The Basics About Non-Compete Clauses

Posted about 3 years ago. Applies to New York, 1 helpful vote



Are Non-Compete Clauses A Recent Invention?

It's easy to understand how one might think that contractual provisions designed to prevent an employee from working in his or field of work after the current employment ends springs from the very commercial world in which we live. But such clauses actually have their roots back in the fourteenth and fifteenth centuries in England.


What Exactly Is A Non-Compete Clause?

A non-compete clause (sometimes referred to as a convenant not to compete) is a contract or provision sometimes seen in employment law. It is, as its name suggests, an agreement by an employee not to compete with the employer after the employment relationship ends. Often, but not always, a non-compete clause is presented by the employer to the employee at the time employment begins. Sometimes, however, the employer asks an existing employee to sign such a clause; in those cases, the employer must give something of value to the employee in exchange in order to make the non-compete clause enforceable. Because non-compete clauses arise in situations in which the employee often has little or no bargaining power, the clauses are rarely actually the product of a negotiation. Typically, they are signed by the employee just as they are presented, without any changes.


What Motivates A Non-Compete Clause?

An employer is sometimes concerned that information or relationships that the employee will establish during the course of the employment will later be used to undermine the employer. An employer has a legitimate interest in preventing former employees from exploiting or appropriating the goodwill of a client or customer (which had been created and maintained at the employer's expense) to the employer's competitive detriment. Non-compete clauses usually will state a period of time during which, and a geographic area within which, the employee is prohibited from competing after the end of the employment relationship.


How Do We Analyze A Non-Compete Clause?

The ultimate question, typically, is whether the restriction is a restraint greater than what is needed to protect the employer's legitimate interests. Part of the inquiry is whether a former employee uses confidential information to attract clients or customers of the former employer with whom he had not had a relationship is relevant.


Are Non-Compete Clauses Enforceable?

When a court deems the non-compete clause to be broader than needed, the court can refuse to enforce the clause. Employers thus have an incentive to design non-compete clauses that are not draconian. The typical non-compete clause specifies a period of time in which it will be in effect -- usually a year or two, but sometimes far longer -- and the geographical distance -- measured from the place of business -- within which the employee is prohibited from working. The key to analyzing the clause is the duration and the geographical area. Non-compete clauses are governed by a standard of reasonableness. To be valid, restrictions must be: (1) necessary to protect the employer's legitimate interests; (2) not harmful to the general public; and, (3) not unreasonably burdensome to the employee. Courts will find a non-compete clause to be reasonable only if it meets all three of these prongs. A violation of any one prong can render the entire covenant invalid.


Are Trade Secrets Protected?

Under the first prong, the employer's interests are limited to protection against misappropriation of employer trade secrets or customer lists, or protection from competition by a former employee whose services are unique or extraordinary (which includes professionals). Reasonableness, in any event, is measured by the circumstances and context in which enforcement is sought.


What Is A Reasonable Geographical Area?

What is a reasonable geographical area to cover will depend, in large part, on the type of area. For example, a non-compete clause that applies in New York City will be treated differently from one in a rural area. A ten-mile radius may be completely unreasonable in New York City, but quite reasonable in, say, Sidney, New York, a village not far from Binghamton and Oneonta. One case involving that municipality found that a radius of 30 miles from the village was a quite reasonable geographical restriction.


Are Codes Of Ethics Relevant?

To the extent that there is a national code of professional conduct that obligates the employee to act in a way that serves the public interest, will factor into the equation. In the legal profession, for example, there is a rule that states that "[a] lawyer shall not that be a party to or participate in a partnership or employment agreement with another lawyer that restricts the right of a lawyer to practice law after the termination of a relationship created by the agreement, except as a condition to payment of retirement."


Should A Lawyer Evaluate A Non-Compete Clause?

The most prudent approach is to have an attorney evaluate the non-compete clause before it is signed. If, however, that was not done and the employment relationship is coming to an end, an attorney should be consulted to evaluate the non-compete clause.

Additional Resources

Law Offices of Michael S. Haber

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