Properly structured noncompete agreement can protect NY businesses

Noncompete agreements can protect businesses in the event an employment relationship ends.

A noncompete agreement, also known as a covenant not to compete, is a contract – or a clause in a contract – that can be used to protect a business from unfair competitive advantages in the event the employment relationship ends.

Enforceability of noncompete agreements in New York

As a matter of public policy, some states will not enforce noncompete agreements against former employees. California, for example, will not enforce traditional non-compete agreements except in extremely limited circumstances. New York, by contrast, permits enforcement of reasonable and properly limited noncompete agreements that are designed to protect the legitimate business interests of an employer as long as the agreements are entered into voluntarily.

Drafting an enforceable noncompete agreement

While New York law permits the enforcement of noncompete agreements, noncompetes are nevertheless disfavored contracts and regarded by courts with a measure of suspicion. As a practical matter, this means that unreasonably broad or overreaching noncompete agreements will not be enforced by the courts.

There are a number of steps a business can take to increase the likelihood that a noncompete agreement will be enforced. To begin with, the agreement must be carefully tailored to ensure that it restricts the former employee’s rights only to the extent necessary to protect the employer’s legitimate business interests. Examples of legitimate interests can include: (i) guarding relationships with the employer’s existing clients with which the former employee worked, and (ii) precluding the use of confidential and proprietary information, client lists, or trade secrets. On the other hand, it would most likely not be legitimate for an employer to seek to preclude its former employee from competing for the business of any of the employer’s customers, absent evidence that the former employee was using confidential information or close relationships developed during the term of his or her employment to compete for the business of those customers.

In addition to the requirement that the noncompete agreement be limited to protecting legitimate business interests, it must also be reasonable in both scope and duration, and not injurious to the public. In assessing the overall reasonabless of a noncompete agreement, courts look to a variety of factors, including:

  • Duration. There is no bright line rule regarding how long a noncompete may last. However, the length of the noncompete should be correlated with the importance of the business interest being protected, and must not be longer than necessary to protect that interest. Generally speaking, agreements prohibiting competition for periods of time ranging from six months to two or three years have been enforced, depending, as always, on the underlying circumstances of the case.
  • Geographic Scope. Generally speaking, courts will only enforce noncompete agreements when they involve geographic areas where the employer is actively doing business.
  • Public Interest. Courts will also consider the interest of the general public in determining whether to enforce a particular noncompete agreement. Thus, a court might hesitate to enforce an otherwise reasonable noncompete agreement, appropriately limited in time and space, if there are an insufficient number of other similar service providers in the protected area such that enforcement of the noncompete would preclude clients from having a meaningful choice of professional service providers.

Drafting and enforcing noncompete agreements can be a difficult task, and the courts have provided few, if any, hard and fast rules to guide the process. Businesses considering the use of noncompete agreements should therefore consult with experienced counsel to develop a noncompete that will protect the legitimate business interests of the company in a manner that is not overreaching, and is likely to be enforced by the courts.