What You Need to Know About Non Compete Agreement in New York

Although they can be advantageous for employers, non-compete agreements can be extremely detrimental to employees. They narrow career paths, block opportunities, and force employees to stay in undesirable jobs.

Non-compete agreements can also affect third parties, like customers and patients, who might find their former hairdresser or doctor refusing to provide service or care solely due to the fact that he or she signed a non-compete agreement. At first glance, a non-compete may appear to be an insignificant form you fill out on your first day of work. The truth is, however, that non compete attorneys have no shortage of work attempting to negotiate releases for their clients. Employers oftentimes attempt to require overly restrictive non-competes on new employees. Non-competes, however, generally must reflect the legitimate business interests of the employer. If you are presented with a non-compete agreement, you should never blindly sign it without first understanding its terms. Non-competes are complex legal documents that have been the target of litigation for decades. If you are faced with signing a non-compete, it is best to always consult with a labor attorney in NYC and seek legal advice before making any decisions. While non-competes are complex documents, a qualified attorney can quickly walk you through any impacts it may have on your future employment. 

What is a Non-Compete Agreement?

A non-compete agreement is an agreement that prohibits a person from working for a competitor of their employer for a certain period of time after the employment relationship ends.

A non-compete agreement can limit your ability to move around in your industry. By signing one, you effectively agree that if you stop working for your employer, you will not work for a competitor for a period of time that typically ranges from six months to two years.

How Does a Court Decide if a Non-Compete Agreement is Enforceable?

The enforceability of a non-compete agreement in New York is highly fact-specific, meaning that the analysis will change according to the particular agreement and set of circumstances surrounding the relationship.

Non-competition agreements are considered to be “restraints of trade” – and are unlikely to be enforced if they are found to be “unreasonable.”

When evaluating a non-compete agreement, the court will consider the following factors:

• Does the employer have some legitimate interest it is protecting with the non-compete agreement?
• What is the geographic scope of the restriction? Will it keep you from making a living?
• What is the temporal scope of the restriction? How long will the non-compete agreement last?
• Does the agreement keep you from doing a type of work very different from what you had been doing?
• Did the employer provide you with additional compensation or benefits in return for getting your agreement to sign the non-compete?
• Did you voluntarily resign from your employment or were terminated without cause?

A) Does it Matter That I was Terminated Involuntarily and/or Terminated Without Cause?

Yes, it does. An involuntary termination and/or a termination without cause is a termination that occurs through no fault of the employee. Budget problems, operational restructuring, and downsizing are common reasons for a termination without cause.

It is well settled that New York courts will not enforce a non-compete agreement where the former employee was involuntarily terminated. This is because an essential aspect of enforceable restraints on an employee’s ability to change jobs is the employer’s continued willingness to employ the party agreeing not to compete.

This reasoning relies specifically on the unfairness of a scenario in which an employee against whom the non-compete agreement is sought to be enforced has done nothing to bring about his/her termination.

B) Enforceability of Non-Compete Agreements

New York has a strong public policy to afford an individual the right to work and pursue a livelihood. While a non-compete agreement may be valid to the extent it furthers some legitimate goal of the employer, it is not valid if its only purpose is to restrict competition. There needs to be some good reason to justify enforcing a non-compete agreement.

For example, if the employer introduced you to all its best customers, it may have a legitimate interest in keeping you from going to a competitor and luring those customers away. The goodwill developed in terms of customer relations gives the employer a competitive advantage.

They may want to prevent you from exploiting these relationships to your benefit and their detriment. Or, if you gained certain confidential knowledge that you would inevitably use in the course of working for your new employer, a court may find that to be a legitimate reason to uphold a non-compete agreement.

Thus, under New York law, a non-compete agreement will only be enforced if it:

1. is no greater than is required for the protection of the legitimate interest of the employer,
2. does not impose undue hardship on the employee, and
3. is not injurious to the public.

Courts must weigh the need to protect the employer’s legitimate business interests against the employee’s concern regarding the possible loss of livelihood, a result strongly disfavored by public policy in New York.

A non-compete agreement that is reasonable in time and geographic scope shall be enforced only to the extent necessary:

1. to prevent an employee’s solicitation or disclosure of trade secrets,
2. to prevent an employee’s release of confidential information regarding the employer’s customers, or
3. in those cases where the employee’s services to the employer are deemed special or unique.

For example, in cases where the employee’s job was not unique and the employee did not possess trade secrets or confidential information, New York courts will not enforce a non-compete agreement because it would not be necessary to protect a legitimate interest of the employer.

Courts often consider these factors (geographic scope, length of time, nature of duties restricted and consideration) in relation to one another. For example, if the non-compete agreement is designed to protect valuable information, the reasonable duration is for the time the information has value.

Further, a broad geographic scope – say an entire state – may be more likely to be enforceable if the duration of the restriction is short – say a month.

On the other hand, a broad geographic scope coupled with a long time period of prohibition is more likely to be held unenforceable by a court. When looking at geographic scope, courts examine the services provided by the employer.

The court generally will not permit a non-compete that prevents an employee from working in a region where the employer does not do business.

Lifetime bans on a particular area of work have been upheld in unique circumstances, but, generally, courts analyze the “protectable interest” the employer has and will not uphold time restrictions, which go far beyond the employer’s “protectable interest.”

C) What is considered a reasonable restriction?

Employers may have a legitimate interest in protecting material that is not a trade secret or proprietary, but involves highly specialized, current information not generally known in the industry, created and stimulated by the research environment furnished by the employer, to which an employee has been exposed solely due to his employment.

Accordingly, courts must evaluate the reasonableness of the non-compete agreement in light of the individual circumstances of the employer and employee and balance the employer’s need for protection and the hardship on the employee that may result.

Thus, the court must assess an agreement’s reasonableness on a case-by-case basis. A court therefore may not presume that a temporal or geographical limitation deemed reasonable in one case is necessarily reasonable in another.

In determining whether a non-compete agreement protects a business’s legitimate business interests, the court will consider the agreement’s duration, the geographic limits, and the scope of activities prohibited.

Each of those factors must be narrowly tailored to ensure the non-compete is no broader than necessary to protect the employer’s interests.

An employer has no legitimate and/or protectable interest in preventing competition as such, and a non-compete agreement cannot be used to stifle legitimate competition, including competition from a former employee.

Courts evaluating the hardship prong have considered the likelihood of the employee finding work in his field elsewhere. There may be restrictions which are so broad that they eliminate the ability to work at all in a given field or profession.

New York courts recognize that non-compete agreements clearly limit an employee’s employment opportunities and in many instances probably interfere with an employee securing a position in which he could most effectively use his skills, at the same time depriving society of a more productive worker.

D) Blue Pencil Rule

Even if the court finds that the non-compete agreement is enforceable, the court may still limit its geographical area, its period of enforceability, and its scope of activity under what is known as the ‘blue pencil’ rule. If a non-compete agreement is overbroad, a New York court may choose to modify it (by reducing its duration, scope, etc.) in order to make it enforceable.

Courts are not required to blue pencil an overly broad non-compete, and can instead simply decline to enforce it. As a result, many employment agreements are drafted to include a “blue pencil clause” – which essentially states that both parties intend for the non-compete to be enforceable to the maximum extent allowable by law (and if it’s overbroad, a reviewing court should blue pencil the clause in order to make it enforceable).

E) Employee Choice Doctrine

The employee choice doctrine is an exception to the usual requirement that a non-compete agreement be reasonable. In other words, reasonableness does not matter if an employee has the choice between not competing, and receiving certain contractual benefits, or competing and giving up those benefits.

Thus, the employee must voluntarily leave employment. The point, of course, is that it has to be the employee who makes an actual choice between competing or receiving a benefit. If the employee is terminated, the employer has in fact made the choice for the employee and any non-compete the employer seeks to enforce will be subjected to the usual reasonableness standard.

The employer must also demonstrate that it continues to be willing to employ the individual. Thus, if the non-compete is drafted to present the employee with a choice between:

1. working for a competitor and
2. receiving benefits/deferred compensation/etc. – the non-compete will most likely be considered valid and enforceable.

Non-compete agreements and their applicability are some of the more complex points in the employment law arena.

Employment Restrictions of Non-Compete Agreements

Employment restrictions found in non-compete agreements can vary, but are generally directly related to the employee’s duties. Employment restrictions outside of the scope of the employee’s duties can be challenged. The worry for the previous employer is that you will take the knowledge, training, and skill you obtained while working for them and take those attributes to a direct competitor. Also, many former employers may seek to start their own companies competing with their former employers. This is generally considered a legitimate business reason for requiring a non-compete. 

Many times, however, employers require non-competes that are extremely restrictive, perhaps illegally so. For example, if you are an employee for a start-up that provides medical billing services, a non-compete would generally prohibit you from working for another medical billing company for a certain period of time. If the non-compete prevented you from working for any medical company, or any billing provider, that may be considered unreasonable in scope. Before signing a non-compete, you should always closely read the language and understand exactly what types of employment you will be barred from taking after you move on from your roll. 

What Happens if You Violate a Non-Compete Agreement?

If you choose to work for a competitor of an employer with whom you have a non-compete agreement, your former employer may decide to do nothing. In this case, be sure to come to some kind of agreement with the employer so you can do what you want.

Additionally, be sure to get the employer to release you from your non-compete agreement with a non-compete release letter.

On the other hand, the employer may sue you and go to court seeking what is called an “injunction” to prevent you from violating your agreement. Because a violation of a non-compete agreement can cause an employer immediate harm, the court will often use expedited procedures in these cases.

Once your employer requests an injunction or restraining order, you may have very little time to retain a New York non-compete attorney and discuss your case, so make sure that you enlist the help of an experienced employment attorney as soon as you know that your employer is challenging your actions.

If an injunction is granted by the court, this is a legal remedy which can stop you as an employee from working. It can cause you to lose your ability to be employed for whatever period of time the court sets.

This can last for months or years until the court reaches a resolution of the final decision on whether the non-compete agreement which the employee signed is actually enforceable or not.

Additionally, the employer can seek any actual damages or losses which they claim have occurred due to the employee’s violation of the non-compete agreement. This could include lost profits from customers, the loss of secret employer information, and similar losses.

Courts will therefore enforce non-compete agreements, but only to the extent necessary to protect the legitimate interests of employers.

If you have any questions about your non-compete agreement, contact an experienced non-compete attorney today.

How to Negotiate a Non-Compete Agreement

Because of the uncertainty in this area of the law, it is important to consult an experienced non-compete lawyer before signing a non-compete agreement.

If you are in the process of negotiating a non-compete agreement, here are some measures you can take to make sure the agreement will not limit your future chances of obtaining employment:

• Try to limit it as much as possible in terms of geographic scope and duration. Limit it narrowly to the area the employer is actually concerned about you working in not the whole industry or line of work.
• Ask for severance pay in the event of an involuntary termination.
• With so much potentially at stake, if you have any concerns at all about an agreement, it would be wise to consult with a non-compete attorney who is familiar with these types of agreements. Making an incorrect assumption about the validity of a non-compete agreement could seriously affect your ability to work and could cost you a lot of money, so you want to proceed carefully.

Are There Alternatives to A Traditional Non-Compete In New York?

There are alternatives to a non compete in New York that may also prevent an employee from competing against his or her employer for a period of time or to protect trade secrets. These alternatives have come into existence because many employers are seeking ways around what is sometimes a difficult path to enforcement. One alternative to a non-compete is called a “garden leave” agreement. Under this agreement, the employee must provide the employer with a significant notice of his or her departure. This can be a few weeks, or even months. During that time, the employee will still be paid by the employer and considered an employee, but will not provide any services to the employer. Because of his or her employment, the employee is prohibited from working for someone else, including a direct competitor.

A more common alternative to a non-compete, however, is through optional compensation, sometimes called “employee-choice.” The employer will give the employee two options: (1) enter into a non-compete and receive non-vested stock options or other compensation, or (2) refuse to enter into a non-compete and forfeit the additional compensation. Paying the employee extra compensation for entering into a non-compete may make it easier for the employer to enforce its terms in court. More typically vested compensation, such as retirement payments that are not vested for 5 years, also serve to ensure the employee will not abruptly or suddenly leave the employer. 

Benefits and Drawbacks of Non-Compete Agreements

Benefits

There is generally only one benefit for signing a non-compete from the viewpoint of the employee – and that is employment. Many employers, especially those seeking to hire highly-compensated individuals, will require some form of non-compete. If you are in a position where your employer requires a non-compete, however, you may have the ability to include this in your negotiation. You may be able to negotiate either your compensation, taking the non-compete in consideration, or the terms of the non-compete itself, such as the length or scope. 

Drawbacks

The main drawback of entering into a non-compete is that it may severely restrict your potential employment options, leaving you unemployable for a period of time after you leave your job. While there is significant litigation concerning non-competes and their enforceability, reasonably limited non-competes are enforceable and can be difficult to overcome. 

Famous Examples/Cases

• In 2016, the New York State Attorney General’s office settled a case against Law360, one of the top legal news websites in the country, in which Law360 agreed to stop using non-compete agreements that had previously been mandatory for the vast majority of employees. As the New York Attorney General stated, “Unless an individual has highly unique skills or access to trade secrets, non-compete clauses have no place in a worker’s employment contract. Unscrupulous non-compete agreements not only threaten workers seeking to change jobs, they also serve as a veiled threat to employers who may be reluctant to hire candidates due to the mere existence of a non-compete agreement. Workers like the reporters at Law360 should be able to change jobs and advance their careers without fear of being sued by their prior employer.”
• After Merrill Lynch terminated the employment of two employees without cause, both began working for a competitor. Many months later, Merrill Lynch informed the two former employees that all of their rights in the company-funded pension plan had been forfeited pursuant to a provision of the plan which permitted forfeiture in the event that an employee directly or indirectly competed with the firm. When the employees brought an action against Merrill Lynch for breach of contract, the New York Court of Appeals held that “where an employee is involuntarily discharged by his employer without cause and thereafter enters into competition with his former employer, and where the employer, based on such competition, would forfeit the pension benefits earned by his former employee, such a forfeiture is unreasonable as a matter of law and cannot stand.”

Example of a Non-Compete Agreement

In exchange for initial and/or continued employment, at the Termination Date, EMPLOYEE shall not in any way Compete, as defined below, with EMPLOYER for a period of one year. The term “Compete” includes, but is not limited to:

1. Providing services directly, indirectly or on behalf of a third party, to any person or entity in the Geographic Area that are within the scope of services provided by EMPLOYER (“competing services”);
2. Providing services directly, indirectly or on behalf of a third party to EMPLOYER’s Customers located anywhere including outside of the Geographic Area;
3. Soliciting directly, indirectly or on behalf of a third party any customer for EMPLOYER’s services in the Geographic Area, whether or not EMPLOYER is under contract with them or has a business relationship with them, for any reason whatsoever including but not limited to soliciting contact information, business or referrals;
4. Advertising and promoting competing services or products in any existing or future advertising medium, including, but not limited to, e-mail, social networking media, radio, television, newspaper, periodical, trade magazine, trade show, convention, flyer and direct mail which is aired, received or takes place, as applicable, in the Geographic Area.

Existing FAQ Section Omitted

Contact a Qualified Non-Compete Attorney to Review your Case

Satisfying the terms of a non-compete can be a serious burden on any individual in today’s employment market. As a binding legal document, a non-compete should never be entered into without first understanding the entirety of its terms. We know, however, that this is not always possible. In our experience, many employers are willing to release or limit non-competes once the employee has decided to leave the company. This is especially true once an attorney gets involved and begins questioning the validity of the agreement. A judgment invalidating the terms of one of the employer’s non-competes may invalidate all others as well. 

If you have signed a non-compete and are seeking to understand your options, contact an attorney at the Moshes Law Firm today. Our experienced attorneys have drafted non-competes and fought to get them overturned in New York courts. We understand exactly what your employer may and may not require from you in return for employment. If you’re ready to move on from your previous employer, contact us today for a free consultation.