A company’s key salesman quits. The employee has inside information learned while working for the company about its business models, manufacturing processes, marketing methods, advertising strategies, and more.
When the employee leaves and goes to work for a competitor, all that information goes with the employee, and the competitor can use it to their advantage.
Companies do not want this to happen, of course. They have developed a contract clause called a covenant not to compete, which limits the employee’s ability to take jobs with competitors after leaving the company. A covenant not to compete may also be known as a non-compete clause or a non-competition agreement.
Non-compete covenants prevent employees who have quit or been terminated from taking jobs with competing businesses. They prohibit employees from working for competitor companies within a specified geographic area and for a designated number of years.
The idea behind the covenants is that while working for an employer, some employees gain knowledge of their company, products, or industry. Their employer is interested in keeping that employee from working for a competitor and passing along this critical information to the new employer or using it to gain an edge over the company.
Companies that commonly use covenants not to compete include those that handle:
- Highly confidential materials
- Client demographic or information databases that an employee can access
- Trade secrets
- Trademarks and copyrights
The typical restrictions contained in a covenant not to compete address the following:
- Time: After the employee leaves the former employer, they must refrain from working for a competitor for a certain period of time.
- Type of business: Working in certain industries and businesses that are related to that of the employer may be prohibited.
- Location: The employee may not be able to work for a competitor within a specified geographic location.
It is very important to note that, towards the end of 2024, there will be a new federal law, the Final Rule, that will govern non-compete agreements across the country, including in New York state. More information about this rule and how it will affect current New York laws will be discussed at the end of this article.
Is There a Public Policy Against Covenants not to Compete?
Covenants not to compete have been around for many years, but courts have often rejected them in whole or in part. Courts have held that public policy favors economic freedom and an employee’s right to earn their livelihood. Non-compete agreements are seen as restraints of trade. This public policy certainly holds true in New York today.
Although New York has no statute making covenants not to compete illegal, judges may decide, based on certain generally accepted legal principles, whether they should deny enforcement of a covenant brought to court.
However, under New York employment laws, there is no proscription of non-compete agreements. New York courts have enforced non-compete agreements in cases in which they had the following characteristics:
- They do not impose any greater restrictions than are truly necessary to protect the legitimate business interests of the employer
- They do not impose an unreasonable hardship on the former employee
- They do not harm the interests of the general public
- They are limited in reasonable ways in terms of time period and geography
As for what is reasonable in terms of the time period for which the agreement is effective when reviewing these agreements, New York courts have held in numerous cases that time periods of 6 months or less are generally reasonable.
However, courts analyze these agreements on a case-by-case basis. Unique circumstances might show that a longer non-compete provision is reasonable. For example, one New York judge held that a non-compete agreement that would be in effect for 5 years was reasonable. In that case, the non-compete agreement was part of a deal for the sale of a business, which was one of the case’s unique circumstances.
New York judges do seem to have a special aversion to enforcing non-compete agreements in cases in which an employee has been terminated without cause. Some judges have even ruled that their courts would not enforce a non-compete agreement signed by an employee who was involuntarily fired without cause. However, a court still analyzes the unique facts of each case.
How Do I Draft a Covenant not to Compete?
Employers in New York should exercise caution when drafting covenants not to compete. They should be very specific about the proprietary information they seek to protect. They should be short and to the point and clear in meaning, and not confuse the employees who read them.
The covenant not to compete might be unclear, ambiguous, or filled with legalese. If this is the case, a court may find that the employee did not sign the contract knowing what the employer was trying to accomplish, and the covenant can be struck down.
As mentioned above, the company’s covenant not to compete should be reasonable in the geographic area and time period within which they restrict their employee’s ability to seek work in the future.
Note also that it is unlikely that a court will enforce a covenant not to compete for an employee who works in a lower-level position because that employee is less likely to have proprietary information the company needs to protect.
Finally, the covenant should address the consequences for the employee who breaches the contract by doing what it proscribes. If a person breaches the contract with a valid covenant not to compete, their former employer may pursue legal action against them and seek an award of money damages. A specific amount of money can be stated in the contract.
In addition or as an alternative, the contract may state that breach of the covenant not to compete will result in an injunction that typically requires the employee not to work for a prohibited employer or, if the employee has already started work, to stop working for them.
Am I Required to Sign a Covenant not to Compete?
As mentioned above, an employer may require a person to sign a covenant not to compete in order to be offered a job. A person wants to read the employment contract carefully. A person always wants to understand any contracts they may sign. Sometimes, non-compete clauses are buried in an employment contract, and a person may not notice them. That is why a person wants to read a contract carefully.
A person might think that a non-compete agreement is oppressive and unfair. If so, they may always ask a local New York lawyer for an opinion and try to negotiate a different agreement. The best time to negotiate is before signing the agreement and not later when a former employer wants to enforce it.
If a person signs without inspection or advice upon leaving that employer, a person may find that they have signed a covenant that is overly restrictive and makes it difficult to find a new job. In that case, again, a person may negotiate with their ex-employer to modify the covenant. If that does not work, a person may have to take the matter to court for relief.
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What Is the Most Recent Law Governing Non-Compete Agreements?
The Federal Trade Commission (FTC) voted on a new law, called the Final Rule or Non-Compete Clause Rule, in April 2024 that will place a ban on most non-compete agreements. This rule will be effective 120 days following the Federal Register being published.
This means that the Final Rule will not likely take effect until around August of 2024. Once the Final Rule is in effect, every employer in the country, including New York State will have to comply with the new requirements.
Because of this New York employers should begin preparations as soon as they can to be in compliance with the new law. They can consult with their attorney or in-house counsel for assistance.
The only exception to the ban on non-compete agreements under the new rule is those that were entered into with senior-level executives, as they were more likely to have been negotiated. Aside from that one exception, employers will have to inform all of their other workers that any non-compete agreement they signed will no longer be enforceable.
How Does this Affect State Laws?
The Non-Compete Clause Rule will preempt any current New York State laws that allow non-compete agreements because it is a federal law. Although, in general, courts in New York do not favor these agreements, they are still not prohibited under state law.
This change will affect New York employers and employees, as after the Final Rule goes into effect, non-compete agreements will no longer be enforceable. This may require employers to change their current employment contracts.
What if the Final Rule Is Challenged in Court?
The Non-Compete Clause Rule will most likely face changes, challenges, and undergo interpretations as time goes on. It contains a severability clause that provides that the remainder of the rule will remain in effect if any portion is deemed unenforceable or invalid.
In addition, the new rule could be entirely struck down in the future. Because of the many possibilities, it is essential for employers in New York to reach out to a lawyer for legal advice on how to prepare and protect their businesses.
If litigation is already in process involving a non-compete agreement, all parties should ask their lawyers to stay updated on these issues and how it may affect their claim and to prepare arguments for all possibilities. Being aware of the changes and updates to this rule is important in New York, as the changes will affect the enforceability of non-compete agreements in the state.
Do I Still Need to Know about the Previous Non-Compete Agreement Laws?
It is very important for individuals in New York to know the current laws as well as how they will change when the new rule goes into effect. As noted, when the rule is in full force and effect, non-compete agreements, except for those made with senior executives, will not be permitted in New York.
If, however, the rule is later struck down or invalidated, the laws will be as they were previously. This is why it is important to be aware of both sets of laws and how it may affect business operations.
A business may want to include a non-compete agreement, even though it may not be enforceable, to ensure they are covered no matter how the law changes. A lawyer will help an employer draft and edit employment agreements to ensure that they comply with the Non-Compete Clause Rule and prepare for the possibilities of changes to the rule.
Do I Need a Lawyer if I Have Questions About a Covenant not to Compete?
Before you sign anything that may restrict your future employment options, it is important to have an attorney review the document. Your attorney could even help you negotiate and draft a covenant not to compete so that it is a provision that respects your rights to pursue business employment that serves your interests.
LegalMatch.com can connect you to a qualified New York employment contract lawyer who can help you if you have questions about a covenant not to compete before signing it.
Your lawyer may also be able to negotiate for you or represent you in court if you have already signed a covenant that you believe is overly restrictive and should not be enforced.
If you are an employer, you want a non-compete clause that a court will enforce if that should become necessary. Again, a lawyer can ensure that you have a clause that is enforceable.
