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Non-compete Agreements: Restricting an Employee’s Right to Compete

In many industries—particularly technology, pharmaceuticals, and sales—employers require their employees to sign agreements that forbid them from competing with the employer or soliciting former customers and employees after the employment relationship terminates.  When the relationship terminates, an employer seeking to enforce a non-compete agreement will often go to court on an expedited basis, seeking an injunction barring the employee from going to work for a competing company, soliciting customers, or disclosing a trade secret.

New York is a state where these agreements are enforceable if they are reasonably tailored to protect the legitimate interest of the employer.  In contrast, California and some other states do not enforce these agreements.

The leading case in New York is BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (1999).  This case serves as an example of some of the legitimate interests of the employer that the courts in New York will protect: trade secrets and non-public customer relationships that have been developed at the employer’s expense.

The competing concern is that courts generally do not want employees to be in situations where they are unemployable and may have no other choice than to turn to state benefits while they wait for a non-compete agreement to expire.   To advance this policy, the courts are very careful to make sure that non-compete clauses are narrow in terms of geographic scope and duration. When they are too broad, or one of the provisions is perceived as being unfair, there is a tendency for courts either to strike them down or narrow their scope.

Weighing the competing interests of the employer and the employee is particularly pertinent when an employee has been involuntarily terminated. There is a tendency in the courts to view enforcement of a non-compete clause against an employee who has been involuntarily terminated as unfair, and often, that will lead to the court denying the employer the right to enforce the agreement through an injunction. 

A case in point is  Eastman Kodak Co. v. Carmosino, 77 A.D.3d 1434 (4th Dep’t 2010).  In Eastman, the employer eliminated the employee’s position due to a corporate reorganization.  The court held that the balance of equities did not favor an injunction, because the employee was terminated without cause.  Eastman relied on the opinion of the New York Court of Appeals in Post v. Merrill Lynch, 48 N.Y.2d 84, 89 (1979), which held that when an employer terminates an employee without cause, the employer cannot condition the employee’s receipt of a previously earned pension on compliance with a restrictive covenant.

However, when the loss of an earned pension is not involved, an agreement not to compete may still be enforceable, even when an the employer involuntarily terminates the employee.  For example, in Novendstern v. Mt. Kisco Medical Group, 177 A.D.2d 623 (2d Dep’t 1991), the court granted an injunction enforcing an employee’s agreement not to compete even though the employer involuntarily terminated the employee pursuant to the procedures in the employment agreement.   Similarly, in Hyde v. KLS  Professional Advisors Group LLC, Slip op. 12-1484-cv, an unpublished opinion of the United States Court of Appeals for the Second Circuit, the court refused to bar the employer from enforcing an agreement not to compete.  The district court in Hyde had held that under Post, restrictive covenants are per se unenforceable in New York against an employee terminated without cause.  The Second Circuit criticized the district court for “extending Post beyond its holding,” stating that Post involved the loss of an earned pension, which did not occur in the Hyde case. The lesson of these cases is that agreements preventing an employee from competing against a former employer are enforceable in New York in limited circumstances, even when an employee is involuntarily terminated.

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