The Ultimate Guide for Executives
This Guide was created to help executives navigate the minefield of New York Non-Compete Agreements. The Ottinger Employment Lawyers has been assisting executives with non-compete agreements since 1999.
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Chapter 1: General Principles of Non-Competition Law in New York
A non-compete agreement is a contract between a company and an employee that prevents the employee from working for a competing business during, and after, the term of employment. These clauses are typically inserted in employment agreements along with other restrictions such as nonsolicitation agreements and trade secret obligations.
New York non-compete agreements are widely misunderstood and many of them are unenforceable. This is because New York strongly disfavors non-compete agreements and courts will not enforce them unless a company can overcome a presumption of unenforceability. In the case of Purchasing Associates, Inc. v. Weitz, 13 NY2d 267, 271, (1963) the court held that “public policy considerations militate against sanctioning the loss of a person’s livelihood through enforcement of [non-compete agreements].” A company seeking to enforce a non-compete agreement against an employee faces an uphill battle.
New York non-competition law attempts to strike a balance to protect an employer’s legitimate business interests, an employee’s ability to earn a living, and the public interest in free trade. This law has developed over centuries and the modern version is based on a three-part test to determine if the restraint is reasonable.
A non-compete agreement is considered reasonable only if it: (1) “is no greater than required for the protection of the legitimate interest of the employer, (2) does not impose an undue hardship on the employee, and (3) is not injurious to the public.” BDO Seidman v Hirshberg (1999). A violation of any one of the three factors renders a non-compete agreement invalid.
Courts are cautioned to enforce non-compete agreements only to “the extent that it is reasonable in time and area, necessary to protect an employer’s legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee.”
What does all of this mean for an executive bound by a non-compete agreement? It means that courts will not enforce the agreement against you unless it is clear that your former employer’s interests will be harmed if you are permitted to work for a competitor. See Chapter 2 below for an explanation.
Chapter 2: The Legitimate Business Interests Test
New York Non-compete agreements are disfavored. Courts don’t want to lock talented employees out of their fields unless there is a very good reason to do so. This is why the legitimate business interests test was created. In Reed, Roberts Associates, Inc. v Strauman (40 NY2d 307 ), the court held that non-compete agreements would be enforced only to the extent necessary to protect a company’s legitimate business interests.
Two-Part Test to Determine Legitimate Interests
The courts use a two-part test to determine when a non-compete agreement serves an employer’s legitimate business interests. Under the legitimate interests test, New York non-compete agreements are enforceable only (1) to the extent necessary to prevent the disclosure or use of trade secrets or confidential information, or (2) where an employee’s services are extraordinary.
In order to satisfy the first prong of the legitimate interests test, a company has to prove that the employee in question has access to actual trade secrets. This can be a difficult burden to carry. The Reed case, mentioned above, is a good example because it shows that courts are often skeptical. In that case, the company argued that a non-compete agreement should be enforced against a former executive who had access to a list of its customers. But the court rejected this argument and found that the customer list was not a trade secret because the information on the list was publicly available in the phone book and online directories. The court refused to enforce the non-compete agreement because the executive did not possess genuine trade secrets.
What is a Trade Secret:
In New York, a trade secret is defined as “any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.” Ashland Mgmt. Inc. v Janien, 82 NY2d 395, 407 (1993).
If a company trying to enforce a non-compete agreement against an employee cannot prove that the employee has access to trade secrets, then the only other option is to prove that the employee’s services are “unique or extraordinary.” An employee is considered unique or extraordinary only if the “services are of such a character to make his replacement impossible or that the loss of such services would cause employer irreparable injury.” Purchasing Assocs., Inc. v. Weitz 13 NY2d 267, 274 (1963). This is a difficult burden for companies to meet because very few people are irreplaceable. Even high-level key executives are routinely found to be replaceable. The truth is that pretty much everyone is replaceable.
As you can see, courts are reluctant to enforce New York non-compete agreements and will do so only upon a clear showing of actual harm due to the disclosure of trade secrets, or in the rare circumstance of truly unique or extraordinary services of an employee.
Chapter 3: Widespread Abuse of New York Non-Compete Agreements
Courts will only enforce New York non-compete agreements in certain specific circumstances upon a showing of genuine harm to their legitimate business interests such as the disclosure of trade secrets. However, companies routinely try to bully employees into compliance with unenforceable non-compete agreements. It got so bad that the New York Attorney General came after several companies, such as Law360, for abusing New York non-compete agreements.
Journalist Bullied Into Non-Compete Compliance
In 2017, Stefanie Russell-Kraft was working as a legal journalist for Law360. She got a job offer from Reuters, a competitor to Law360. Russell-Kraft had signed a non-compete agreement and Law360 sent a letter to Reuters. The letter alleged that Russell-Kraft was prohibited from working for Reuters by the terms of her non-compete agreement. Reuters, as many companies do, choose to fire Russell-Kraft to avoid the potential conflict with Law360.
The New York Attorney General’s Office came after Law360 for abusing their non-compete agreements. Law360 settled with New York State and agreed to limit their use of non-compete agreements. In connection with the settlement, the New York Attorney General’s issued the following statement:
“Unless an individual has highly unique skills or access to trade secrets, non-compete clauses have no place in a worker’s employment contract. Unscrupulous non-compete agreements not only threaten workers seeking to change jobs, they also serve as a veiled threat … Workers like the reporters at Law360 should be able to change jobs and advance their careers without fear of being sued by their prior employer.”
Here is the Law360 settlement agreement. Under the terms of the non-compete agreement, all journalists and editorial staff were prohibited from working at any another news agency in the nation for a year. The practical impact of agreements like these is to trap employees within a company. If they leave, they are barred from their field. This is bad for the employees bound by these agreements, and the economy because it prevents the free flow of labor within the industry.
The New York Attorney General also sued Jimmy John’s for making food workers sign New York non-compete agreements. The workers signed agreements that prohibited them from working for rival sandwich makers within two miles of any Jimmy Johns store. Jimmy Johns settled and agreed to stop tying up food workers with non-compete agreements. Read here for more details on that case.
The Proliferation of New York Non-Compete Agreements
New York non-compete agreements were once limited to high-level company executives who had access to vital company information. Often, these executives had pre-negotiated severance agreements that paid them to sit out during the non-compete period. These were fair deals. But times have changed. Now, some companies are forcing low-level workers such as sandwich makers and delivery drivers to sign non-compete agreements. The New York Times profiled this new practice and explained how it harms people.
Non-compete agreements are controversial. Numerous states and cities are considering legislation that would limit or ban the use of non-compete agreements. New Hampshire and New York City are currently considering limiting legislation. Vermont and Pennsylvania have broader proposals that would prohibit the use of all non-compete agreements.
Chapter 4: Fired Without Cause: The Silver Bullet That Defeats Most Non-Compete Agreements
Imagine getting fired for no good reason and then being told that you cannot work in your field for a year or two because of a non-compete agreement. New York executives find themselves in this situation frequently. It’s a terrible feeling.
But there is no reason to feel trapped by that non-compete agreement. It’s not enforceable in this situation.
New York will not enforce a non-compete agreement against an executive who was terminated without cause. Marsh USA, Inc. v. Alliant Ins. Services, Inc. 26 N.Y.S.3d 725 (2015). If a company wants to prevent an employee from working for a competitor, it has to be willing to employ that person. If they fire the person, the company can no longer enforce the non-compete agreement. “Enforcing a noncompetition provision when the employee has been discharged without cause would be unconscionable because it would destroy the mutuality of obligation on which the covenant not to compete is based.” SIFCO Indus., Inc. v. Advanced Plating Techs, Inc., 867 F.Supp. 155, 158 (S.D.N.Y 1994).
Bottom Line: If you were fired without cause, your non-compete agreement is void.
A person is fired without cause when the termination is not based on misconduct. A termination for cause occurs when an employee is terminated for serious misconduct such as theft, assault or similar conduct. Some executives have employment agreements that define what conduct constitutes a “for cause” termination.
A Common Scenario
Today, most New York executives are bound by non-compete agreements. And many find themselves fired without cause or laid off at some point. They feel trapped by their non-compete agreement. They want to stay in their field because that is where they offer the most value. They have bills to pay and families to support. But, their non-compete agreement forbids working in their field. In addition, most of these executives don’t have access to their former employer’s trade secrets. They usually hold positions in sales, management, operations or other areas that did not necessitate access to genuine company trade secrets.
If you find yourself in this situation, your New York non-compete agreement is unenforceable. A court is unlikely to enforce it against you because it does not protect your former employer’s legitimate business interests and because they fired you. It’s not worth the paper its written on. But many companies still try to coerce executives into compliance. How should you handle this situation?
We have helped countless executives through this situation. If this is happening to you, it might make sense to get legal help. You need to stay in your field, but also have peace of mind knowing that you are not going to wind up in court.
More companies are using non-compete agreements. A study by economists in 2014 found that one in five people nationwide are bound by non-compete agreements.
Chapter 5: The Janitor Rule
The Janitor Rule is a tool used by courts to void non-compete agreements that are too broad. For example, a non-compete agreement that prevents a CEO from being employed by a competitor as a janitor, cook, pilot or any other role is invalid.
In Reading & Language Learning Center v. Sturgill (2016), a speech therapist was prohibited from working with “any current client” for two years. The non-compete agreement did not “limit or define the capacity in which the employee is prohibited from contracting.” The court found that this agreement was so broad, that the speech therapist was barred from working in any capacity and this was too broad. Under this non-compete agreement, the speech therapist would not be able to work as a janitor for a competitor and the court refused to enforce it.
A federal judge in Wisconsin described “janitor clauses” as terms which “prohibit employees from taking any position at a competitor, even those unrelated to the current position.”
Courts are now dismissing non-compete suits filed against employees that are based on agreements that are overly broad. A judge in Illinois recently rejected a non-compete suit filed against a former staffing employee. The employee signed a non-compete agreement that prevented her from having any involvement with any competitors or being connected “in any manner” with a competitor. The judge refused to enforce the non-compete agreement because it was too broad. Medix Staffing Solutions, Inc. v. Dumbrauf (2018).
If you are facing a non-compete issue, take a look at your agreement. Is it overly broad? Does it prevent you from working for a competitor in any manner including working as a janitor? Or does it narrowly tailor the restrictions so it relates directly to your position with the company? Read our blog post: The Janitor Rule Mops Up Another Non-Compete Agreement.
Chapter 6: Defenses Against the Enforcement of New York Non-Compete Agreements
In the preceding sections of this Guide, we covered several of the best arguments executives can use to prevent the enforcement of a non-compete agreement. These are (1) the lack of legitimate business interests, (2) the company fired the executive, and (3) the Janitor Rule. These arguments are often all you need to defend against a non-compete action. But the arguments below can be very effective in certain cases.
- The Company Breached the Agreement: A company cannot enforce a contract that it has already breached. If your employer has breached any part of its employment agreement, then you can stop them in their tracks if they try to enforce the non-compete clause of the same agreement.
- The Non-Compete Period is Too Long: Some non-compete agreements try to restrict executives for two years or more. Most courts will not enforce a non-compete period that is over a year. In some cases, courts will simply modify the agreement by reducing the non-compete period.
- A Change in Circumstances: If your position has materially changed since you signed your non-compete agreement, then it might not be enforceable. For example, if you were promoted to a higher level and have increased responsibilities and duties, then the prior agreement is out of date and unenforceable.
- The Geographic Area of Restriction is too Broad: This argument applies if the non-compete covers a geographic area that exceeds the reach of the business. If a company only operates in Queens, it cannot prevent its employees from working in Manhattan.
New York Non-Compete Agreements Review & Consultation
Do you have questions about a non-compete agreement? The best way to get legal assistance is with a Review & Consultation. We will review your non-compete agreement and meet with you over the phone, to answer your questions and/or devise solutions to your problem.
We charge a flat fee of $500 for a Review & Consultation.
A Review & Consultation is often the first step. In many cases, we continue representing executives in negotiations or litigation. We have been assisting executives with non-compete issues since 1999.