Non-compete agreements, a tool increasingly used by employers to protect their employee investments and trade secrets, are fast becoming the source of employment lawsuits in New York City and beyond, as workers cite stifling effects on entrepreneurship.
A recent analysis by The Wall Street Journal indicates that U.S. court decisions involving non-compete contracts have spiked by more than 60 percent since 2002, highlighting the rapid expansion of these agreements and the force with which workers are fighting back.
When it comes to these agreements, there is really no such thing as one-size-fits-all. The parameters are governed by state law, which can vary widely from region to region. For example, in California, such agreements are all but unenforceable, except in certain situations where the agreement is made alongside a business sale or a partnership dissolution. However, in Florida, non-compete agreements are broad and readily enforceable. Other states indicate that if part of the agreement is “overly broad,” then the entire agreement may be deemed invalid.
New York state both recognizes and enforces various forms of non-compete agreements. However, application of this enforcement is not without legal limits. Most state courts have come to agreements about what constitutes a “reasonable” agreement, and that includes:
- Restrictions that are no greater than what is necessary to protect the legitimate business interest of the company;
- Restrictions that do not impose an undue hardship on workers;
- Restrictions that are not injurious to the public.
Of course, some of this is open to interpretation, which is why it’s wise to have an experienced business lawyer review the contracts before they are issued. This is an important move not just for large corporations, but even for smaller firms. In fact, small business owners may have more at stake because they tend to invest proportionately more on individual employees. A non-compete agreement is one important way to protect their business interests. Doing it in such a way that you are also shielded from future litigation, however, is likely to require some prior legal guidance.
Sometimes, it’s the small business owners themselves who become embroiled in a non-compete agreement claim from a former employer, a result of a contract they signed before striking out on their own.
The example given by the Journal is that of an entrepreneur in Virginia who recently founded a company that offers automated protection of website hacks. Shortly after opening his firm, his previous employer sued him, alleging that his non-compete clause barred him from launching such a venture. It took six months of legal wrangling before he was able to reach a settlement with his old bosses.
This case illustrates why new start-ups should have an experienced business lawyer review their non-compete clause prior to opening. Even slight tweaks in the new business model may help you avoid costly litigation.
It may also be beneficial to have your attorney review the recruiting process, as firms could find themselves on the losing end of a lawsuit for hiring someone who had previously signed such an agreement – regardless of whether that agreement was disclosed.
The Law Offices of Ira S. Newman provides business litigation representation in New York City, Long Island, Great Neck and throughout the area. Call 516-487-7375 or send us an e-mail.
Litigation Over Noncompete Clauses Is Rising, Aug. 14, 2013, By Ruth Simon and Angus Loten, The Wall Street Journal
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