9 things you must know about non-compete clauses
Do you have a non-compete agreement or is your new employer asking you to sign one? Have you read it? It’s important not to gloss over this important detail because it could negatively impact your future options. Maryann Stallone, a commercial litigator, shares nine things every employee should know about these restrictive covenants.
Ready to look for another job? Well, here’s another big question: have you looked at your employment agreements to consider what, if any, restrictions there are on your post-employment activities? Does your agreement with your soon-to-be former employer contain a non-compete provision? Is your new employer asking you to sign an agreement with a non-compete agreement? The answer to these questions is often yes.
It is not uncommon for employment or service agreements to contain non-compete, non-solicit, non-servicing and/or confidentiality clauses. Employees looking for their dream jobs generally focus on negotiating their salaries, benefits and job titles, and gloss over these covenants. It would be wise not to do so.
These clauses represent an agreement between the employee and employer in which the employee agrees not to perform certain actions during employment and for a stated period of time post-employment. The most restrictive of such clauses is the non-compete clause, which prohibits an employee from performing the same or similar work for a competitor or starting a competing business, typically in a certain geographic region, during employment and for a specified period of time post-employment.
A non-solicitation clause is less restrictive in that the employee is able to work for a competitor but is prohibited from soliciting the employer’s clients, employees, or vendors during employment and for a specified period of time after employment has ended. For the purpose of this article, we will refer to all restrictive covenants as non-competes.
Are non-competes enforceable? Answer: It depends. The devil is in the details. There appears to be a common misconception that such clauses are not worth the paper they are written on. If you learn anything from this piece, it would be to take such clauses seriously. If you don’t, you may find yourself spending thousands upon thousands in legal fees to defend against breach of contract claims.
Overly prohibitive clauses are typically unenforceable. Generally, non-competes that prevent an individual from earning a living and are broader and more restrictive than necessary to protect the employer’s legitimate interests (goodwill with its clients and employees, and confidential information) are likely not to be enforced.
Don’t download, email or forward yourself the employer’s confidential data. If you take (“misappropriate”) confidential information with you when you leave the employer (i.e., client lists and contact information, pricing data, and company financials), your former employer is likely to find out. Why does that matter? Well, you have now increased the odds that the non-compete clause will be enforced against you, because courts are highly protective of confidential data created at the employer’s expense. You’ve also increased the chances that the employer may seek an order in court to enjoin you from using that data and soliciting its clients and employees or working for the competitor.
Your position and role matters. Non-Competes involving higher-level employees (executives, those with a managerial role), learned professionals (doctors, accountants), employees with unique skills or those with substantial interaction with the employer’s clients are more likely to be enforced.
A non-compete is more likely to be enforced if you have an equity interest in the company. Period.
Negotiate less restrictive clauses at outset of your employment relationship. Start with the premise that non-competes are legally binding obligations. Therefore, before you sign any agreement, make sure you review it closely and understand its terms. Check the contract to determine what state’s law applies. You also should consider having an attorney review the contract at the outset of employment and try to negotiate less restrictive terms. For instance, instead of agreeing to a non-compete in all of New York for a 2-year period post-employment (what the employer initially proposed), negotiate for a non-solicitation clause of clients and employees for 1 year or 18 months. The money you spend having someone review the contract will be a mere fraction of what it will cost you to defend against an employer suing you for violation of the non-compete.
The enforceability of non-competes varies from state to state. Thus, the first step in evaluating the enforceability of your non-compete should be to determine what state’s laws governs your agreement. The contract will typically specify. For instance, in California, non-competes are typically not legal except for specific limited circumstances like protecting trade secrets. However, in New York, such clauses are enforceable if they are reasonable. Moreover, certain covenants, such as non-solicit and/or confidentiality provisions, are more frequently enforced than non-competes.
There is no bright line rule to determine ‘reasonableness.’ While non-competes are generally disfavored, New York courts enforce them if they: (1) are reasonable in duration and geographic scope; (2) are no greater than is necessary to protect the employer’s legitimate business interests (e.g., goodwill and confidential information); (3) do not impose an undue hardship on the employee; and (4) are not injurious to the public. Courts also consider whether the employee would be precluded from earning a living; the employee’s level of interaction and role with the employer’s clients and position with the company; and level of access to the company’s confidential and proprietary information.
Litigation involving the enforcement of non-competes is usually expensive and disruptive. Hence, why it is important to take non-competes seriously from the outset and try to negotiate less restrictive clauses.
Has the economic impact of the pandemic affected the enforceability of such covenants? Possibly. Courts don’t want to preclude individuals from earning a living. Therefore, if you have been terminated due to the pandemic, and you go to work for a competitor as a result, courts may be less inclined to enforce the non-compete clause if it seeks to keep you out of the workforce. However, again, it’s going to be based on the particular circumstances of your case and your actions. No matter what, exercise caution.
Maryann Stallone is a partner at Tannenbaum Halpern Syracuse & Hirschtritt LLP