Business & Charities Law Blog

Friday, March 27, 2015

How Restrictive Can Restrictive Covenants Be?

Restrictive covenants are contractual agreements. Usually, an employer includes restrictive covenants in an employment agreement seeking to restrict a departing employee in some way. Examples of restrictive covenants include non-compete, non-solicitation and confidentiality agreements.

Non-compete agreements typically feature a geographic limitation (do not open a competing business within 25 miles) or a time frame (do not work for a competitor until one year has passed). Courts have enforced non-compete agreements when they were necessary to protect an employer's trade secrets or confidential customer information. As with any restrictive covenant, examining a non-compete provision is very case-specific and enforceability will depend upon the particular circumstances.

Non-solicitation agreements restrict an employee from soliciting business from his or her former employer's customers. A non-poaching covenant seeks to prevent the departing employee form soliciting other employees to also leave the company.

Confidentiality provisions usually define types of information that a former employee cannot possess or use, such as customer lists, sales data, marketing materials and other business plans. These provisions typically do not expire.

Restrictive covenants are generally disfavored by New York courts, but they can be viewed less critically when an employee agrees to a restrictive covenant in exchange for post-employment benefits such as a severance package. If an employer breaches the employment agreement, however, courts may not enforce any restrictive covenant contained in the agreement. 

Courts can review restrictive covenants to determine whether the restrictions imposed are fair and enforceable. Factors to be considered include whether the restraint protects a legitimate interest of the employer, whether the restraint imposes an undue hardship on the employee and whether the restraint is harmful to the public. Courts can modify the restrictive covenant ("blue pencil" it is sometimes called) or reject it entirely. The more narrowly drafted a restrictive covenant is, the more likely it is to be considered enforceable.

Employers doing business in more than one state often include a choice-of-law provision in their contracts. Sometimes, however, a New York court might reject another state's restrictive covenant law as contrary to New York's public policy.

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