Restrictive Covenants: Legal Issues When Hiring a Competitor's Employee

March 17, 2006

Excerpted from New York Employment Law Letter, written by attorneys at the law firm Epstein Becker & Green, P.C.

When an employee leaves a company to join a competitor, both the former employee and the new employer may be subject to a lawsuit if the employee is a party to an employment agreement containing a restrictive covenant or the former employer suspects disclosure of its trade secrets.

The former employer may seek to bar the former employee from competing through enforcement of the restrictive covenant. In that case, the new employer could lose the time and effort it spent recruiting the employee and the prospective economic advantage it sought to gain from using the individual's skills and knowledge. Here are some things employers should know about restrictive covenants to avoid such a loss.

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General background on enforcement
The enforcement of agreements that restrict employees from competing with their former employers varies widely from state to state. In fact, in some states, they're simply unenforceable. Even in states where covenants not to compete are enforceable, courts in published opinions tend to disfavor them because they're thought to discourage competition and to curtail individual rights. Generally, courts will apply a "reasonableness" test to determine whether to enforce a covenant not to compete and examine a number of factors in evaluating restrictive covenants.

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Other factors courts will examine
Nature of the employer's interest. It's well established that "protectable" employer interests include trade secrets and other proprietary information, such as confidential customer lists developed after considerable time and effort.

Duration of the restriction and geographic area. In considering whether a covenant not to compete imposes an undue hardship on an employee, courts may examine the duration of the restriction and the geographic area covered by the covenant. A geographic limitation must be reasonable in view of the particular facts of the case, including the nature of the former employer's business. Thus, a covenant that sought to prevent a neurologist from practicing within five miles of a hospital at which he had formerly worked was found unreasonable, but a covenant that was unlimited in geographic scope was enforced as reasonable when the former employer's business was worldwide.

Interference with the public interest. In keeping with the public policy that encourages free trade and competition, courts consider whether the public interest is adversely affected by the enforcement of covenants not to compete. In addition to the public policy favoring free competition, courts may look at other public interest considerations, particularly in cases in which a restrictive covenant has the effect of preventing members of the public from obtaining the services of a doctor, lawyer, accountant, or other professional of their choice.

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Bottom line
With all the preceding considerations in mind, employers should take preventive measures to avoid potential litigation arising from hiring an employee of a competitor. You first should determine whether the candidate has an agreement with the competitor that you may arguably be violating by hiring the employee. Your counsel should review noncompetition agreements in particular.

The best way to prevent a lawsuit is for the former employee to negotiate a release from the agreement with the former employer. Absent such a release, employers that consider hiring a competitor's employees must weigh the potential costs of litigation, including potential liability, against the benefits they hope to obtain from employing the particular individuals. If the prospective employee is valuable enough and the noncompetition provision seems unenforceable, you may wish to join with the individual in court action to invalidate the agreement.

Practical tips for hiring employees subject to restrictive covenants

• Determine whether a potential new hire is subject to any agreements or policies of her former employer that arguably may be violated as a result of her employment.
• Review any such agreements or policies to determine whether they have potential application to your business operations or are legally enforceable.
• Make it clear in any hiring documentation that new hires aren't permitted to use any trade secrets or confidential information that belongs to any of their former employers.
• Create procedures whereby new hires aren't involved in the solicitation of customers who were customers of their former employers, and require those customers to acknowledge in writing that their business wasn't solicited by your company or through the efforts of the new hires.
• Determine whether any files or materials brought into the company by the new hire constitute bona fide trade secrets, such as detailed customer lists or research and development information. Take steps to avoid any review or disclosure of that information within the company, and remove and consider returning that information to its rightful owner.
• Adopt written policies and/or employment agreements that prohibit new employees from using any confidential information or trade secrets from their previous employers, and condition the hiring of employees on (1) their assurance that they aren't subject to any prior confidentiality agreements, restrictive covenants, or noncompete provisions or (2) their agreement to disclose to your company the terms of any such obligations and their commitment to fully comply with their terms.

Copyright © M. Lee Smith Publishers LLC. This article is an excerpt from NEW YORK EMPLOYMENT LAW LETTER. New York Employment Law Letter does not attempt to offer solutions to individual problems but rather to provide information about current developments in New York employment law. Questions about individual problems should be addressed to the employment law attorney of your choice.

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