United States: New York Developments Continue Trend Against Non-Competition And Non-Solicitation Agreements

Last Updated: August 31 2017
Article by Eve I. Klein

A recent New York federal court decision and a proposed bill by the New York City Council may impact all New York employers who use non-competition and non-solicitation agreements.

Federal Court Denies Enforcement of Employer's Non-Compete and Non-Solicitation Agreement

In In re Document Techs. Litig., 2017 U.S. Dist. LEXIS 104811 (S.D.N.Y. Jul. 6, 2017), the Southern District of New York denied a motion for a preliminary injunction seeking enforcement of a non-competition and non-solicitation agreement against former employees (Individual Defendants). In that case, Document Technologies, Inc. (DTI) acquired Epiq eDiscovery Solutions, Inc. (Epiq) and continued to operate Epiq as a wholly owned subsidiary. Epiq had required their employees, including the Individual Defendants, to sign employment agreements containing numerous restrictive covenants, including a one-year non-competition agreement, a one-year prohibition on soliciting the company's clients, and a one-year prohibition on soliciting the company's employees.

One of the Individual Defendants was contacted by a recruiter regarding an employment opportunity at LDiscovery, LLC (LDisovery), a competitor of Epiq's, and then communicated the opportunity to the rest of the Individual Defendants. After negotiations, the Individual Defendants resigned from Epiq and entered into employment agreements with LDiscovery where they would not work for LDiscovery for a year and, in return, would be paid signing bonuses between $1,200,000 and $1,400,000. LDiscovery further agreed to indemnify the Individual Defendants for attorneys' fees and damages relating to their transition from Epiq to LDiscovery.

DTI argued the Individual Defendants breached the terms of their non-competition covenants by executing employment agreements with LDiscovery and participating in meetings to discuss strategy once the Individual Defendants were active employees at LDiscovery. The Court rejected this argument, holding that a "former employee may prepare to compete during the term of a non-competition provision... ." Legitimate preparatory acts include incorporating a later competing business; building facilities; and filing and obtaining trademarks. The Court stated acts cease to be preparatory when they "detrimentally impact the former employer's economic interests" during the term of the non-competition clause, but the Individual Defendants did not cross that line as their acts were merely preparatory.

DTI also argued the Individual Defendants breached their employee non-solicitation clauses by jointly searching for new employment. The Court held that this clause was unenforceable to the extent it prohibited at-will employees, who have not accepted an offer of new employment, from inducing or encouraging their co-workers to leave their present employer. An employee non-solicitation clause is reasonable, and thus enforceable, if it: (1) is no greater than is required for the protection of the legitimate interest of the employer; (2) does not impose undue hardship on the employee; and (3) is not injurious to the public. DTI argued the clause prevented the potential harm to company operations arising from the coordinated mass resignation of several employees. The Court held this was not a legally cognizable interest for the purposes of a restrictive covenant. The Court stated if DTI desires to prevent employees from coordinating their resignations, it is free to hire them pursuant to term employment agreements. The Court found the clause to impose an undue hardship on DTI's employees because it prohibited any speech that "encourages" or "induces" an employee to terminate his or her employment. The Court found such a restriction to be a "contractual gag rule on employee complaints." The Court additionally found the clause injurious to the public because it "serves to keep departing employees in the dark about job opportunities beyond DTI." The Court stated the public interest strongly supports the free flow of information concerning alternative employment.

New York City Proposes Partial Ban on Non-Compete Agreements

On July 20, 2017, the New York City Council proposed new legislation that would prohibit New York City employers from entering into a non-competition agreement with any "low-wage employee." The bill defines "low-wage employee" to mean any non-exempt employee, other than manual workers, railroad workers or commission salespersons. To be properly classified as exempt under the New York Labor Law, the employee must be employed in a bona fide executive, administrative or professional capacity and receive earnings in excess of $900 per week.

The proposed bill would also prohibit New York City employers from requiring any potential employees (i.e., non-low-wage employees) to enter into a non-compete agreement unless, at the beginning of the hiring process, the employer discloses in writing that the prospective employee may be subject such an agreement.

If passed by the New York City Council, the bill is likely to be signed by Mayor Bill de Blasio and would take effect 120 days after being signed into law. The law would not apply to agreements entered into before the bill's effective date.

What This Means for Employers

Even before these developments, New York had already set a high bar for the enforcement of non-competition and non-solicitation agreements. The In re Document Techs. Litig. case is a further indication that New York Courts will closely scrutinize restrictive covenants. It is not enough for employers to have their employee sign non-competition and non-solicitation agreements. For these agreements to be enforceable, employers must be able to state a legitimate business interest as to why they are necessary, and the agreements must be narrowly tailored to protect this legitimate business interest. For high-level employees, companies may try to get around non-competition restrictions by hiring an employee and then having the employee take a sabbatical year, which the Court in In re Document Techs. Litig. found to not violate the non-competition restriction at issue. Regarding employee non-solicitation agreements, preventing a mass exodus of employees is not a legitimate business interest. Employee non-solicitation agreements will only be enforceable to protect against unfair competition.

While the New York City Council bill has only been proposed and is not law, it follows the growing trend in New York to attack restrictive covenant agreements. The New York attorney general has challenged non-compete agreements viewed to be overly broad, and just last October, proposed legislation largely mirroring the New York City Council bill. It is possible that New York State legislation limiting the use of restrictive covenants will follow the New York City bill. We will continue to monitor these legislative developments.

For Further Information

If you have any questions about this Alert, please contact any of the New York attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Day Pitney LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Day Pitney LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions