District Court Decision Suggests That Overly Broad Restrictive Covenants Will Not Be Enforced in Employment Agreements in the Wealth Management Industry

Ideally, hedge fund managers and employees should be able to negotiate employment agreements that align the interests of the manager with those of the employee.  However, the interests of managers and employees will almost inevitably conflict in the context of certain typical employment agreement provisions.  Most notably, restrictive covenants, such as non-competition, non-solicitation and confidentiality clauses, highlight the diverging interests of managers and employees.  On one hand, hedge fund managers wish to include restrictive covenants in employment agreements to protect their confidential and proprietary information and to protect investments in employee development.  On the other hand, employees wish to limit the scope of such covenants to provide them with the widest universe of employment opportunities following departure from a manager.  While the laws governing restrictive covenants vary from state to state, generally, such laws have been interpreted by courts to balance these competing interests.  For a comprehensive discussion of relevant law and practice, see “Schulte Roth & Zabel Partners Discuss Non-Competition and Non-Solicitation Provisions and Other Restrictive Covenants in Hedge Fund Manager Employment Agreements,” Hedge Fund Law Report, Vol. 4, No. 42 (Nov. 23, 2011).  Where such covenants have been found to be overly restrictive, courts have typically refused to enforce them.  A recent District Court decision addresses the permissible scope of a restrictive covenant in an employment agreement between a wealth management firm and an employee of the firm where the employee was terminated involuntarily without cause.

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