Employer Remedies for Violations of Restrictive Covenants in New York: Unfair Competition

Types of Restrictive Covenants

An agreement containing a restrictive covenant is an agreement in which one party agrees to limit his conduct in exchange for a benefit.  Two common types of restrictive covenants include agreements not to compete and agreements not to solicit.  A non-competition agreement is a contract that an individual, often an employee, enters into with another party, often an employer, in which the individual agrees not to offer or engage in services that are competitive with the other party.  A non-solicitation agreement is a contract in which an individual, often an employee, enters into with another party, often an employer, in which the individual agrees not to poach employees and/or clients of the other party.

Non-competition and non-solicitation agreements may be beneficial to employers because they offer protection for their business models, clients, and/or employees, which they may have spent years developing and training.

Restrictive Covenants Under New York Law

The laws governing non-competition and non-solicitation agreements vary from state to state.  New York law generally recognizes these restrictive covenants as enforceable to the extent they are reasonable.  For more information as to whether or not your restrictive covenants are enforceable, see Enforceability of Restrictive Covenants in New York. 

There are several types of claims available to employers for a violation of a restrictive covenant that are commonly recognized by New York courts.  See Employer Remedies for Violations of Restrictive Covenants in New York.  One such claim is unfair competition.  Unfair competition occurs when an individual or entity utilizes dishonest or fraudulent methods to gain an unfair advantage in trade or commerce.  A common example of unfair competition is when one party duplicates the goods or services of another with the intent to confuse or deceive the market/customers, so as to increase its own sales.

Establishing a Claim of Unfair Competition

“The essence of an unfair competition claim under New York law is that the defendant has misappropriated the labors and expenditures of another…Central to this notion is some element of bad faith.”  Vichy Spring Co. v Lehman, 625 F.2d 1037, 1044 (2d Cir. 1980).  In order to demonstrate bad faith, the employer must show that the defendant acted with a “dishonest purpose.”  Kalisch-Jarcho Inc. v City of New York, 448 NE.2d 413, 417 n.5 (N.Y. 1983).  Therefore, negligence or even recklessness is insufficient to demonstrate an unfair competition claim.  Abe’s Rooms, Inc. v Space Hunters, Inc., 833 N.Y.S.2d 138, 140 (2d Dept 2007).  There must be a showing that the defendant intentionally engaged in misconduct.

If an individual agrees to be bound by a non-competition agreement, but then subsequently violates the contract by engaging in dishonest or fraudulent business practices to compete with the employer, the employer may be able to assert an unfair competition claim, among others, if the above conditions are met.

If you are an employer seeking to enforce a restrictive covenant or a party who is subject to a restrictive covenant, contact Maya Murphy, P.C. at (203) 221-3100 for a complimentary consultation to discuss your case.