Non-compete clauses are commonly found in employment agreements across a broad range of companies and firms, including financial services companies (investment banks, hedge funds, asset managers, etc.), professional services firms (physicians, dentists, CPAs, etc.) and corporations, particularly for executive/management level positions.

The validity of a non-compete will be determined by state law (and in certain instances, by the rules of regulatory agencies like FINRA), and each state has a different set of rules under which courts (or an arbitration panel) will consider a non-compete.

Validity

The enforceability of a non-compete in New York is highly fact-specific, meaning that the analysis will change according to the particular agreement and set of circumstances surrounding the relationship.  Below are a number of relevant principles.  Non-competition agreements are considered to be “restraints of trade” – and are unlikely to be enforced if they are found to be “unreasonable”

• Non-competes have been found to be “reasonable” where they:
• are no broader than is required to protect the employer’s legitimate interests (i.e. trade secrets, confidential information, goodwill, preventing the loss of key employees to competitors)
• do not impose undue hardship on the employee
• do not injure the public
• have a reasonable duration of existence (typically 6 months or less)
• have a reasonable geographic scope (although NY courts have enforced non-competes that have had no limitation on geographic scope, so long they were “reasonable under the circumstances”)

In addition, in order to be enforceable a non-compete clause must have sufficient consideration (i.e. a bargained-for exchange of value).  Such consideration can include:

• the initial employment itself, or continued employment
• cash payment
• knowledge gained by the employee
• skills obtained by the employee

Blue Pencil

If a non-compete agreement is overbroad, a New York court may choose to modify it (by reducing its duration, scope, etc.) in order to make it enforceable.  This is called “blue penciling” the clause.  Courts are not required to blue pencil an overly broad non-compete, and can instead simply decline to enforce it.

As a result, many employment agreements are drafted to include a “blue pencil clause” – which essentially states that both parties intend for the non-compete to be enforceable to the maximum extent allowable by law (and if it’s overbroad, a reviewing court should blue pencil the clause in order to make it enforceable).

Enforcement

In New York, an employer seeking to enforce a non-compete can sue for:

• Injunctive Relief (a preliminary injunction, sought prior to the competitive activity, aimed at preventing the employee from engaging in the behavior in question)
• Monetary Damages (after the fact, measure of damages suffered by the former employer as a result of the employee’s competitive activity).  This is typically measured in terms of lost profits.

Other Considerations

In addition to the non-compete, parties should consider the applicability of a number of other considerations, clauses and legal principles:

Duty of Loyalty. In New York, an employee owes its employer a duty of loyalty, requiring it to exercise the utmost good faith, loyalty and obedience during the employment relationship.  Thus, during the employment relationshipan employee may not:

• compete with its employer
• solicit co-workers to leave the employer to work for a competitor
• solicit co-workers to follow the employee to a competitor
• use or disclose the employer’s confidential or trade secret information (other than in the performance of the employee’s job duties, or as authorized by the employer)

Garden Leave/Employee Choice Doctrine. If a non-compete clause is tied to garden leave payments, differed compensation, or some other payment of value, a court will likely enforce the non-compete without even considering its reasonableness.  Thus, if the non-compete is drafted to present the employee with a choice between (1) working for a competitor and (2) receiving benefits/differed compensation/etc. – the non-compete will most likely be considered valid and enforceable.

Financial Services Industry – Protocol for Broker Recruiting.  Many financial firms are signatories to this Broker Protocol, which among other things provides that neither the former employee nor new employer will have any financial liability to the former employer if (1) both firms are signatories to the Broker Protocol and (2) procedures set out in the Broker Protocol are followed.

Other Restrictive Covenants

Non-solicitation:  These clauses are similar to non-compete in the way they are structured and enforced; relate to the solicitation of the employer’s clients and employees.

Confidentiality/Nondisclosure: These clauses are generally more enforceable because they are less likely to be considered a restraint of trade; designed to prevent the use or disclosure of trade secret and confidential information acquired by the employee during the employment.

For more information, please contact Chintan Panchal or Denise Lang.

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