It is natural for employers to be concerned about former employees going into competition with them, especially if that employee had access to privileged information or interacted regularly with customers. Restrictive covenants in employment agreements limit an employee’s ability to compete with their former employer once the working relationship ends. Employment agreements typically include one or more of the following restrictive covenants:
● Noncompete: A former employee may not compete with their old employer either directly or by taking a job with a competitor
● Nondisclosure: Prevents a former employee from revealing information they obtained in the course of their employment.
● Nonsolicitation Prohibits a former employee from soliciting business from the former employer’s customers.
New York law has a complex take on restrictive covenants, making them enforceable, but only under certain conditions.
When an employer becomes aware that a former employee is competing against them despite the presence of a restrictive covenant in the original employment agreement, they should consult an attorney immediately to determine if the covenant is actually enforceable.
In New York, the enforceability of a restrictive covenant depends on whether the employee is terminated with or without cause. If the termination is with cause, the covenant is enforceable, although the limitations must be reasonable in duration, geographic application, etc. But if the working relationship ends without cause, it is not. This rule became law in 1979, after the New York Court of Appeals decided in Post vs. Merrill Lynch et al that it would be unfair for an employer to terminate an employment contract through no fault of the employee and then prevent them from engaging in their selected livelihood.
If an employer is concerned that a former employee intends to violate a restrictive covenant, they may seek a temporary restraining order. Depending on the circumstances, a court may issue an injunction preventing the covenant from being breached, especially if the former employee had access to trade secrets or confidential information. Permanent injunctions may be granted in cases where the former employee’s breach will result in irreparable damage because of the nature of the business and the former employee’s connection to that business.
In a recent case (Brown & Brown, Inc. v. Johnson) a New York appellate court ruled that an employer could not use a Florida choice-of-law provision to enforce an employment agreement’s restrictive covenants against a former employee. The employer was a Florida parent corporation with a principal place of business in Florida and the restrictive covenants forbade the ex-employee from sharing trade secrets or soliciting the employer’s clients or employees for two years after termination. Unlike New York, Florida law forbids courts from considering the hardship imposed upon an employee in evaluating how reasonable a restrictive covenant is. The Appellate Court ruled that application of the Florida law in New York would yield an “obnoxious” result that was completely at odds with New York public policy.
New York law permits employers to impose reasonable restrictions on competitive activity from important ex-employees. The most effective method is to defer a certain amount of the employee’s compensation to a future date, with the provision that they will receive it if they don’t compete with their former employer. New York courts have upheld these noncompetition covenants under the doctrine of “employee choice”, reasoning that the former employee has the option of choosing between receiving the deferred compensation or competing with the former employer. To prevail, the employer only needs to prove that the employee left their position voluntarily.