As a business owner, it is likely you have spent a number of years creating, developing, and fostering a formula to make your business highly competitive. After expending such efforts to give your business its competitive edge, you want to protect your company’s from the threat of a former employee using stolen business methods to start their own business or to bring your company’s proprietary information to one of your competitors. Many employers will have employees sign a non-compete agreement before they can start working in order to protect the company’s trade secrets and proprietary information. However, there are many common mistakes made when drafting non-compete agreements that will render the contract unenforceable.
If a former employee brings a legal action seeking to void a non-compete agreement or if an employer seeks to enforce the agreement after learning the former employee violated it, a court will evaluate the non-compete agreement by taking into consideration the following factors:
Is there a legitimate interest the employer is trying to protect with the non-compete agreement?
Does the non-compete agreement include a geographic restriction? What is the scope of the geographic restriction?
Does the non-compete agreement include a temporal restriction stating how long the agreement will last?
Does the non-compete agreement preclude the employee from performing a different type or scope of work from what they were hired to do by the employer?
Does the employer provide any consideration, such as additional benefits or compensation, in return for having the employee sign the non-compete agreement?
Was the employee terminated without cause or did the employee voluntarily resign?
Business owners must understand that New York maintains a strong public policy that individuals have the right to pursue livelihood and work. A non-compete agreement will not be enforced if the only purpose is to simply restrict competition. A company’s non-compete agreement must further the employer’s legitimate goal, such as protecting customer lists or other specified confidential knowledge the employee gained only while working for the business that would inevitably be used to benefit a competitor.
Under New York law, a non-compete agreement will only be enforced if: (1) the scope of the agreement is no greater than is required to protect the employer’s legitimate interest; (2) the agreement does not impose an undue hardship on the employee; and (3) the agreement is not injurious to the public. Courts will weigh the factors stated above when determining whether a non-compete agreement is enforceable.
There are a variety of reasons why a court would render a non-compete agreement unenforceable. One common reason non-compete agreements are found unenforceable arises when the agreement causes undue hardship to the employee because it lacks a reasonable geographic and temporal scope in relation to the information the employer is trying to protect. A non-compete agreement will likely be enforced to the extent it is necessary to prevent an employee’s disclosure or solicitation of trade secrets, to prevent an employee’s use of the employer’s confidential customer information, or where the services performed by the employee were deemed unique or special to the employer.
For example, it is unlikely a non-compete agreement would be enforceable where it includes a broad geographic restriction spanning an entire state, if the duration of the restriction is to last more than one or two months. This restriction would cause the employee an undue hardship because it would essentially cause the employee to move to another state in order to find a job. It is also unlikely a court would hold an agreement to be enforceable where the geographic restriction prevents the employee from working in a region where the employer does not conduct business. If the employer does not do business in the region where the employee is restricted from working, the agreement does not seek to protect the employer’s interest.
Reasonable restrictions may be enforceable when the employer is clearly trying to restrict the employee from using trade secrets, proprietary information, or specialized information to which the employee was only exposed to because of their employment, and that is not generally known in the industry. In addition, the geographic and time restraints must be reasonable in relation to the information sought to be protected. Reasonable geographic and time restrictions will depend on the industry of the company and existing state precedent. In New York, reasonable time restrictions have been found to range from six months to two years. A reasonable geographical restraint will generally be enforced on a case-by-case basis, and requires the court to consider the length of the temporal restriction and the activities the employee is restricted from performing.
It is also important whether the employee voluntarily resigned or was terminated without cause. When an employee’s employment is terminated without cause due to downsizing or operational restructuring, the employee should not be restrained from seeking new employment, as that squarely violates New York’s public policy. An essential trait of a non-compete agreement is that the employee has the choice to leave their job when the employer is still willing to continue to employ the employee.
Not all non-compete agreements will be deemed unenforceable when the court finds a defect relating to a geographic or time restriction. In many instances, courts may “blue pencil” the agreement to limit the geographical area, decrease the duration of the agreement, and reduce the scope of the employee’s restricted activity in order to make the agreement enforceable. However, courts are not required to blue pencil an overly-broad agreement. Hence, the agreement may include a “blue pencil clause.” This clause would state the parties intend that the agreement will be enforced to the maximum extent permitted by law, and that should a reviewing court find the agreement is overbroad, the court may blue pencil the clause to make the agreement enforceable.
One exception to the requirement that a non-compete agreement must be reasonable is when the employee chooses not to compete and in return, receives certain contractual benefits, including deferred compensation and benefits. However, when the employee is terminated without cause, the employer has already made the decision for the employee and any non-compete agreement the employer tries to enforce will likely be found to be unreasonable.
Employers should thoroughly review their non-compete agreements to ensure that they are reasonable in duration, geographic scope, and aim to reasonably protect the employer’s legitimate interest.
PMP is available to review or create your non-compete agreements.
Comments