New Caselaw Concerning Non-Compete Agreements Favors Employers

Non-compete agreements seek to prevent an employee from competing with his or her former employer. These agreements theoretically protect the employer, who has trained the employee and shared specialized knowledge about the business or its clients, from an employee who leaves to work for a competitor or even sets up the same type of business nearby. However, these agreements have been extremely difficult to enforce. Courts have been reluctant to restrict an employee’s ability to find employment in his or her chosen field.

The courts have ruled that in order to have an enforceable agreement, it must protect legitimate business interests of the employer, be reasonable both in time and geographic location, and not present an undue hardship to the employee in seeking new employment. Non-compete agreements have been historically difficult to enforce because each of these elements is open for interpretation, with the most difficult legal battles usually being fought over whether the restrictions in the agreement are “reasonable.” The caselaw interpreting what is reasonable has been extremely inconsistent. For just about every case in which a non-compete agreement was held reasonable, one could find a case with similar facts in which the non-compete agreement was rejected as unreasonable.

An employer seeking to enforce a non-compete agreement had no real assurances that the agreement would be deemed enforceable by a court. Employees seeking to breach the agreement could do so knowing the employer would have to begin costly litigation with an uncertain outcome in order to try to enforce the agreement. New employers seeking to recruit employees bound by these agreements would sometimes take on the cost of defending the litigation for the employee.

A recent decision by New York’s highest court in Morris v. Schroeder Capital Management, offers an alternative to traditional non-compete agreements for employers who wish to have some certainty that the agreement will be enforced. Forfeiture For Competition Agreements condition post-employment payments on non-competition. These agreements generally surround a severance package given to the employee at the end of his or her employment. The employee gets compensation and/or benefits for a certain period of time, to which he or she would not otherwise be entitled, in exchange for an agreement to abide by the non-compete agreement.

In the Morris case, the Court of Appeals determined that a Forfeiture For Competition Agreement will be enforced without regard to the reasonableness of the underlying non-compete agreement. With the “reasonable” requirement removed, most of the uncertainty about enforcement is removed as well. The rationale of the court was that in giving the employee a free choice by either electing to receive the benefits under the agreement or risk forfeiture of those benefits by exercising his or her right to compete, there is no unreasonable restraint on the employee’s ability to earn a living.

For employers, this decision alleviates concerns that a disciplined employee who leaves in a huff, or the employee dissatisfied with his or her position after a restructuring, can leave and still challenge his or her employer on a well-drafted Forfeiture For Competition Agreement. However, employers must be certain that their Forfeiture For Competition Agreement and the underlying non-compete agreement are well-drafted and are adequate to protect their concerns.

Of course, to any rule there is always an exception. The employee will not be deemed to have free choice unless he or she truly left the job voluntarily and the employer was otherwise willing to continue the employment. If the employee is able to show that he or she has been forced to leave, the Forfeiture For Competition Agreement will not be enforced. This is known as “constructive discharge” and occurs when the employer, rather than terminating the employee, deliberately makes the work conditions so intolerable that a reasonable employee would be forced to resign.

For employees, the court ruling extending the circumstances in which Forfeiture For Competition Agreements will be enforced makes it critical that they be aware of the implications of the agreement before signing. They need to be fully aware that if they breach the agreement, the penalty will be repayment of the benefits to the employer. Further, they may wish to obtain legal advice concerning the timing of their departure from employment, as well as negotiating with the new employer to recover benefits they may forfeit. Finally, they should seek advice if they believe they have been forced to resign.

If you have questions concerning the topics raised in this article, you should contract our Corporate Department, and ask to speak with one of our team of attorneys: Craig R. Welch (chair) at (585) 324-5726, Karen Schaefer at (585) 324-5718, Jennifer Chadwick at (585) 324-5721, Matt Ryen at (585) 324-5701.