News & Noteworthy

Just How Restrictive Are Restrictive Covenants?

Posted on June 7, 2017

Many employers and employees alike assume that a non-compete covenant in an employment agreement will be enforced without issue if an employee violates it. The reality, however, is far less certain. In New York, the general public policy favoring “robust and uninhibited competition” weighs “against sanctioning the loss of a man’s livelihood.” As such, New York courts will “rigorously examine” restrictive covenants and enforce them “only to the extent necessary to protect the employer from unfair competition.” If a restrictive covenant is reasonable in time and geographic scope (which is different for each case), a court will enforce a non-compete if it is necessary to protect 1) the employer’s trade secrets; 2) confidential customer information; 3) the employer’s client base; and 4) “irreparable harm” where the employee’s services are “unique or extraordinary” – such as a professional athlete or musician, or a broker, trader or salesperson who has a “unique relationship” with the employer’s clients.

Even if an employer can meet the rigorous test to demonstrate a restrictive covenant is necessary to protect it, the First Department Appellate Division (the appellate court that covers New York County and Bronx County) recently confirmed that an employer may not enforce a non-compete covenant against an employee terminated without cause. The court drew on prior cases that referred to the inherent unfairness of an employer seeking to prevent an employee from working when that employee did nothing to bring about her own discharge. The court confirmed that an employer’s “continued willingness to employ” the employee is a required part of enforcing a non-compete. New York courts simply will not prevent a laid off employee from trying to earn a living.

It is important to note, however, that a termination must be without cause to render a non-compete covenant unenforceable. A federal district court in New York recently explained that a termination for cause will not affect the enforceability of a non-compete because of the perverse incentive it would create. Specifically, the court stated that “to hold otherwise would be to permit employees to avoid reasonable non-compete agreements simply by ‘creating’ cause for their dismissal.” Lest one think that scenario far-fetched, this exact scenario played out in an earlier case where the court found that a doctor “purposely engaged in a course of conduct that was designed to induce [his employer] to fire him” with the hope of rendering the doctor’s non-compete unenforceable. Because the court found the non-compete was necessary to protect the employer from unfair competition, the non-compete was enforceable against the scheming doctor.

If you are an employer or an employee with any questions about non-competes and other types of restrictive covenants, please do not hesitate to contact us.