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Caveat Employer: Limitations every employer should know.

Byline: David M. Levy

From the employer's perspective, the principal objective of any post-employment restriction is to protect your most important assets ---- namely, your proprietary information, your client/customer relationships and your key employees. All of these assets may be in jeopardy when an employee resigns or is terminated. This piece will survey recent developments in the law of post-employment restrictions and offer practical guidance on how to maximize their enforceability when push comes to shove. Thoughtful drafting, realistic expectations and a working knowledge of how far courts will go in enforcing post-employment restrictions are key to a successful result.

The law in this area was stated clearly by the New York Court of Appeals 15 years ago in the case of BDO Seidman v. Hirschberg, 93 N.Y.2d 382 (1999), which remains the seminal case in New York regarding post-employment restrictions. As a starting point, it is important to remember that New York public policy decidedly disfavors the use of terms in an employment or separation agreement that seek to prevent an employee from pursuing his or her chosen occupation after the termination of their employment -- restrictions that place a real burden on a former employee's ability to earn a living. It therefore follows that such post-employment covenants will be enforced only if they are reasonable as to duration, scope and geography. And even then, they are enforceable only as necessary to protect the employer's legitimate interest in trade secrets or confidential information or to protect its business relationship in a manner not harmful to the general public and not unreasonably burdensome to the employee.

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If the employee that you are looking to restrict was not privy to confidential information or had no meaningful relationships with your customers/clients, then a non-compete clause is probably not reasonable. It will instead be viewed as unfairly restricting his or her employment options after the relationship is terminated. So, step one is to evaluate as objectively as possible whether you will be able to articulate, and then eventually prove, a legitimate business interest in limiting your employee's employment options after they leave.

Even assuming that there is a rational basis to restrict competition post-employment, the restriction should be tailored to fit each situation. As a general rule, industry-wide restrictions relating to a competing business are disfavored, and far more difficult to enforce than a narrowly drawn limitation. And, unless you are paying your employee for garden leave, restrictions beyond a period of eighteen months are suspect and typically subject to challenge. So, too, are geographical limitations that go beyond the areas where your business activities are concentrated. The point here is that blanket restrictions from competing generally in an industry, for a prolonged period of time, or over a wide geographical area are likely to be unenforceable.

Given the inherent impracticality of barring an employee's right to earn a living, an agreement not to solicit the employer's customers/clients (rather than an agreement not to compete) is more likely to be held enforceable simply because it does not unfairly limit an employee's post-employment options. The non-solicit restriction has a more narrow purpose -- that is, to protect specific relationships deemed proprietary by the employer. However, just like with non-compete covenants, agreements which restrict the solicitation of customers/clients must also be reasonable. BDO Seidman teaches us that client-based restrictions must distinguish between those clients with which the employee may have developed a relationship due to their employment, and those clients with which the employee had a pre-existing relationship or had no relationship at all during the term of his employment. As a general rule, if the employee develops a relationship with your client/customer that arises from his employment, the employer has a legitimate interest in the post-employment restriction which is deemed to be reasonable for the employer's protection. But, if the employee has a significant relationship with the customer/client that pre-dates his employment, or has no relationship at all with the customer/client, then the employer has no protectable interest in restricting post-employment solicitation.

BDO Seidman also instructs that where post-employment restrictions are found to be unreasonable, the courts are empowered -- under what is known as the Blue Pencil Doctrine -- to modify the contractual terms to fit within reasonable parameters. Since this doctrine was given life in this area of employment law, employers have historically been emboldened to broadly articulate post-employment restrictions with the comfort of knowing that a court will, in effect, re-write the parties' agreement if the restrictions are found to be unreasonable, e.g., for too long a period, too broad in scope or too wide a geographical area. As a practical matter, however, there are good reasons to remain thoughtful and to take a more conservative approach when fashioning these post-employment obligations.

Recently, there have been material inroads in the application of the Blue Pencil Doctrine. Some courts are now taking the position that a facially unreasonable term will be struck in its entirety and be held to be unenforceable, rather than being modified to comport with New York law. In particular, at least one court in New York has refused to re-write a restriction prohibiting the solicitation of any of the employer's clients, Brown & Brown, Inc. v. Johnson, 115 A.D.3d 162, 980 N.Y.S.2d 631 (4th Dep't. 2014), and another struck a world-wide non-competition clause, instead of limiting it to a discrete geographical area, Veramark Technologies v. Bouk, 10 F. Supp. 3d 395 (W.D.N.Y. 2014). These decisions signal an important trend which now require a more realistic approach to drafting post-employment restrictions. Courts now appear more inclined to protect the employee on the grounds that employers are using their "superior bargaining power to impose unreasonable anti-competitive restrictions uninhibited by the risk that a court would void the entire agreement." Brown & Brown, 115 A.D.3d at 172 (citing, BDO Seidman). So, employers beware!

Post-employment covenants remain an important component in employment and separation agreements. If your interest in restricting post-employment is legitimate, sometimes less is more. To guarantee enforceability, great care should be given to make sure that your post-employment restrictions are reasonably drawn.
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Publication:Inside Counsel Breaking News
Date:Jun 26, 2015
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