New York courts rarely enforce non-compete covenants in employment agreements for public policy reasons: they reduce competition and prevent people from being gainfully employed in the area of their expertise. Every case is fact-specific, so it is impossible to know in advance whether a particular non-compete covenant will be enforced. There are circumstances when enforcement is likely: to protect trade secrets or other proprietary information of the employer or if the employer compensates the employee for the time out of the market. Typically, non-competes are common in the hedge fund, computer programming and health service industries.
In reality, most non-competes are never enforced. Enforcing a non-compete may be expensive and is usually an action of last resort. Thus, non-competes often serve as deterrents to future unwanted behavior by the employees.
New York courts will enforce a non-compete covenant only if such covenant is reasonable, which means, it must be (1) no greater than is necessary to protect the employer's legitimate interests; (2) is reasonable in time and area; (3) not unreasonably burdensome to the employee; and (4) not harmful to the general public. See BDO Seidman v. Hirshberg, 712 NE 2d 1220 (N.Y. Ct. App. 1999).
The following interests are legitimate: protection of trade secrets, protection of confidential customer information or database, or protection against irreparable harm if the services of an employee were unique or extraordinary.
Merely preventing competition is not a legitimate business interest. Also, business or financial information, such as market reports or market strategies, do not trigger the trade-secrets legitimate interest. Customer lists are generally not considered to be confidential information unless such lists are discoverable only by extraordinary efforts and not through public sources.
With respect to the uniqueness of the employee’s services, courts examine the relationship between the employee and the employer’s business (whether the employee’s services are so unique and valuable that competition from this employee could irreparably harm the business). Typically, unique employees are musicians, professional athletes, actors and members of a learned profession (ex: accountants).
Even in the absence of non-compete agreements, New York courts can enjoin employees from working for direct competitors of their former employers by using the “inevitable disclosure” doctrine. Under this doctrine, employer can establish a claim of trade secret misappropriation if he shows that in the new job for a direct competitor, the former employee will inevitably rely upon the former employer’s trade secrets. Thus, in PepsiCo, Inc. v Redmond (54 F.3d 1262 (1995), Redmond worked in a senior position at PepsiCo in a highly competitive sport-drinks industry. He signed a confidentiality agreement but not a non-compete agreement. When he joined Quaker Oats, a direct competitor of PepsiCo, the court “converted” Redmond’s confidentiality agreement into a non-compete by prohibiting Redmond to work for Quaker Oats for six months even though there was no proof of an actual misappropriation of trade secrets.
In summary, employers may be well advised to include non-compete covenants in employment agreements for their employees. Of course, such covenants have to be reasonable in terms of duration and geographic scope and cannot serve to limit competition in general. I also recommend including a so-called “blue pencil” provision, giving the court permission to modify the terms of a non-compete covenant to make it enforceable. Also, employers should limit the non-competes to the employees with unique specialized skills and be very specific about the activities in which such employees cannot engage post-employment (have to be narrowly defined and competing directly with employer’s business). Finally, it is always advisable to pay for the employee’s time off the market. After all, employers must take all steps to protect their valuable proprietary information and maintain the critical competitive advantage.