Non-compete agreements

A covenant not to compete is an agreement by a person who will not compete with a business of the company during a certain period of time on a certain territory. Non-competes are executed between partners, between sellers and buyers of the business, but most commonly we see them in an employer-employee relationships.

 

These types of agreements are strictly construed by the courts and can be enforced only if they are:

 

·        In writing,

·        Supported by consideration,

·        Reasonable as to the duration of the restriction and the territory, and

·        Do not violate a public policy.

 

The agreement should clearly state the governing law. Some courts are tougher on review and enforcement. The interpretation what is reasonable may also vary between the jurisdictions. Below I will explain how non-compete agreements are governed under New York law.

 

New York law disfavors non-compete agreements as an unreasonable restraint of trade. Courts may implement a non-compete as long as the restriction stipulated in the agreement is reasonable. Although courts evaluate non-competes on a case-by-case basis, a non-compete can be enforced only if it:

 

     Is no greater than required to protect an employer's legitimate protectable interests;

     Does not impose undue hardship on the employee;

     Does not cause injury to the public;

     Is reasonable in duration and geographic scope.

 

The legal principle is that an employee should be able to apply all skills and knowledge he acquired during his previous employments. Isn’t it what is called ‘work experience’ anyway? However, the courts must also recognize the legitimate interest of an employer to protect specific technics and information that gives his business competitive edge. If employer did not have this right, he would not have much protection from deliberate commercial piracy either.  

 

While courts strictly enforce non-solicitation agreements (cannot go after ex-employer’s clients), trade secrets & other confidential information, the cases with non-compete agreements are very fact-specific. As I previously stated they should be reasonable and not more extensive than necessary for the protection of the business.

 

Duration & geographical scope are two major parts in deciding whether restrictions are reasonable. Recognizing advances in technology, which allows employers be competitive nationwide or in several counties, New York courts have enforced broad geographic restrictions when they were:

 

     Required to protect the employer's legitimate business interests;

     Reasonable in light of other provisions in the non-compete (for example, duration).

 

However, courts also have found these broad geographic restrictions to be unreasonable in other cases. For example, the court found that a nationwide non-compete provision was unreasonable because the employer did business in only eight states. Courts have been willing to enforce very broad geographic restrictions on employees where the “nature of the business requires that the restriction be unlimited in geographic scope,” so long as the duration of those restrictions was short (short duration is usually 6 months or less). On the other hand, if geographic is limited to a certain small area where business is located (e.g. cannot open a coffee shop on the same block), the duration can be longer.

 

Considering the requirements of NY law and most other jurisdictions to structure the non-compete agreements as narrow as possible based only on the vital & legitimate interests of the employer, otherwise it simply will not be enforceable, it should be drafted or at least reviewed only by the business attorneys.

Leave a comment

Make sure you enter all the required information, indicated by an asterisk (*). HTML code is not allowed.