Many companies require their employees--particularly those who have access to "proprietary" or otherwise "sensitive" information--to sign "covenants not to compete," or CNCs. These written agreements acknowledge that the employees have been, or will be, afforded access to "business plans, computer software, confidential concepts, customer lists, data, designs, developments, discoveries, drawings, inventions, marketing plans, methods, pricing and product information, processes, programs, research, sales information, source codes, techniques, trade secrets, vendor lists, and other information (such as, the composition of compounds, formulae, molds, or other company products)" which are not publicly accessible and damaging to the company's interests, reputation, and/or profitability, if released to a competitor, the public, or otherwise used by the employees for their personal advantage or gain.
To discourage that damage--which is typically incapable of a precise determination at the time the document is signed--the agreement will usually consist of the following components:
1) the employee promises not to compete and/or to disclose the designated information;As you can imagine, CNCs are "disfavored" by courts, particularly when "overly broad" or "onerous" in scope. When litigation is commenced, these documents are examined with a critical eye, and may be found unenforceable if perceived to be "oppressive" or enslaving those who have signed same. In other words, courts will give the agreement short shrift if:
2) for a paticular time period or term (which may not be of an unreasonable duration);
3) within a delineated geographic area (which may not be overly expansive or onerous);
4) for a certain sum payable to the employee according to the specified terms (and which monies may be forfeited in the event of a breach by the employee); and
5) subject to the availability of "injunctive relief" should the agreement be violated (that is, the employer may seek a court order directing--among other things--the return of the information or prohibiting its dissemination, implementation, or use).
it unreasonably limits an employee's ability to earn a living; and/orA case in point is Morris v. Schroder Capital Mgt. Intl. & Schroder Inv. Mgt. N. Am. Inc., where the New York State Court of Appeals was asked to determine whether Mr. Morris--who had been affiliated with an investment banking and asset management company, as a "Senior Vice President and head of domestic equities" encharged with overseeing the company's domestic equity research operations--was entitled to collect deferred compensation which was allegedly forfeited when he left the company to establish a "competing" hedge-fund operation.
the employer's conduct somehow divests the employee of a meaningful choice (such as when an employer creates a work environment intended to induce the employee to leave).
According to the opinion, Mr. Morris claimed that his departure was "involuntary," triggered by a significant reduction in his employment-related functions and responsibilities. Among other things, Mr. Morris alleged that when the assets under his control were reduced "from approximately $7.5 billion to $1.5 billion," he was of the belief that he "was in a 'dead-end job'" and had been given "no alternative but to resign."
In a question certified to the state's highest court by a federal appellate panel (the United States Court of Appeals of the Second Circuit), the New York State Court of Appeals was asked to determine the "test" to be applied when an employee (subject to a CNC) is involuntarily forced to leave a company. The Court of Appeals concluded that a "constructive discharge test" applied and responded to the question, in pertinent part, as follows:
In cases where an employer intentionally makes the employee's work environment so intolerable that it compels him to leave, [the choice in either preserving his rights under an employment contract by not competing or losing them by engaging in competition] is essentially taken away from the employee. In those instances, an employer should not be permitted to enforce an unreasonable non-compete clause and simultaneously deny the employee his benefit under the guise of the employee choice doctrine ....Here is how that particular test works:
Under the constructive discharge test, the actions of the employer in creating the intolerable workplace condition must be deliberate and intentional ..., and the atmosphere in the workplace must be so intolerable as to compel a reasonable person to leave ... The constructive discharge test is not met if the employee is simply dissatisfied with a change in his job assignments ....Since it is unclear from the decision whether the reduction of equities under Morris's direct supervision adversely impacted his job title, salary, and/or seniority, it is difficult to assess--at this juncture--whether Morris forfeited his deferred compensation by engaging in a "competitive" activity or if someone will be "showing him the money" in the foreseeable future.
Fora copy of the Court of Appeals's decision in Morris v. Schroder Capital Mgt. Intl. & Schroder Inv. Mgt. N. Am. Inc. please click upon the following link: