Generally, restrictive covenants are contract provisions or stand-alone agreements made between an employer and an employee which prohibit the employee from taking certain post-employment actions, such as working for a competitor, disclosing trade secrets, or soliciting co-workers or clients.[1] Because there are no specific statutes governing restrictive covenants in New York, the courts have shaped the extent to which they can be enforced.
Non-compete Agreements
What is a non-compete agreement? A non-compete agreement is a type of restrictive covenant which prohibits former employees from unfairly competing with their former employer by working for its competitors.[2] In New York, a non-compete is only allowed and enforceable to the extent it:
- Is necessary to protect the employer’s legitimate interests,
- Does not impose an undue hardship on the employee,
- Does not harm the public, and
- Is reasonable in time, period, and geographic scope.[3]
The courts generally construed these agreements narrowly in favor of the departing employee, because the State wants employees to have mobility and continue contributing to the economy.
There is a trend nationwide towards eliminating non-compete agreements altogether. Several states, including California, do not permit non-competes. On January 5, 2023, the Federal Trade Commission (FTC) proposed a rule that would eliminate non-compete clauses from any current and future employment contracts nationwide (“Proposed Rule”).[4] The Proposed Rule would do the following:
- Declare that any and all non-compete agreements with employees are “unfair methods of competitions,” making it illegal under federal law to enter into or maintain such agreements;
- Mandate that employers cancel existing non-compete agreements; and
- Provide a template for notices and require employers to notify current and former employees of the clause’s revocation.[5]
The FTC argues that the Proposed Rule is to protect workers and promote competition. The FTC claims that the Proposed Rule will “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”[6] Opponents of the Proposed Rule argue that such measures restrict an employer’s freedom to contract. Additionally, the Proposed Rule may hurt an employer’s ability to protect their business from opportunistic employees and prevent them from maintaining a consistent and secure group of employees.
Currently, it is unclear whether the rule will eventually be enacted, but even if it is, the rule will be challenged in the courts.[7] Regardless, it is advised that employers review their employment contracts and look for anything that may be deemed a non-compete clause, including overbroad non-disclosure agreements, which may act as a non-compete, and plan ahead.[8]
Non-disclosure Agreements
What is a non-disclosure agreement? A non-disclosure agreement restricts communications between former employees and possible future employers and/or competitors.[9] These agreements generally prevent the release of information that an employee may have obtained during their employment, including business/trade secrets and proprietary or confidential information, such as client lists, pricing, and business plans.[10] In order to qualify as confidential material or a trade secret, and for such non-disclosures to be enforceable, the information must be confidential and unavailable through public means or access.[11]
Non-solicitation Agreements
What is a non-solicitation agreement? Well actually, there are two types of non-solicitation agreements: (1) non-solicitation of customers, and (2) non-solicitation of employees.[12] These restrictive covenants are generally made in order to restrict former employees who start new businesses from poaching either customers or other employees from the former employer’s business.[13] This, again, is done in order for the former employer to maintain a competitive edge and to have assurances and protection when hiring new employees.[14]
Public Policy Considerations
Traditionally, the courts do not allow restrictive covenants to be all-encompassing; rather, courts limit such covenants in the best interest of public policy. They use a “reasonableness” standard as to the extent that these restrictive covenants can go.[15] To be enforceable, the restrictions must be necessary to protect employers from unfair competition from the former employee. This protection from unfair competition must be shown to be necessary to protect the legitimate business interests of the employer.[16] A legitimate business interest could be anything from protecting a trade secret, to protecting confidential information, to preventing employees from taking specialized skills they gained on the job to a competitor.[17] A reasonable scope is one that is either geographically limited, temporary in nature, or reasonable in the type of competitive activity an employee can and cannot engage in.[18]
Restrictive covenants are closely scrutinized because the courts do not wish to stifle competition, nor do they wish to restrict a person’s livelihood and ability to provide for themselves and their family.[19] There is a balance that must be maintained in order to protect both the rights of the employer, the employee, and the general public.
For help navigating restrictive covenants and drafting employment agreements, contact KI Legal’s knowledgeable labor & employment attorneys by calling (646) 766-8308 or emailing info@kilegal.com.
[1] M. Alexander Bowie, 2022 in New York Business Litigation 329–378 (2022).
[2] Id.
[3] Labor Bureau & Letitia James, Non-Compete Agreements In New York State Frequently Asked Questions, chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://ag.ny.gov/sites/default/files/non-competes.pdf.
[4] Bruce D. Sokler et al., FTC Invokes New and Expanded Powers to Propose Bar on Employee Non-Competes, XIII The National Lar Review (2023), https://www.natlawreview.com/article/ftc-invokes-new-and-expanded-powers-to-propose-bar-employee-non-competes (last visited Jan 10, 2023).
[5] Id.
[6] Latham & Watkins: Client Alert Commentary, January 9, 2023.
[7] Id.
[8] Id.
[9] Bowie, 2022.
[10] Id.
[11] Nondisclosure agreements under New York Law, UpCounsel, https://www.upcounsel.com/non-disclosure-agreements-under-new-york-law#:~:text=Nondisclosure%20agreements%20under%20New%20York%20law%2C%20also%20known%20as%20noncompete,their%20time%20at%20the%20company. (last visited Jan 6, 2023).
[12] Bowie, 2022.
[13] Sheryl B. Galler, Hoguet Newman Regal & Kenney, LLP, March 10, 2013.
[14] Bowie, 2022.
[15] Id.
[16] Id.
[17] Galler, 2013.
[18] Bowie, 2022.
[19] Id.
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