By Joshua D. Sussman, Esq. Email Joshua
Your Director of Sales suddenly quits and announces they are joining a direct competitor up the road. The new opportunity is in direct breach of their non-compete agreement, which prohibits them from competing with your company within ten miles of your office for two years after the end of their employment.
What do you do?
Employers frequently race into court to prevent former employees from violating non-compete clauses or other prohibitions contained within employment agreements, which are generally referred to as restrictive covenants. Although non-compete agreements are disfavored under New York law, and thus difficult to enforce, a court may issue an injunction preventing an employee from violating his or her non-compete clause in certain circumstances. Before commencing litigation, an employer and its attorneys should evaluate whether the clause at issue is enforceable and whether the legal standard for a preliminary junction can be satisfied in the circumstances.
Courts employ a case-by-case analysis when determining whether to enforce non-compete clauses contained within employment agreements. To be enforced, a non-compete clause must be reasonable in scope (both duration and geographic area), necessary to protect the employer’s legitimate interests, not harmful to the general public, and not unreasonably burdensome to the employee.[i]
A court may find that an employer has a legitimate interest to enforce a non-compete clause to prevent the disclosure of its trade secrets or confidential customer information, if the former employee provided unique or extraordinary services (i.e., professionals, accountants, physicians[ii], etc.), or in other circumstances where an employer can demonstrate an injunction is necessary to protect its interests.
In contrast, a non-compete clause may be unenforceable if it merely seeks to restrict a former employee’s use of generalized skills and knowledge acquired during their employment or from providing services to customers who the employer had no relationship with, if the employee did not provide unique or extraordinary services, if the restricted geographic territory is unrelated to employer’s business, or if restrictions go beyond what are necessary to protect the employer’s legitimate interests. As mention in a prior article, although non-compete agreements are not illegal, the New York State Attorney General has entered into settlement agreements with employers that allegedly had misused non-compete agreements with rank-and-file employees who did not have access to trade secrets or confidential information.
If a non-compete clause is deemed too restrictive, the Court may nonetheless choose to partially enforce it to the extent necessary to protect an employer’s legitimate interest if the employer can also demonstrate an absence of overreaching, coercive use of dominant bargaining power, or other anti-competitive misconduct.
To obtain a preliminary injunction from a court to enforce a non-compete clause, an employer must establish a likelihood of success on the merits, irreparable harm, and that the harm it would suffer if the injunction is not granted is greater than the harm the employee will suffer if the injunction is granted (called, ‘balancing the equities in the movant’s favor’). Each factor must be separately established even though the underlying facts are often intertwined. A movant will likely establish a likelihood of success on the merits if it demonstrates the non-compete clause is enforceable and is being breached. To establish irreparable harm, one must show that the injury to be suffered is imminent and cannot be compensated by a monetary award or when calculating damages would be difficult. For example, irreparable harm may be shown if there is a loss of client relationships and customer goodwill or theft, misappropriation, or disclosure of trade secrets.
It is critical to move quickly if it is determined that suit will be commenced as an unreasonable delay can be fatal to obtaining an injunction from a court.
The foregoing analysis is based upon our experience and prior court decisions, but it is important to engage in a case specific analysis when determining whether to file suit as each situation and agreement are unique. Should you need the assistance of experienced counsel to assist you in determining whether your restrictive covenants may be enforceable and whether you could be successful in court, do not hesitate to contact Joshua D. Sussman at (516) 287-8035 or [email protected].
Weiss Zarett Brofman Sonnenklar & Levy, P.C. is a Long Island law firm providing a wide array of legal services to the members of the health care industry, including corporate and transactional matters, civil and administrative litigation, healthcare regulatory issues, bankruptcy and creditors’ rights, and commercial real estate transactions.
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[i] These factors differ if the agreed-upon non-compete clause is contained within a post-employment separation agreement or is related to the employee’s acceptance of postemployment benefits, both of which are not discussed here.
[ii] Read our earlier article about the courts’ treatment of non-compete agreements with physicians here.