benefit
- Returning all confidential materials upon departure
- Deleting electronic copies of confidential information
- Not retaining copies of partnership documents or data
Non-Disparagement
Non-disparagement clauses prevent partners from making negative statements about the partnership, other partners, or the business after departure.
Typically covers:
- Public statements (media, social media, industry events)
- Private statements to clients, prospects, or industry contacts
- Online reviews and comments
- Statements to employees, vendors, and other stakeholders
Common exceptions:
- Truthful statements required by law (court testimony, regulatory inquiries)
- Statements made in the context of legal proceedings between the parties
- Good-faith communications with personal advisors
Non-disparagement should be mutual — the partnership and remaining partners should be equally bound not to disparage the departing partner. One-sided restrictions breed resentment and may face enforceability challenges.
Enforceability Considerations
Reasonable Scope
Courts uniformly require that restrictive covenants be reasonable. What's "reasonable" depends on the specific circumstances, but general principles apply:
Duration:
- Non-compete: 1-2 years is generally enforceable; 3+ years faces more scrutiny
- Non-solicitation: 1-2 years is standard
- Confidentiality: Indefinite for trade secrets; 2-5 years for general business information
- Non-disparagement: Often indefinite
Geographic scope (for non-competes):
- Must correspond to the partnership's actual market area
- A local business can't enforce a nationwide restriction
- Online businesses may justify broader geographic restrictions
- Some courts accept industry-specific restrictions instead of geographic ones
Activity restrictions:
- Must be limited to activities that actually compete with the partnership
- Can't prevent the partner from working in their entire profession
- Should be specific enough that both parties know what's prohibited
Adequate Consideration
For restrictive covenants to be enforceable, the restricted party must receive something of value:
- At formation: The partnership opportunity itself serves as consideration
- After formation: Additional consideration may be required (bonus payment, increased equity, continued employment)
- At departure: Buyout proceeds typically satisfy the consideration requirement
State Law Variations
Enforceability varies significantly by state:
- California generally refuses to enforce non-competes (with limited exceptions for partnership dissolution)
- Most other states enforce reasonable restrictive covenants
- Some states (Texas, Florida) have specific statutes governing enforcement
- A few states allow courts to "blue pencil" (modify) overly broad restrictions rather than striking them entirely
Severability Provisions
Include a severability clause that allows courts to modify unreasonable restrictions rather than invalidating them entirely. This gives the partnership the best chance of maintaining some level of protection even if a specific provision is deemed too broad.
Remedies for Breach
Injunctive Relief
The most important remedy. An injunction stops the violating conduct immediately rather than waiting for the partnership to prove damages. Your agreement should include:
- An acknowledgment that breach causes irreparable harm
- Consent to injunctive relief without the need to post a bond
- Agreement that injunctive relief is available in addition to (not instead of) monetary damages
Monetary Damages
Actual damages caused by the breach, which might include:
- Lost revenue from clients who followed the departing partner
- Cost of replacing solicited employees
- Damage from disclosed confidential information
- Lost business opportunities
- Costs of investigating and proving the breach
Liquidated Damages
A pre-agreed damage amount for breach, which avoids the difficulty of proving actual damages:
- Must be a reasonable estimate of anticipated damages
- Cannot be so high that it functions as a penalty (courts may refuse to enforce penalties)
- Provides certainty for both parties
Forfeiture and Buyout Adjustments
Breaching restrictive covenants may trigger:
- Forfeiture of remaining buyout payments
- Reduction in the buyout price
- Acceleration of repayment obligations
- Loss of deferred compensation
Extension of Restricted Period
Some agreements provide that the restricted period is extended by the duration of any breach. If a partner violates a two-year non-compete for three months, the restriction is extended by three months.
Drafting Best Practices
- Be specific — Vague restrictions are harder to enforce. Define exactly what activities are restricted and what's permitted
- Tailor to your business — Generic provisions from templates may not fit your situation. Customize based on your industry, market, and partnership dynamics
- Make them mutual — All partners should be subject to the same restrictions
- Review periodically — As the business changes, restrictions should be updated to remain reasonable and relevant
- Consider enforceability first — An unenforceable restriction provides no protection. It's better to have a narrow restriction that courts will enforce than a broad one they'll invalidate
Building Protective Covenants Into Your Agreement
Restrictive covenants are the guardrails that protect your partnership's most valuable assets. When crafted carefully, they balance business protection with fair treatment of departing partners.
PactDraft's partnership agreement generator includes customizable restrictive covenant provisions tailored to your partnership's industry and needs — create your agreement now.