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Understanding The Legalities Of Non-Compete Clauses In Business Litigation

 

Non-compete clauses, also sometimes referred to as “NCCs,” “non-compete agreements,” or simply “non-competes,” can serve an important function in protecting a company’s trade secrets and preventing employees who benefit from specialized training at the expense of one business from immediately offering their newly-elevated skills to a competitor. However, the legality of non-compete clauses has been brought into question several times in recent years, by regulators at both state and federal levels, while the enforceability of NCCs continues to be a complicating factor in many instances of business litigation. Businesses seeking to navigate the complex legal questions involved in developing legally enforceable non-compete clauses – as well as evaluating viable alternatives, when appropriate – may benefit from consultation with the experienced business law team at Schwab & Gasparini. For your convenience, we maintain offices throughout New York State. Call us at (315) 422-1333 to speak with our team members in Syracuse, dial (914) 304-4353 to connect with our attorneys in the Hudson Valley and White Plains area, or schedule a consultation in Albany by calling (518) 591-4664.

What Is a Non-Compete Clause?

A non-compete clause is typically drafted and signed as part of an employer-employee agreement. The major purpose of non-compete clauses is to prevent employees from learning a business and then opening their own version, in direct competition with their former employers; some particularly broad non-compete clauses aim to prevent employees from leaving a business and seeking employment with its existing competitors.

The prevalence of non-compete clauses can vary somewhat by industry. The enforceability of such clauses, on the other hand, varies widely by jurisdiction, with some states strongly discouraging noncompetes, others virtually banning similar clauses, and still others relying heavily on the guidance of federal regulators. The complexity of the legal landscape, particularly for businesses that maintain operations in more than one state, can make the legalities of non-compete clauses difficult to navigate – yet addressing them early and often can help to ward off complications during business litigation, should a dispute arise.

Non-Employee Agreements: Managing Competition and Risk in Business Contracts Outside the Employer-Employee Relationship

Notably, some businesses, for a variety of reasons, occasionally wish to include non-compete clauses in their agreements with independent contractors – usually during the period of the contract, or in cases where the business (Company A) works with the same contractor on a semi-regular basis, for the duration of a specific project. The goal in these instances is typically to ensure that the same contractor will not take on a substantially similar project for one of Company A’s direct competitors (Company B) at the same time.

Identifying the Underlying Concerns

In some instances the underlying concern may be not that the contractor’s work-product for Company B will be better than their work-product for Company A (thereby giving Company B an edge in the competition), but that the contractor might (intentionally or inadvertently) reveal details about the internal operations and deliberations of Company A, of which the contractor has become aware in the course of their work for that business, to anyone in the organizational structure at Company B. The legality of non-compete clauses in independent contractor agreements can present questions even more complicated than those involved in employee contracts, in part because some jurisdictions consider a non-compete clause itself to be evidence that the individual worker is likely an employee and not an independent contractor (raising a separate set of potential compliance issues relating to wage and hour violations).

Selecting Risk Management Strategies

Business attorneys rarely use the terms “always” and “never” to describe the legal landscape, since much can depend on the circumstances of the individual case. In general, however, because non-compete clauses already face significant legal headwinds, and because the impetus for drafting such clauses in non-employee contexts is often related to concerns about a company’s proprietary information, business owners and leaders considering how to mitigate their risk exposure in working with external parties such as independent contractors may wish to consider discussing their protections under the Defend Trade Secrets Act of 2016 (DTSA) with an experienced business law attorney in their area. 

As the American Bar Association (ABA) explains, the DTSA includes provisions that apply specifically to parties who have a duty to maintain the secrecy of the information they have acquired. Those provisions will not prevent an independent contractor from doing excellent work for one of your competitors, any more than you can prevent a vendor from selling similar goods to other businesses in your industry. They can, however, give a business whose proprietary information has been improperly divulged to competitors a strong case for relief in the civil courts.

Shifting Legal Landscape: Background and Recent Developments

The overwhelming majority of non-compete clauses, of course, are drafted and signed in the context of employment contracts, and the focus of existing regulatory frameworks has continued to reflect this reality, even as use (and therefore awareness) of NCCs has grown over the past few decades. As far back as 2014, the Harvard Law School Forum on Corporate Governance noted that for high-paying executive positions, particularly, the prevalence of non-competition provisions in contracts for these roles increased sharply from the 1990s to the 2000s, from 60% to 65% in the early portion of the 1990s to as high as 89% in 2008 before dropping slightly over the next few years.

Economic Stakes

The widespread use of such clauses – and especially the normalization of their expansion beyond highly compensated executive roles, to encompass other ranks within the organizational hierarchy – has created re-employment challenges for individuals who leave or lose their jobs, as a non-compete clause can significantly impact a former employee’s options for finding future work. While many employers may consider this a problem belonging to the employee, rather than the organization, the practical reality is that, at scale – the Federal Trade Commission (FTC) estimated in early 2023 that around 20% of United States workers were bound by the terms of non-compete clauses – the restrictions imposed by NCCs can have “ripple” effects beyond the personal inconvenience to former employees. Particularly in industries that have been affected by substantial waves of layoffs, the pervasive use of non-compete clauses can significantly limit the talent pool by putting otherwise desirable candidates out of reach for the term of their NCCs.

Regulatory Considerations: Updates and Legal Challenges to Federal Rulemaking

In response to widespread concerns about the increased prevalence of non-compete clauses across multiple industries and at multiple levels within companies’ organizational structures, the FTC introduced proposed rulemaking in 2023, followed by the publication of its Final Rule in the Spring of 2024, sharply curtailing the legal uses of NCCs, with potential implications for the legal enforceability of some non-compete agreements already signed that did not align with the updated guidance. However, the “Final Rule” was challenged in court before its scheduled effective date in September 2024, and a report from KFF examining the legal status of non-compete clauses for health care workers employed by not-for-profit hospitals notes that the FTC Final Non-Compete Clause Rule was placed under injunction by the federal judge presiding over Ryan, LLC v. FTC in July of that same year.

Further complicating the picture, a change of Presidential administrations has taken place in the intervening period, with the incoming administration signaling a particular interest in reviewing, and perhaps revising, pre-existing guidance. Business attorneys who frequently advise clients on compliance issues will be aware that it is not unusual to find some degree of changes in the regulatory emphases and operational oversight of federal agencies in the Executive Branch from one Presidency to the next, but more pronounced departures from recent policy will – if implemented – have the potential to result in comparably more dramatic changes in business practices, making it essential for businesses to stay up to date with the latest changes in the regulatory environment.

Regulatory Considerations: Maintaining Compliance With the Rules in Your State

Unfortunately for business teams working to protect their interests, federal regulations – however fixed or fluid they might be – are not the only rules to consider. Many states, including New York, have their own regulatory frameworks that can affect the legality of non-compete clauses, particularly when signing them is made a condition of employment. These state requirements can also in many instances affect the enforceability of a non-compete clause if a contract dispute proceeds to business litigation. Businesses operating in multiple states will need to take care to verify which state’s laws apply to their own employee contracts, as it can often be the location of the signatory, or the location where the agreed-upon work is to be conducted, that controls non-complete clause legality. In the event that a dispute goes to business litigation, state labor laws can often play a significant role in determining whether a non-complete clause previously signed by a company employee is ultimately enforceable.

Factors That May Affect the Legality of NCCs

As frustrating as the intersections of state and federal regulations can sometimes be, one potential source of reassurance for many business owners is that, even while litigation over the FTC’s 2024 rule remains pending, many states – including New York – provide detailed guidance regarding how employers as well as employees should approach non-compete agreements and their potential implications. In New York, some of the most concise and directly applicable guidance is found in a Frequently Asked Questions (FAQs) sheet provided by the New York State Attorney General’s office.

This FAQs sheet indicates that most NCCs are prohibited under state laws, but also outlines the parameters under which “non-competes” are permitted and legally enforceable. Broadly speaking, for a non-compete clause in an employee’s contract to be enforceable in the event of business litigation in New York State, the NCC must meet the following criteria:

• The non-compete must be “necessary” to safeguard the legitimate interests of the employer. Depending on the circumstances, “necessary” can sometimes be a high bar to clear, and so a business law attorney with Schwab & Gasparini will often review other possible solutions for protecting a company’s interests to make sure all avenues have been thoroughly explored, prior to recommending the inclusion of a non-compete clause.
• The non-compete clause is not harmful to the public. Here it may be helpful to think of “the public interest,” as framed by economic advantages and access to information, rather than thinking of a direct threat to public safety.
• The terms set out in the non-compete clause may not unduly burden the employee bound by the agreement. The factors that can lead to “undue” hardship may vary from case to case, but as a general rule it can be helpful to think in terms of the scope of the NCC and the relative breadth of the industry and role in which the employee will work.
• The non-compete clause must establish limits that are “reasonable” in their duration and region. Duration, in this context, is the length of time the NCC will be in force once employment is concluded, while region is the geographic range, or market, throughout which the NCC will apply for that period of time. Geographic region, in particular, can sometimes become a complex question to navigate, especially in fields with a high degree of remote work.

Importantly, the Attorney General’s office specifies that the terms of a non-compete clause must be only as broad as necessary to achieve the essential goal of protecting the employer’s interests, which themselves are generally subject to fairly narrow interpretations.

Learn More From a New York Business Law Attorney

Non-compete clauses have been the focus of significant regulatory scrutiny for the past few years, raising questions about how NCCs may be handled in the event of business litigation. The enforceability of these contract clauses can depend on a number of factors, but the overarching principles involved are generally to choose options likely to prove less burdensome to their signatories whenever practical, and to make the terms of such clauses no broader than necessary to fulfill their purpose. For more detailed guidance, or to discuss your specific concerns regarding New York non-competes, reach out to the business law team at Schwab & Gasparini. You can connect with our Syracuse office by calling (315) 422-1333, find us in Albany at (518) 591-4664, or get in touch with our team members in the White Plains and Hudson Valley area when you dial (914) 304-4353.

Mon Jul 28 2025, 12:00am