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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
