Enforceability of Restrictive Covenants in New York

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 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.

The laws governing non-competition and non-solicitation agreements vary from state to state.  New York law generally recognizes non-competition agreements as enforceable to the extent they are reasonable.  To determine whether or not a non-competition covenant is reasonable, New York Courts apply a balancing test; Courts weigh the employee’s right to pursue employment utilizing the skills and knowledge he has acquired during his work experience that are important to his trade against the employer’s legitimate interest in protecting his business.  An example of a legitimate business interest is protecting the business from those who may try to pirate intellectual property for their own benefit.   Often these types of agreements limit the individual’s ability to engage in competitive work for a certain period of time in a certain geographic area, namely the market in which the other party offers their services.  The time period and/or geographic limitation are among the factors that a Court would review in assessing the reasonableness, and, therefore enforceability, of the provision.

New York Courts assess the reasonableness of a non-solicitation agreement by analyzing whether or not it serves a legitimate business interest of the employer.  For example, New York Courts have ruled that a non-solicitation agreement cannot prohibit a former employee from having contact with a business’s entire client base if the employee had not previously serviced the entire client base or otherwise maintained relationships with all clients.  This would be overly broad and fail to serve a legitimate business interest.

New York Courts have recognized four types of business interests that an employer may seek to shield by way of a restrictive covenant; i) protection of trade secrets, ii) protection of confidential customer information, iii) protection of an employer’s client base, and iv) protection against irreparable harm where an employee’s services are unique and extraordinary.  Silipos, Inc. v. D. Bickel, No. 05-cv-4356 (RCC), 2006 WL 2265055 at *3 (S.D.N.Y. 2006).

The New York Court of Appeals has stated that the restraint of these types of agreements shall be “no greater than is required for the protection of the legitimate business interest of the employer.”  BDO Seidman v. Hirschberg, 93 N.Y.2d 382, 388-389 (1999).   This means that these types of provisions cannot be unnecessarily broad or restrictive, particularly if the restriction does not serve to protect the business.  This analysis is very fact specific.  For example, in Good Energy, L.P. v. Kosachuk, 49 A.D. 3d 331, 332, 853 N.Y.S.2d 75 (1st Dep’t 2008), the Court ruled that a non-competition provision that restricted the employee from working anywhere in the United States was unenforceable because the employer only operated in eight states.  The court reasoned that restricting the employee from earning a living throughout the country, including states where the employer did not compete in the market, was unreasonable because, as to at least forty-two states, it did not serve to protect a legitimate business interest.  Alternatively, in Payment Alliance Intern., Inc. v. Ferreira, 530 F.Supp.2d 477 (S.D.N.Y. 2007), the court found the same territorial restriction enforceable because the employer did, in fact, operate throughout the United States.  Similarly, New York Courts have held that a restrictive period of six months is unenforceable in some cases while ruling that a restrictive period as long as five years is enforceable in another circumstance.

In addition to assessing the duration, geographic scope, and business interests served by these agreements, when evaluating the enforceability of these types of agreements, New York Courts assess whether or not the provisions protect the public interest.  For example, courts have ruled that it is injurious to the public when a physician is restricted from practicing for an extended period of time within a certain area.  However, this is not to say that all medical professionals are exempt from restrictive covenants; restrictive covenants are generally enforceable against medical and dental professionals if they are reasonably limited in time and geographic scope (presuming such limitations do not injure the public i.e. patients) and serve a legitimate business purpose of the former employer.  Again, the analysis is fact-specific.

There are certain circumstances in which a New York Court is more likely to deem a non-competition provision enforceable.  For example, if an employee accepts post-termination benefits from the employer (i.e. severance) in exchange for agreeing to abide by the non-compete, the Court is more likely to determine that the restrictive covenant is enforceable.  In such circumstances, the Court may even uphold the non-compete if it is otherwise unreasonable.  It is important to note, however, that some New York Courts have ruled that a non-competition agreement may not be enforced against an employee who is terminated without cause.  In such circumstances, courts have ruled that if the employer did not have a continued willingness to employ the individual, it cannot restrict the employee from finding employment elsewhere.

If you are an employee subject to a restrictive covenant or an employer who is seeking to enforce a restrictive covenant against an employee or former employee, contact Joseph Maya, Managing Partner at Murphy, P.C. at (203) 221-3100 or directly via email atJMaya@Mayalaw.com for a complimentary consultation to discuss your case.