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Enforceability of Non-Compete Clauses in Employment Agreements

Ask ten lawyers if non-compete agreements are enforceable in New York and you may receive ten different answers, ranging from “they’re not worth the paper they’re written on” to “they are absolutely iron-clad.” As with most complex legal questions, the answer is somewhere between these two absolutes, and is dependent on a variety of factors.

Non-compete agreements and non-solicitation agreements (sometimes referred to collectively as restrictive covenants) generally impose one or more restrictions on an employee’s activities following the termination of employment. Common restrictive covenants include restrictions on competing with the employer’s business within a geographic region for a certain period of time, restrictions on using the employer’s confidential or proprietary information, and restrictions on soliciting customers or employees of the employer.

In determining the enforceability of a restrictive covenant, courts attempt to balance the employer’s legitimate interests against the (former) employee’s right to seek employment or start a business in his chosen field. In deciding whether a restriction is enforceable, the courts will examine the following four factors:

  1. Is it necessary to protect the legitimate interests of the employer;
  2. Is it reasonable in duration and geographic scope;
  3. Does it impose an undue hardship on the employee; and
  4. Is it injurious to the public?

A violation of any of these factors four factors will suffice to render a restrictive covenant unenforceable.

  1. Protection of Employer’s Legitimate Interests.

‚ÄčThe first factor a court will examine is whether the employer is truly seeking to protect a legitimate interest, or simply seeking to shield itself from competition. The courts will most commonly find a restriction reasonable if it is designed to protect an employer’s goodwill with its customers or to protect its trade secrets.

Thus, if an employer has established customer relationships through a substantial investment of time and effort, a restriction limiting an employee’s ability to solicit customers with whom he had contact solely by virtue of his employment relationship will generally be upheld. This may not, however, justify a blanket restriction against soliciting all customers of the employer with whom the employee had no contact.

Similarly, a non-compete clause narrowly tailored to protect an employer’s genuine trade secrets will likewise be enforceable. In general, this may extend to customer lists if the information is not generally known and is discoverable only through extraordinary efforts.

  1. Duration and Geographic Scope of Limitation.

Even if an employer is seeking to protect a legitimate interest, the restriction must still be reasonable in duration and geographic scope. In general, restrictions on competition that are of greater than 6 month’s duration are harder to enforce than shorter ones absent a compelling rationale. Whether a geographic scope is reasonable depends on an analysis of all of the relevant facts. For example, prohibiting competition within a five mile radius may be reasonable for a drop-in medical practice, while a nationwide restriction may be appropriate for an employer with a national customer base.

  1. Undue Hardship on the Employee.

A restraint may not impose undue hardship on an employee, such that it makes it overly difficult or impossible for the employee to earn a livelihood. A restriction that prohibits an employee from practicing his chosen profession over a large geographic region or for an extended period of time will generally be unenforceable.

  1. Injury to the Public.

A restriction will not be considered injurious to the public if the services provided by the employee are also provided by others in the affected geographic region. However, when a service in a given geographic area is provided exclusively by the employee, a restriction that prevents the public’s access to those services will likely be deemed injurious.

It is worth noting that the above discussion is limited to restrictive covenants where New York law applies. This is an area where there is considerable variability from state to state, such that the identical agreement enforceable in New York may be invalid under the laws of another state. Always consult a practitioner versed in the laws of your locale.