Passive Leads Not Protected – New York Federal Court Rejects Enforcement of Non-Compete
Written by Tyrone P. Thomas
It is a story familiar to many companies. Company hires employee into a managerial position exposing the employee to its confidential and trade secret information. To protect its interests, the company requires the employee to execute a non-compete agreement. Employee thereafter leaves the company to work for a competitor. Company promptly attempts to enforce said non-compete agreement, but meets resistance from a suspicious court. The story was no different in Frantic v. Konfino, a recent decision out of a New York Federal Court. The lesson, as always: ensure that your non-compete agreements are narrowly tailored to protect your legitimate business interests.
In Frantic, the court reviewed a post-employment covenant restricting a help-desk manager from engaging in technical and computer support and networking services for 18 months after leaving employment. The agreement also prohibited the employee from soliciting the company’s employees for 18 months and its clients for 2 years. Although it denied the employee’s motion to narrow or void the non-compete because of unresolved material issues of fact, the court, must to the company’s dismay, still expressed a clear view that the agreement’s restrictions were overbroad.
In New York, there is a three part test to determine the reasonableness – and therefore enforceability – of a non-compete agreement – (1) is the restraint no greater than necessary to protect the employer’s legitimate business interest, (2) does it create an undue hardship on the employee, and (3) is the limitation harmful to the public. The Frantic court found the non-compete overbroad because it prevented the employee from servicing any potential clients in the industry, not just former customers. In an important cautionary tale from the ruling - the court found the company’s interest in acquiring business from potential clients to be limited to those it was actively pursuing. Other New York courts have applied similar analyses, and this result is hardly surprising.
Of course, no dispute over a non-compete arrangement is complete without a parallel fight over whether the employee misappropriated trade secrets. To make this case more interesting, the employee…..accidentally…..logged on to the employer’s network after termination, but disputed having or retaining any of its trade secret information. He likewise denied downloading information for 6 hours on the day before he turned in his notice of resignation. Ultimately the court found material issues of fact remained for determination as to whether the employee maintained and possessed company trade secrets, and even if so, how long that information remains competitively valuable.
The pitfalls in protecting a company’s current and prospective customers from an enterprising former employee run far and wide. As this case illustrates, a non-compete that is restricted for a reasonable period of time may be unenforceable for a series of other reasons. As many of the hurdles in preparing and enforcing post-employment restrictions are fact-specific, there is not a one-size fits all remedy in this area. We recommend that you contact your outside counsel to ensure that, if challenged, a court (in the applicable jurisdictions) would enforce your restrictive covenants. Our employee mobility practice group is well-versed in all matters relating to restrictive covenants and can assist with such a review. And one last thing, as this case shows, it is quite necessary to take steps to prevent employees from taking years of inside business development information across town to a chief competitor – something as simple as shutting down Konfino’s access to Frantic’s electronic systems before he walked out the door would have lessened Frantic’s legal headache considerably here.