Restrictive covenants: what they mean and how to draft them

What restrictive covenants do

A restrictive covenant narrows a party’s freedom to act, usually after a relationship ends. The category covers several distinct promises. A non-compete bars someone from working for a competitor or launching a rival business. A non-solicitation blocks targeting specific customers, and a no-hire or anti-raid clause protects the workforce. A confidentiality or non-disclosure promise guards trade secrets and sensitive data. A non-disparagement clause limits harmful public statements.

These clauses appear across many agreements. Employers use them in offer letters and employment contracts. Buyers rely on them when they purchase a business and want to protect the goodwill they paid for. Partners, franchisees, vendors, and independent contractors sign them to keep confidential information and customer relationships from walking out the door. The common thread is protection: the party imposing the covenant is guarding an asset that would lose value if the other side could compete, solicit, or disclose without limit. Courts treat these promises with caution because they restrain trade, so the drafting party carries the burden of showing the limit is fair and necessary.

Drafting example

A defensible covenant is specific. It ties each restriction to a real interest and keeps the burden no larger than necessary. The annotated non-solicitation below shows the moving parts.

Non-solicitation of customers. For twelve (12) months after the Employee’s last day of employment [keep the duration short and defensible], the Employee will not, directly or indirectly, solicit, divert, or attempt to divert the business of any Customer [define “Customer” narrowly, for example accounts the Employee served or learned confidential information about in the final twelve months] for the purpose of providing services that compete with the Company’s business [tie the restriction to the actual line of business you protect]. This Section applies only within the Territory described in Exhibit A [match the geography to where the Employee actually worked].

Each bracketed note is a design choice, not boilerplate. Narrow definitions, a short clock, and a matched territory are what separate an enforceable clause from one a court will strike. The same discipline applies to a non-compete, which needs an even tighter fit: name the specific competing activities it bars, state the consideration the employee receives, and, where local law expects it, offer paid notice or garden leave so the restriction is not a pure loss of income.

What US law says

There is no single federal statute that governs restrictive covenants. Enforceability turns mostly on state law, and the rules vary widely from one state to the next. Most states apply a reasonableness test: the covenant must protect a legitimate business interest, and its scope, geography, and duration must be no broader than necessary to do so.

Some states go much further. California voids most non-competes by statute and reinforced that ban with legislation in 2024. Minnesota enacted a broad ban on new employment non-competes, and several states set income thresholds below which non-competes are unenforceable. A federal effort to ban most non-competes nationwide was challenged in court and did not take effect, which leaves the state-by-state patchwork firmly in place.

States also differ on what a court does with an overbroad clause. Under a blue pencil or reformation approach, a judge may narrow the covenant to a reasonable scope. Under a stricter approach, the entire covenant fails if any part reaches too far. Choice-of-law and forum clauses can shift which state’s rules apply, but courts do not always honor a clause designed to escape a protective home-state law. Because the stakes and the standards move with geography, the safe assumption is that a covenant valid in one state may be void in another.

Common mistakes to avoid

The most frequent error is overreach. A duration measured in years, a nationwide territory, or a bar on any employment in the industry invites a court to strike or shrink the clause. The second error is the copy-paste covenant reused across states and roles without adjustment, which ignores both the local rule and the specific interest at stake. Another is choosing a governing law purely for convenience, since a court may apply the law of the state where the worker actually lives and works.

Weak or missing consideration is another trap. Some states require independent consideration, such as a raise or bonus, when a covenant is added after employment begins. Vague definitions cause similar trouble: if “customer” or “competing business” is undefined or sweeping, the whole clause reads as a naked restraint. Teams also forget to refresh covenants when an employee is promoted or changes roles, and they lose track of expiration dates, so a signed obligation quietly lapses or is never enforced when it should be.

When it matters most

Restrictive covenants earn their keep at moments of departure and transition. When a key salesperson or engineer leaves for a competitor, the non-solicitation and confidentiality terms decide whether customers and secrets stay put. In a business sale, the buyer relies on the seller’s non-compete to protect the goodwill embedded in the purchase price. During fundraising or an acquisition, diligence teams scrutinize whether existing covenants are enforceable, and unenforceable or missing clauses become negotiation points or price adjustments. Enforcement often plays out fast, through a request for a temporary restraining order or preliminary injunction, so the clarity of the clause is tested under pressure and on a short clock. High-trust roles with access to pricing, roadmaps, or client relationships are where a well-drafted covenant does the most work.

Restrictive covenants are only as strong as the discipline behind them. A promise buried in a signed PDF protects nothing if no one can find it, track when it expires, or confirm it matches the law of the state where it will be tested. This is where a contract lifecycle management platform like Pactolane helps: a central repository surfaces every agreement that carries a covenant, compliance playbooks written in plain language flag when a clause conflicts with a rule such as a state ban, and risk scoring highlights covenants that read as overbroad. Renewal and deadline alerts keep expiration dates from slipping, PactAI extracts the key obligations and dates into a plain-language summary, and a full audit trail records who agreed to what and when. The human still decides how to draft, negotiate, and enforce; the platform makes sure nothing enforceable is lost, and nothing unenforceable goes unnoticed.