Restrictive Covenants & Non-Competes

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Competition is Generally Permissible Absent an Agreement to the Contrary

New York law does not prohibit a former employee from engaging in competition with a former employer after the term of employment ends. That being said, a former employee’s right to compete against the former employer is not unfettered or absolute. Even absent an agreement, the former employee cannot use the former employer’s confidential information or trade secrets to compete against the former employer. 

Two Types of Circumstances Warranting Enforcement of a Non-Competition Agreement

One of the most litigated issues in the employment realm is related to the enforcement of a non-compete agreement. Litigation of a non-competition claim generally arises in one of two specific scenarios: (a) non-competition agreements between an employer and employee; and (b) a non-competition agreement arriving out of the sale of a business and being enforced by the purchaser against the seller (former owner of the business).

A. Non-Competition Agreements in the Employer/Employee Context

By way of example, an employer may permissibly seek to protect its trade secrets, confidential information, and properly-protected customer lists and ordering history. In its essence, a non-competition agreement precludes a former employee from competing with a former employer at a subsequent business. Generally, a non-compete covenant will be enforceable if it:

  1. is reasonable in duration and geographical scope;
  2. is not greater than required for the protection of the employer’s legitimate interest;
  3. does not pose an undue hardship on the employee; and 
  4. does not injure the public.

Each of the foregoing prongs involves a complex analysis concerning the particular facts and circumstances which may weigh in favor of, or against, enforcement of a particular non-competition clause. 

B. Non-Competition Agreements Related to the Sale of a Business

Sometimes, a non-competition agreement is included within the sale of a business to preclude the former owner from improperly competing against the new owner by recovering the assets or accounts which the buyer paid to acquire.

When a restrictive covenant (such as a non-compete or non-solicitation) is entered into in conjunction with, and as a condition of the sale of a business, the restrictive covenant is evaluated pursuant to the standard applicable to the sale of a business rather than the stricter standard of reasonableness applicable to employment contracts. More specifically, a covenant restricting the right of a seller of a business to compete with the buyer is enforceable if its duration and scope are “reasonably necessary to protect the buyer’s legitimate interest in the purchased asset.” This is because the purchased asset necessarily includes “[t]he goodwill of a business, an intangible asset which may be transferred from the seller to the purchaser, [and] has been defined as the right of the purchaser to expect that the firm’s established customers will continue to patronize the business”.

As the Court of Appeals recognized nearly 60 years ago in Purchasing Associates v. Weitz, 13 N.Y.2d 267 (1963):

Where, for instance, there is a sale of a business, involving as it does the transfer of its goodwill as a going concern, the courts will enforce an incidental covenant by the seller not to compete with the buyer after the sale. []; see, also, 6A Corbin on Contracts (1962), § 1385; 5 Williston, Contracts (rev. ed., 1937), § 1641.) This rule is grounded, most reasonably, on the premise that a buyer of a business should be permitted to restrict his seller’s freedom of trade so as to prevent the latter from recapturing and utilizing, by his competition, the good will of the very business which he transferred for value. []; see, also, 6A Corbin on Contracts (1962), § 1385.)

If you have any questions or wish to discuss your non-competition agreement, please call for a free consultation with one of our attorneys.

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