The following article originally appeared in the May 2013 edition of The Myers Report newsletter published by the firm.

Business Handcuffs – The Non-Compete Agreement

Part II

By Jane M. Myers, Esq.

Remember when you started that unbelievably fantastic job a few years ago and saw nothing but unlimited possibility for success?  Did you happen to sign a Non-Compete Agreement at that time? And now that the job has turned out to be a total nightmare and you’re looking to move on, have you forgotten what that Non-Compete Agreement says?

Can you even find it?

In this issue, we’ll look at: (1) what the rules of competition are in the marketplace generally, (2) what interests can be protected by a Non-Compete Agreement, and (3) what courts consider in deciding whether a Non-Compete Agreement is enforceable.

Keep in mind that the purpose of a Non-Compete Agreement is to control and limit an employee’s actions.  It can be absolutely life-changing.

If you signed a Non-Compete Agreement without having it first reviewed by an attorney, at least have it carefully reviewed by your lawyer before striking out on a new business venture.  You might be inviting a lawsuit by your former employer seeking an injunction or money damages. The new employer who hires you is at risk and can be sued, too.

On the other hand, employers should not automatically assume that just because an employee has signed a Non-Compete Agreement that it will be enforced in court – that depends on what the agreement says and whether it’s warranted and reasonable, under the circumstances. 

 1. The Rules of Competition.

Here’s the general rule in New York: after employment has ended, and in the absence of an enforceable Non-Compete Agreement, an employee is free to compete with their former employer, work for the former employer’s competitors and solicit the former employer’s customers.

This means that a former employee can set up a competing business right next door to you!

The courts encourage free enterprise and will not restrict an employee’s “freedom of advancement,” except under very specific conditions.

It’s important to note, however, that an employee’s freedom to compete is not unlimited. An employee may not use their employer’s confidential customer information, trade secrets or other proprietary information to compete against a former employer.

 2.  What Interests can be Protected?

How can an employer protect itself from competition by an employee who has learned the “ins and outs” of how the company does business?

Have the employee sign a Non-Compete Agreement. 

The most common ways an employer will try to restrict a former employee’s right to operate or work in a competing business are:

• by preventing the former employee from soliciting and/or accepting work from the employer’s clients;
• by preventing the former employee from soliciting other employees of the company to quit their jobs with the company in order to work for the former employee or a competing company where the former employee is now working; and/or
• by preventing the former employee from operating or participating in the same type of business as the company within the same geographical area where the company does business (the geographic restriction may look to prevent the employee from opening a competing business within a certain number of miles of the employer’s business or it may look to prevent the employee from operating a similar business in a particular town, city or region). 

These prohibitions generally remain in effect only for a limited period of time, often in the range of about six months to two years.

3. What the Courts Consider.         

Because of the general rule that courts will not restrict an employee’s “freedom of advancement,” (except under very specific circumstances), in order for a Non-Compete Agreement to be enforceable by a court it must be:

• “reasonable” as to: (1)  the geographic area where the employee is prevented from working after employment has ended; (2) the  length of time of the restriction;  (3) the scope of restriction on the employee’s activities; and
• necessary to protect the employer’s interests, not harmful to the general public, and not unreasonably burdensome to the employee.

For the most part, and probably because everyone is elated when a new employment relationship begins, Non-Compete Agreements are signed and stored away without much thought. They’re scrutinized when an employee who has been given access to an employer’s trade secrets and confidential information wants to make a move. Enforceability depends very much on the specific circumstances at hand.

That’s when my phone rings.

Depending on whether the caller wants to enforce the Non-Compete Agreement or break it, they’ll boom into the phone, “This thing isn’t (or, is) enforceable!!!!!!”  Then meekly, “…Right?” 

Well, that depends on what it says and what the situation is now.

Approximately once a month we publish The Myers Report, an e-mail newsletter containing articles similar to this one that we believe will be of interest to our clients, colleagues and friends.  If you’d like to receive The Myers Report then please click here to add your e-mail address to our mailing list.

Please note that this article is intended only as a general discussion of issues pertaining to non-compete agreements and that it should not be taken as creating an attorney-client relationship or as legal advice with respect to any particular person, business or situation.  Circumstances and the applicable legal principles vary and you should consult with an attorney regarding any questions you may have regarding your specific situation.