Month: April 2019

What is a Non-Compete?

As all of our readers undoubtedly know, a non-compete provision is a type of restrictive covenant that many employers include in employment and severance agreements to restrict a former employee’s ability to work for a competitor after the cessation of his or her employment.

Enforceability of a Non-Compete?

Although non-compete provisions are generally disfavored in New York¹, such a provision is likely to be enforced if “‘it is reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee.’”² The common law standard of reasonableness was articulated by the New York Court of Appeals twenty years ago in BDO Seidman v. Hirshberg³ in which it held that a non-compete is reasonable only if it:

1. Is no greater than required to protect an employer’s legitimate protectable interests;
2. Does not impose undue hardship on the employee or is harmful to the general public; and
3. Is reasonably limited temporally and geographically.

This approach is in sharp contrast to that of several states such as California, Montana, North Dakota, and Oklahoma which ban non- competes for employees either outright or under very limited circumstances.

Employer’s Legitimate Protectable Interests

In New York, an employer’s legitimate protectable interests include⁴:

• Protection of trade secrets;
• Protection of customer relationships;
• Confidential customer information; and
• “Unique” services.
  • This latter category is rarely invoked since the employee must render unique services that cannot be easily replaced.

Scope of Restrictions

New York courts will only enforce non-competes to the extent that they are reasonably necessary and narrowly tailored. If the court determines that a non-compete is necessary to protect a legitimate interest, it will then examine the following three factors:

1. Geographic scope of the restriction. New York courts generally conduct a fact-based analysis on a case-by-case basis. For example, when the “nature of the business requires that the restriction be unlimited in geographic scope,” courts may be willing to enforce a broad geographic restriction so long as the duration of the restrictions are short. Natsource LLC v. Paribello, 151 F.Supp.2d 465 471-72. This is in contrast with Power Boot Camp, Inc. v. Warrior Fitness Boot Camp, LLC, 813 F. Supp. 2d 489, 507 (S.D.N.Y. 2011), where the court held a non-compete unreasonable because the unlimited geographic scope prevented former employees from accepting “any job in the fitness industry that uses obstacle courses … or employs the term boot camp.”
2. Duration of the restriction. When reviewing the length of non-competes, New York courts have held repeatedly that restrictions of six months or less are generally reasonable. However, like the geographic limitation, this analysis is conducted on a case-by-case basis and courts have found certain longer non-compete provisions reasonable in light of other circumstances. For instance, applying New York law, the U.S. District Court for the Southern District of New York held non-compete provisions of three and five years arising out of an employment agreement and an asset purchase agreement, respectively, with the employer’s former president were not excessive even though the longer period was equal to one-third of the former president’s 15 years of experience in the industry.⁵
   
3. The scope of the business activity impacted. Courts will not enforce a non-compete covenant where the scope of the business activity impact is deemed to be too broad or it is not shown to be necessary to protect trade secrets or confidential customer lists.⁶
   • Example where a non-compete was found to be unreasonable:
     • A non-compete that prohibited the former employee from soliciting an employee’s entire former client base where the restriction included client relationships which were established by and maintained by the employee.⁷

Other Factors and Situations Considered by New York Courts

In addition to the factor tests New York courts use to determine whether a non-compete is reasonable, a number of other factors come into play.

Sale of a Business. When there has been a sale of a business, non-compete provisions are more likely to be considered reasonable because they are “designed to protect the goodwill integral to the business from usurpation by the former owner while at the same time allowing an owner to profit from the goodwill which he may have spent years creating.”⁸ Additionally, non-compete provisions incidental to the sale of a business by a stock purchase agreement may also be enforced against shareholders with minority stock ownership.⁹

Consideration. Under New York law, future employment is sufficient consideration for a non-compete clause.¹⁰ Continued employment of an at-will employee has likewise been found to be sufficient consideration to support a covenant not to compete.¹¹

An issue arises when an employee with a non-compete is terminated without cause. As stated in my blog article entitled “ENFORCEABILIY OF NON-COMPETE PROVISIONS IN NY WHEN INVOLUNTARY TERMINATION IS WITHOUT CAUSE,” which is posted on our website, the Second Department and at least three judges in the Southern District of New York have ruled that non-compete clauses are categorically precluded from enforcement when an employee has been involuntarily discharged without cause.¹² However, other New York courts have ruled that there is not a per se rule applicable to all non-compete provisions. Most notably, in Morris v. Schroder Capital Management International,¹³ the Court of Appeals stated that “a court must determine whether forfeiture is ‘reasonable’ if the employee was terminated involuntarily without cause.”¹⁴

Future of Non-Competes in New York

In September 2018, the New York Attorney General’s Office announced a settlement with WeWork Companies that ended its use of overly broad non-compete provisions. This ended the company’s routine practice of requiring all levels of employees to sign a contract including a non-compete restriction regardless of job duties, knowledge of confidential information, or compensation.

This settlement was further evidence of a commitment by the New York AG’s Office to combat the use of non-competes for low-level and low-wage employees. In 2017, the AG’s Office had proposed BILL A07864A to limit non-competes. The bill provided the following:

• Non-competes would be void for employees with earnings of less than $75,000/year (to be increased each year for inflation);
• Non-competes must be provided to prospective employees by the earlier of a formal offer of employment or 30 days before the non-compete goes into effect;
• Non-competes would be unenforceable upon termination without cause; and
• Employees would have a private cause of action seeking to invalidate non-competes that violate the statute.

The passage of time since the bill was proposed without its enactment leads this commentator to believe that it is unlikely to become law in the foreseeable future.

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¹Sutherland Global Services, Inc. v. Stuewe, 73 A.D.3d 1473, 1474 (4th Dep’t 2010).

² Riedman Corp. v. Gallager, 48 A.D.3d 1188, 1189 (4th Dep’t 2008), quoting Reed, Roberts Associates, Inc. v. Strauman, 40 N.Y.2d 303, 307 (1976).

³ BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 389 (1999).

⁴ Arthur J. Gallagher & Co. v. Marchese, 96 A.D.3d 791, 792 (2d Dep’t 2012); 1 Model Management, LLC v. Kavoussi, 82 A.D.3d 502, 503 (1st Dep’t 2011).

⁵ Uni-World Capital L.P. v. Preferred Fragrance, Inc., 73 F.Supp.3d 209, 232 (S.D.N.Y. 2014).

⁶ Sutherland, 73 A.D.3d at 1473.

⁷ Good Energy, L.P. v. Kosachuk, 49 A.D.3d 331, 332 (1st Dep’t 2008).

⁸ Reed, Roberts Associates, Inc. v. Strauman, 40 N.Y.2d 303, 307 (1976); 4D N.Y.Prac., Com. Litig. in New York State Courts § 105:21 (4th ed.).

⁹ See Shearson Lehman Bros. Holdings, Inc. v. Schmertzler, 116 A.D.2d 216, 223 (1st Dep’t 1986) (stating that refusing to enforce a non-compete against someone with “so small an ownership interest … would place an unacceptable barrier in the path of sale of businesses in which ownership is widely diversified … and good will is clearly a central concern in the acquisition”).

¹⁰ See Poller v. BioScrip, Inc., 974 F. Supp. 2d 204, 224 (S.D.N.Y. 2013).

¹¹ Id.

¹² See, e.g., Grassi & Co., CPAs, P.C. v. Janover Rubinroit, LLC, 82 A.D.3d 700 (2d Dep’t 2011); Arakelian v. Omnicare, Inc., 735 F. Supp. 2d 22 (S.D.N.Y. 2010).

¹³ 7 N.Y. 3d 616,621 (2006).

¹⁴ See also Hyde v. KLS Professional Advisors Group, LLC, 500 Fed.Appx. 24 (2d Cir. 2012); Brown & Brown, Inc. v. Johnson, 115 A.D.3d 162 (4th Dep’t 2014), rev’d on other grounds, 2015 WL 3616181 (2015).