- Restrictive Covenants Under New York Law
- April 22, 2013 | Author: M. Alexander Bowie
- Law Firm: Day Pitney LLP - New York Office
Because nothing lasts forever, savvy businesspeople know that effective restrictions on the post-employment competitive conduct of important employees are vital for businesses. Employers should always consider including restrictive covenants in the employment agreements of key employees that restrict the employees' ability to compete with the employer following the end of their employment. New York law on such restrictive covenants is complex and nuanced and has important implications that can be counterintuitive. Beyond crucial considerations in structuring and drafting employment agreements and strategies to deal with the abrupt departure of critical employees, legal criteria in this area can also be important for other activities, such as the documenting and handling of critical confidential business information and even mundane matters such as the documenting and reimbursement of marketing expenses.
New York law disfavors restrictive covenants, although not to the degree they are disfavored in certain other jurisdictions, most notably California. E.g., Reed, Roberts Assocs., Inc. v. Strauman, 353 N.E.2d 590, 593 (N.Y. 1976); Aon Risk Services v. Cusack, 958 N.Y.S.2d 114 (App. Div.2013). To enforce such agreements, New York law requires that employers show a "legitimate interest" warranting protection, such as the protection of misappropriated trade secrets or preventing competition by a former employee whose services are unique or extraordinary. E.g., 1 Model Mgmt., LLC v. Kavoussi, 918 N.Y.S.2d 431, 432 (App. Div. 2011). Even then, the restriction must pass a "reasonableness" analysis, limiting the restriction to the minimum necessary to protect the employer's legitimate interest, which in effect often severely limits the duration and geographic reach of the restriction. E.g., BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999).
Employers, however, are not without options under New York law to impose meaningful restrictions on important employees competing with them after the employees' departure. The most effective is to defer some significant amount of an employee's compensation out into the future, with the proviso that the employee's receipt of the deferred compensation is contingent upon the employee not competing with the employer. New York courts uphold such arrangements under the "employee choice" doctrine, reasoning that the former employee faces the "choice" between receiving the deferred compensation or competing with the former employer. Morris v. Schroder Capital Mgmt. Int'l, 859 N.E.2d 503, 506 (N.Y. 2006). The employer need only show that it would have continued to employ the employee had the employee not chosen to leave. Lucente v. IBM, 310 F.3d 243, 254 (2d Cir. 2002); Post v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 397 N.E.2d 358, 360 (N.Y. 1979). New York courts do not subject such agreements to the "reasonableness" requirement, thus enabling their duration and geographic scope to exceed that which would be permitted under that analysis. While employers cannot use this approach to obtain a court order enjoining their former employees from competing with them, in practice such arrangements can provide a strong disincentive to the former employees who might consider engaging in such competition.
Day Pitney LLP New York trial partner Alex Bowie along with two of his colleagues in Day Pitney's New York City office, counsel Michael Weiss and associate Chelsea Mullarney, recently authored a chapter explaining New York law on restrictive covenants in the newly published treatise New York Business Litigation, published by New York Law Journal Books, a unit of American Legal Media Publishing. Alex's thorough discussion of New York law in this area is a comprehensive and accessible resource for employers navigating this complex area of New York law.