The Enforeability of Restrictive Covenants

Normally, if you enter into an agreement with another person to do or not do something, a court will enforce that agreement if you violate it, with the assumption that you got some kind of fair exchange in the agreement. So, without knowing anything else, you would think that a court would enforce a restrictive covenant. But that is not necessarily the case, at least with restrictive covenants in the context of employment. The reason for this has to do with public policy. There is something about restrictive covenants that courts in New York State don’t like. That something is the effect that restrictive covenants have on competition, and on the ability of employees to make a living.

You should keep in mind that not all states are as tough on restrictive covenants as courts in New York. So, if you live in another state, or work in another state, what I say here about restrictive covenants may or may not apply to you. It depends on the state.

A New York court will enforce a restrictive covenant in the right case, but exactly what is the right case is often difficult to predict. Even when a court enforces a restrictive covenant, it isn’t unusual for the court to reform or re-write the provision to make it less restrictive.

I couldn’t possibly list all of the factors that a court may take into consideration in deciding to enforce a restrictive covenant, but here are some: The nature of the employee’s position. A court is less likely to enforce a restrictive covenant against a file clerk than a high level executive. The nature of the employer’s business. If the employer is a fast food joint, a court is less likely to enforce a restrictive covenant than if the employer is a manufacturer of high tech products. The difficulty involved in identifying potential customers. If every person or business listed in a telephone book is a potential customer, a court is less likely to enforce the provision than if potential customers are few and far between, and hard to identify. The size and insularity of the market. This point is related to the number of potential customers, but is not quite the same. Basically, a restrictive covenant is more likely to be enforced in a small rural market than it would be in a crowded urban market. The investment involved in making a potential customer a paying customer. In some markets, the employer may have to spend a lot of time and money just to find out whether the employer can even service the potential customer. The bigger the investment in qualifying the customer, the more likely a restrictive covenant will be enforced. The size of the transaction has an effect on enforceability. If transactions typically involve only a few dollars, the covenant is less likely to be enforced. If each sale involves millions of dollars, enforcement is more likely..

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