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Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer's legitimate business interests from an unfair competitive advantage with the employee's right to work in a field for which he or she is trained. New York courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed. The Law In New YorkNew York courts generally disfavor non-competition agreements that prevent a former employee from working in a similar field. But the courts will enforce such agreements when they are necessary to protect the employer from unfair competition in regard to trade secrets, confidential customer lists or when the former employee's services were unique or extraordinary. Such restrictions must also be reasonable in terms of geographic scope and duration. If a court finds an agreement is unreasonable, it may modify the terms if doing so will make it reasonable. If not, the court may simply strike down the entire agreement.
ConsiderationWith any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. New York courts have not directly ruled on whether or not the promise of initial employment is sufficient consideration but they have determined that an agreement signed after the employment relationship has begun coupled with a substantial period of employment is sufficient consideration. Reasonableness in Time and Geographic ScopeExamples of non-compete agreements that New York courts have found to be reasonable include: - A judicially modified 12-month restriction on a business analyst for an international banking software developer. It was reduced from 18 months to be consistent with a covenant involving the employer's chief executive officer.
- A 3-year restriction on an equine veterinarian from practicing within 35 miles of the former employer's clinic.
- A 1-year restriction on former financial advisers of a securities brokerage firm from soliciting customers in the same city where they had worked.
The courts have found restrictive covenants unreasonable or used the "blue pencil" rule to modify agreements in these situations: - A 100-mile radius restriction on former employees of a laboratory equipment testing company was too broad because it extended outside the boarders of New York City.
- A 2-year restriction on a former waste management industry employee from having "any contact whatsoever" with customers, potential customers and the remaining employees of the company and their family members.
- A 6-month, 100-mile-radius restriction on a former employee of a securities firm because, at the beginning of the employment relationship, the broker had little bargaining power and could not have requested the terms be changed without risking denial of employment.
Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.
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