A Cautionary Tale in the Use of Non-Compete Agreements

Employers should give careful consideration to the inclusion of non-competition provisions in employment agreements for low-level employees. The New York Attorney General (the "AG") recently announced that it settled investigations with two companies over their use of non-compete provisions in employment agreements for low-level employees. Policing non-compete provisions is a new regulatory frontier for the AG and it is flexing its regulatory muscle pursuant to § 63 (12) of New York's Executive Law, which provides the AG with authority to enjoin businesses from utilizing "unconscionable contractual provisions." [1] The AG investigated and recently settled charges with two companies - Law 360 and Jimmy John's Gourmet Sandwiches - based on their use of "unconscionable" non-compete provisions in employment contracts. In the Law 360 matter, the Attorney General found that Law 360's policy of requiring the majority of its employees - including "rank and file" editorial staff who had little to no knowledge of any trade secrets or confidential information - to sign a one-year non-compete was contrary to New York law. Because these employees did not have access to trade secrets and confidential information, the AG charged that the non-compete was not narrowly tailored to Law 360's legitimate business interests and did nothing more than baldly restrain competition. As part of the settlement, Law 360 agreed that going forward only a small number of its highly paid executives would be required to sign non-compete agreements.

Similarly, in its investigation of Jimmy John's, the AG found that some franchisees required sandwich makers to sign two year non-competes that prevented them from working at any establishment within a two-mile radius of a Jimmy John's location that made more than 10% of its revenue from sandwiches. The AG charged that these employees "are highly unlikely to be privy to trade secrets or confidential customer lists or to have unique skills." Consequently, the AG concluded that the non-compete provisions were "unconscionable". As part of its settlement, Jimmy John's agreed to inform its franchisees that the AG found the non-compete provisions to be unlawful and void.

In both of these cases, the AG focused on the effect of a non-compete on a low-level employee. So, companies should consider avoiding the use of non-compete agreements for administrative personnel and other non-managerial staff. Such provisions are appropriate and are more likely to withstand scrutiny when included in the employment agreements of senior personnel and individuals with unique skills - as long as the provisions are drafted to protect a legitimate business interest. Non-competes are more likely to be upheld if they are designed to ensure that a departing employee will not provide a competitor with an unfair competitive advantage by supplying it with the former employer's trade secrets and/or confidential information. However, it is important to note that requiring all employees - including lower-level staff - to adhere to confidentiality provisions that protect proprietary information and trade secrets does not implicate the same concerns, because enforcement of such provisions does not restrain the employee from working elsewhere. Therefore, confidentiality provisions should be used in all employment agreements where the employee's position involves access to confidential information or trade secrets.

Even when a non-compete is appropriate - such as in the case of a senior manager whose departure would create an unfair advantage for a competitor - its scope and duration must be narrowly tailored to protect a legitimate business interest. To be enforceable in New York, a non-compete must be reasonable in time and area, necessary to protect the employer's legitimate interests, not harmful to the public and not unreasonably burdensome to the employee.

In addition to confidentiality provisions, employers should strongly consider the use of a non-solicitation provision in their employment agreements. Non-solicitation provisions are generally enforceable if they are reasonably related to the employer's interest in protecting relationships with clients the employee worked with or became familiar with while employed. But like non-compete agreements, non-solicitation provisions must also be limited in time and scope.

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[1] See New York Executive Law § 63 (12).

Cheryl Spratt