New York Law on Covenants Not to Compete

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 New York Law on Covenants Not to Compete

A company’s key salesman quits. The employee has inside information learned while working for the company about its business models, manufacturing processes, methods used in marketing and advertising, details about specific products, and lists of clients or customers along with their contact information.

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:

  • Time: After the employee leaves the former employer, they must refrain from working for the competitor for a certain period
  • 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 and discourages restraint 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 for themselves, based on certain generally accepted criteria, whether a covenant brought to court should be struck down.

Are Covenants Not to Compete Legal in New York?

Yes, an employer can require you to sign a covenant not to compete as a condition of employment. They are legal to write, and it is legal to require a new employee to sign one, but not all covenants are enforceable. They must be narrowly tailored so that they are not unreasonable. In general, the language of the covenant must meet the following criteria:

  1. The employer must be protecting a legitimate interest
  2. The covenant must not create undue hardship for the employee
  3. The covenant must not be harmful to the public interest (public policy)
  4. The covenant is reasonable in the geographic area it restricts and the time for which it restricts the employee

A court may strike down covenants that fail to meet the requirements.

Sometimes, a covenant not to compete may be struck down only in part. For instance, the time and geographic area may be unreasonable. For example, it is unreasonable if the employer attempts to restrict the employee from working for any competitor in any area of the country or if it attempts to limit the employee’s job opportunities for an unreasonably long period (say 20 years).

In those cases, a judge may decide that the covenant may stand, but the time/geographic restriction must be modified so it is not as restrictive or burdensome. This is referred to in New York as the “blue pencil rule.”

In analyzing covenants not to compete, the courts try to balance the interests of the employer against the interests of the employee and attempt to protect the employer’s interests without causing undue hardship.

How Do You 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. If the covenant not to compete is unclear, ambiguous, or filled with legalese, 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 period in 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 penalties or consequences if the employee breaches the contract by working for a prohibited employer. If an individual violates a valid covenant not to compete, their former employer may pursue legal action against them, including monetary compensation (a specific amount of money can be written into 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 (an order) that typically requires the employee to not work for the 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 you to sign a covenant not to compete to accept a job offer. Read the employment contract carefully – being aware of any covenants you sign is very important. Sometimes, they are buried in an employment contract, and you may not notice them.

Upon leaving that employer, you may later find that the covenant is overly restrictive and makes it difficult to find a new job. In that case, you must negotiate with your ex-employer to modify the covenant. If that does not work, you must 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 access, it is important to have an attorney review the document. Your attorney can also assist in drafting a covenant not to compete or negotiate the terms of the covenant.

A qualified New York employment contract lawyer can assist you if you have questions about a covenant not to compete before signing it. They may be able to represent you in court if you have already signed a covenant that you believe is overly restrictive and should not be enforced.

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