Does bargaining power matter with non-compete agreements?

Often times employers give new employees restrictive covenants, such as non-competition, non-solicitation, or confidentiality agreements in a stack of orientation paperwork. Not a good idea. A recent case from New York’s highest court reminds employers not only that it is important to narrowly tailor restrictive covenants, but that it is also worthwhile to take the time to explain the meaning of those agreements to new employees, and even provide those new employees with some time to review them.

In 2014, a New York Appellate Division (Fourth Department) case addressed the partial enforcement of an overbroad non-solicitation provision in an employment agreement.  In Brown & Brown, Inc. v. Johnson, the appellate court held that the non-solicitation provision was overbroad and unenforceable because it prohibited the former employee from soliciting any client of the firm, not just those with whom she developed a relationship while employed by the firm.  The firm sought to have the non-solicitation agreement partially enforced.  In other words, the firm asked the court to modify or “blue pencil” the covenant to make it enforceable.

The appellate court refused to blue pencil the overbroad agreement. In doing so, it cited the unequal balance of power between the employee and employer at the time the agreement was signed.  The entire non-solicitation provision was therefore deemed unenforceable, allowing the former employee to solicit any former clients.

In June 2015, the Court of Appeals reversed the Appellate Division on the partial enforcement issue and sent the case back to the trial court to review the circumstances of the case.  According to the Court, the lower court should have taken a closer look at the facts and circumstances surrounding the signing of the non-solicitation agreement before it decided whether to simply strike the overbroad agreement.  The Court noted that the agreement was not presented to the employee, Johnson, until after she left her prior employment “could have caused her to feel pressure to sign the agreement, rather than risk being unemployed.”  Nevertheless, the mere fact that the agreement was a requirement of the job, and that the employee was not presented with the agreement until the first day of work was not enough alone to deny partial enforcement.  The Court cited other factors that would be considered to determine the partial enforcement issue:  whether the employee understood the agreement, whether it was discussed or explained to her, and whether she was coerced into signing it on the first day or could have sought advice from counsel or negotiated the terms.

The New York’s highest court is sending a clear lesson to employers about restrictive covenants: they must be presented to employees in a non-coercive fashion.  If an employer’s restriction on an employee could be construed as overbroad, courts will consider the circumstances under which the agreement was provided to the employee when determining whether to modify or “blue pencil” it to make it enforceable.  To convince a court to do so, facts must exist showing that the employer took steps to minimize the inherent inequality in bargaining power between the employer and the employee.  While employers may be reluctant to negotiate the terms of these agreements, employers should consider sitting down to explain the meaning of a non-compete or non-solicitation agreement, leaving some time for the new employee to think over and review the agreement, and allowing the employee to seek counsel before signing it.

 

Douglas Lipsky specializes in employment contracts. You should contact Doug Lipsky with questions about terms of restrictive covenants.