Competition from employees, former employees,

and former owners of Business

New York courts do not permit an employee to compete with his employer based on the theory that the employee has a fiduciary duty to his employer and owes an obligation of loyalty to the employer. An employee who competes with the employer risks the loss of his compensation during the period of his improper competition.

          However, once the employment relationship is severed, different considerations apply. Absent a contractual restriction, a former employee has the right to compete with his former employer and solicit its customers. New York, like most states, is not favorable to restrictions on a former employee’s right to make a living. Even where there is a written employment agreement that contains a restriction on the employee’s ability to compete with the former employer (“restrictive covenant” or “non-compete clause”), courts are reluctant to enforce them absent a unique skill or special and key position of the former employee. Even where such clauses are held to be enforceable, they must be reasonable in time and geographic scope, and required to protect the former employer’s business interest. Clearly the internet has changed the manner of how certain entities do business and may necessitate a re examination of what is needed to protect the former employer’s business and client base.

          New York courts do not tolerate former employees competing by means of unfair competition, i.e. exploiting trade secrets of the employer, obtained during employment, and using them to unfairly compete with the former employer. Trade secrets can include customer lists, pricing data, confidential supplier sources, and other data used by a business which is not readily obtainable by the former employee from external sources. In order for a trade secret to be protected, the company must show that the information was unique to the company and not in the public domain; that it was compiled at considerable cost and time; that it was protected from widespread dissemination; and that the information could not be readily obtained from other sources.

          When a business is sold, the expectation of the purchaser, who is paying for the business’ good will, is that the former owner will not go back into competition with the buyer, and solicit the customers. Thus, even when the purchase agreement does not spell out restrictions on competition, the law provides protection to the purchaser.

          This area of law is complex and cannot be fully described here and consultation with an experienced business litigator is strongly suggested.

Hoffman, Polland & Furman, PLLC.
220 East 42nd Street
New York, New York 10017
Phone: 212-338-0700
Fax: 212-338-0093