New York Law on Covenants Not to Compete

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 Are Covenants Not to Compete Enforceable in New York?

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.

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; and
  • 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.

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.

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