I. Remedies for Violations
Generally, restrictive covenants are contract provisions or stand-alone agreements made between an employer and an employee which prohibit the employee from taking certain post-employment actions, such as working for a competitor, disclosing trade secrets, or soliciting co-workers or clients.1 Because there are no specific statutes governing restrictive covenants in New York, the courts have shaped the extent to which they can be enforced.
Whether it be employer or employee, when a party violates a restrictive covenant or any contractual provision for that matter, there are consequences to which a court will enforce so long as the restrictive covenants are deemed to be reasonable. Throughout all contracts, the two major means by which a remedy is achieved is through either injunctive relief or the paying of damages.
A. Injunctive Relief
If you own a business and wish to enforce the restrictive covenant between you and a former employee, you can appear before the court and sue for injunctive relief in the form of a temporary restraining order.[1] If relief is granted, the court will stop the former employee from working for a direct competitor or somehow releasing valuable trade secrets to said competitor.[2] Simply put, the court will ensure that the restrictive covenant is enforced as it was written and intended to be used. A former employee may also seek injunctive relief, however, if the former employee asks the court to enjoin (or stop) the enforcement of the restrictive covenant by you and, if successful, ultimately render it null and void.[3]
For example, if a former employer wishes for a former employee to stop searching for jobs that may be prohibited by the restrictive covenant, they can sue the employee in court and legally stop them from continuing the job search. Conversely, the former employee may also sue to halt the enforcement of the covenant if they believe or find it to be unenforceable under the law.
1. Preliminary Injunctions
A preliminary injunction is an injunction granted usually at the beginning or during the course of litigation. A party can seek a preliminary injunction if they can show a likelihood of success on the merits, irreparable injury without the injunctive relief, and that the balance of equities is in the party who sought relief’s favor.
2. Permanent Injunctions
A permanent injunction is granted towards the end of litigation as a final judgment is rendered. It should be noted however that a permanent injunction does not mean the restrictive covenant may be enforced forever; it simply means that it will be enforced for the time as prescribed by the contractual language of the covenant.[4] The court will never expand the meaning of the covenant as courts have historically attempted to limit the power of restrictive covenants.
B. Damages
Damages are the measurement of monetary loss that either party suffers when a restrictive covenant is violated. For a former employer, it may be the financial loss attributed by the former employee working for a competitor and putting the former employer at a significant disadvantage. On the other hand, for a former employee, it could be the loss of pay because the covenant so narrowly restricts the former employee’s ability to earn a living at a competitor.
Many employment contracts that include restrictive covenants also include “liquidated damages clauses.”[5] These clauses establish an amount that would be owed in damages if one party were to breach the contract. Courts have consistently found that such clauses are only enforceable if the amount is deemed reasonable and proportionate to the actual losses and damages.[6]
C. Partial Enforcement
Recently, courts have reserved the ability and power to enforce portions of a restrictive covenant. Courts have severed the parts of restrictive covenants found to be unreasonable in certain areas.[7] For example, if a restrictive covenant is found unreasonable in terms of duration but not geographic scope, the court will choose to sever the duration portion of the covenant but enforce it with respect to its geographic area. If a restrictive covenant prohibits a former employee from working for a competitor within the same neighborhood as the former employer, but for a period of over 50 years, then a court may choose to alter enforcement of the covenant to remain effective in the same neighborhood but for a period of only one year.
II. Defenses to Enforcement
As with any cause of action, there are defenses to breach of a restrictive covenant. Both the former employer and employee may raise the following:
A. Statute of Limitations and Jurisdictional Issues
As for any cause of action, there is generally a statute of limitations which governs how long after an incident occurs an action can be brought before the court. Any breach of contract action in New York must be commenced within six (6) years from the date of the breach.[8] If a party brings a claim after the six years from the time the breach occurred, the breaching party may move to dismiss the action at the onset based on untimely commencement.
B. Waiver
In cases where a former employer waives his right to enforce a restrictive covenant via certain actions, a court will not enforce the covenant if the employer changes their mind. In cases where a former employer chooses to help out a former employee by helping in their job search, the covenant will be considered waived.[9] Furthermore, if a former employer consistently does not historically enforce restrictive covenants, and the former employee knows and relies on such a fact, then the covenant may also be considered waived by the court.[10] Both of these examples are critically important for employers to be aware of. If you’re not going to enforce it, there is little value in having one at all.
C. Lack of Consideration
In most cases, consideration - promise or performance - must be provided for a non-compete agreement to be deemed enforceable.[11] The fact that the employee is still employed by the employer, however, can be sufficient consideration for the court.[12] This issue can become complicated when an at-will employee is terminated without cause. While the termination of at-will employee without cause is permissible, so long as it is not done for illegal reasons (i.e., discriminatory reasons), the issue will be whether the restrictive covenant is no longer effective.
D. Unconscionability
Contract clauses may be deemed unconscionable by the courts by of two ways. The first way is known as procedural unconscionability. What is procedural unconscionability? Procedural unconscionability occurs when a party was effectively forced into signing, and the party had no “meaningful choice.”[13] This occurs in cases where an employer creates contract terms that are unreasonably favorable to themself, knowing that the employee cannot reasonably walk away from the contract.[14]
The second way a covenant can be unconscionable is in its terms. Here, the analysis is tightly intertwined with the reasonableness standards. If a restrictive covenant is not reasonable in its geographic scope, duration, and burden to the employee then it can also be seen as unconscionable, and thus can be raised as a defense to the enforceability of a restrictive covenant.[15]
For help navigating restrictive covenants and drafting employment agreements, contact KI Legal’s knowledgeable labor & employment attorneys by calling (212) 404-8644 or emailing info@kilegal.com. We are here to help protect your business and interests.
[1] M. Alexander Bowie, 2022 in New York Business Litigation 329–378 (2022).
[6] BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1227-28 (N.Y. 1999).
[7] Karpinski v. Ingrasci, 268 N.E.2d 751 (N.Y. 1971); BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1226 (N.Y. 1999).
[9] Int'l Shared Servs., Inc. v. McCoy, 259 A.D.2d 668, 686 N.Y.S.2d 828, 829 (1999).
[10] Horne v. Radiological Health Servs., P. C., 83 Misc. 2d 446, 371 N.Y.S.2d 948 (Sup. Ct. 1975), aff'd sub nom. Horne v. Radiological Health Servs., 51 A.D.2d 544, 379 N.Y.S.2d 374 (1976).
[13] Gillman v. Chase Manhattan Bank, N.A., 73 N.Y.2d 1, 534 N.E.2d 824 (1988).
[15] Bowie, 2022.
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