Non-Compete Clauses in Employment Agreement

Employment related non-competition clauses often result in bitter court disputes as the employee moves on to greener pastures.  The most recent dispute that has made fashion news is the dispute between former chief creative officer and co-founder of Jimmy Choo, Tamara Mellon and her former employer, Jimmy Choo.  In this article, we review what a non-compete clause is, why it is important to include it in a contract and how such clauses can be enforced or stricken in New York courts.

What is a non-compete?

A non-compete provision can be just a clause included in a broader employment contract, or it can be formed as a separate agreement. A non-compete states that upon termination of an employment relationship the employee will not compete for a certain period of time within a particular geographical area.  This means that the employee is restricted from working within a particular industry, with a specified party or starting a new business in the same field.

Why should you include a non-compete provision?

Its purpose is to protect the employer so that the former employee does not injure the commercial interests of the employer (e.g. customer lists, trade secrets, business and training methods and overall goodwill of the company). It is critical to carefully draft a non-compete clause so as to avoid enforceability issues down the line.  An employee, for example, will pay special attention to the length of the restrictive time period and the geographic scope that the non-compete covers. An employer, on the other hand, will want to minimize exposure by making sure that a candidate for employment has not already signed a non-compete with his or her previous employer.  Similarly, an employer will seek to impose a restriction on the contemplated employment relationship.

How do courts in New York enforce non-competes?

Generally, courts strictly construe non-compete agreements. In order for courts to enforce such a covenant, it has to be reasonable in (a) duration, (b) geographic scope, (c) serve a legitimate business purpose, and (d) be supported by consideration. Generally speaking, New York courts frown upon non-compete agreements as an unreasonable restraint of trade. Reed, Roberts Assocs., Inc. v. Strauman, 40 N.Y.2d 303, 307 (1976).

a.      Duration

There is no all-encompassing rule with regards to the duration or the geographical scope of a non-compete. The duration factor is discretionary, and is assessed by courts on a case-by-case basis. Time restrictions included in a non-compete clause depend on the nature of the industry. Fashion or technology are fast moving industries and as a result, a court may find two or three-year non-competes as unreasonable in length.  In other fields, however, such a restriction might be deemed reasonable. For example, New York courts have held that a one-year non-compete was too long given the fast-paced nature of the Internet industry, but a three-year geographically contained covenant was enforceable against a physician. See 13A N.Y. Prac. Employment Law in New York § 5:209 (2d ed.); H. Meer Dental Supply Co. v. Commission, 269 A.D.2d 662, 702 N.Y.S.2d 463, 465 (3d Dep't 2000). Similarly, a six months restrictive covenant for an employee in the insurance industry was deemed reasonable, as decided in Ticor Title Inc. Co. v. Cohen, 173 F.3d 63.

b.      Geographic Restriction

Again, the scope of geographic restriction depends upon the industry. Courts look into the particular facts of a case. In Natsource LLC v. Paribello, for example, the court was willing to enforce very broad geographic restrictions on employees where the “nature of the business requires that the restriction be unlimited in geographic scope,” so long as the duration of those restrictions was short. Natsource LLC, 151 F.Supp.2d 465, 471-72 (S.D.N.Y.2001).  But in another case, a 50-mile radius was found to be unreasonable. Genesis II Hair Replacement Studio, Ltd. v. Vallar, 674 N.Y.S.2d 207 (App. Div. 4th Dept. 1998).  Courts may look at a variety of factors such as a business’s channels of trade, existing client base, potential scope of expansion, marketing efforts, ability to service clients based upon a geographic scope and many other applicable factors within that particular industry.  For example, a mail order business may have a different geographic scope from an ophthalmologist who needs to examine clients.  All of these issues will necessarily affect the enforceability of the clause.

c.       Legitimate Business Purpose

Courts will also look into the employer’s business purpose for imposing the restriction in deliberating whether a non-compete is enforceable. BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (1999). Courts weigh the need to protect the employer's legitimate business interests against the employee's concern for possible loss of livelihood. Simply put, an employer must have a valid reason for prohibiting the employee from competing. He or she might want to protect confidential business information such as IP, business methods or customer databases. Conversely, employees are often under the erroneous belief that contacts or intellectual property developed during the course of employment are transferable to another professional setting at will.  For those reasons, an employer must be able to verbalize the tangible risk of loss that it would suffer as a result of the breach of the non-compete, such as loss of competitive edge, or the disclosure of a trade secret, and so forth.

d.      Consideration

As far as consideration, courts have found an offer of employment, an employee’s remuneration, or the gain of specialized knowledge or skill to constitute sufficient consideration. Additionally, courts have ruled that the promise of future employment may constitute sufficient consideration in a non-compete clause.  Poller v. BioScrip, Inc., 974 F. Supp. 2d 204 (S.D.N.Y. 2013) (holding that “the fact that a restrictive covenant agreement is a condition of future employment does not automatically render such an agreement coercive and unenforceable”). Similarly, in Ikon Office Solutions v. Leichtnam, the court found that the non-compete covenant was enforceable as it included consideration that the employee would continue employment. See Ikon Office Solutions, 2003 U.S. Dist. LEXIS 1469, *1, 2003 WL 251954 (W.D.N.Y. Jan. 3, 2003). Remuneration or an employee’s receipt of knowledge or skill (e.g. a language course or a handcraft workshop) are also sufficient consideration to support a non-compete provision under New York law. See Arthur Young & Co. v. Galasso, 142 Misc. 2d 738, 741 (Sup. Ct. N.Y. County 1989).

Non compete clauses must be analyzed from a fairness perspective.  It is important to draft non-compete clauses that are actually enforceable and appear fair to both parties to the agreement.  While an often challenging balance to achieve, it can certainly make the employment relationship smoother and minimize the risk of unpleasant legal consequences down the line.