Non-Compete Clause Covering All of United States and Canada Unenforceable

On April 13, 2020, Justice Borrok of the New York County Commercial Division issued a decision in Stone Source, LLC v. Hubbard, 2020 NY Slip Op. 30941(U), holding that a non-compete provision covering all of the United States and Canada was unenforceably over-broad, explaining:

A restrictive covenant will only be upheld to the extent that it is reasonable in time and area, necessary to protect the employer's legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee.

The Defendants primarily argue that the Non-Compete Clause is unenforceable because it contains no definitive term during which Ms. Hubbard would be restricted from competing with Stone Source. In their opposition papers, Stone Source argues that it is not required to specify a precise time period for Ms. Hubbard’s leave, as long as such time does not exceed the Hubbard Agreement’s one-year limitation for such leave and Stone Source continues to pay Ms. Hubbard during this time.

A one year restrictive covenant has been held to be reasonable. It is simply of no moment that the Non-Compete Clause is not to exceed one year and not one year because the Hubbard Agreement provides sufficient notice of the restrictive period. The Defendants’ arguments to the contrary are simply unavailing. This is particularly so because Ms. Hubbard is being paid her salary as long as the Non-Compete Clause applies. To wit, courts have upheld similar noncompete provisions that restrict an employee from working post-employment while the employee is compensated for their forbearance.

However, the critical issue which torpedoes the Non-Compete Clause is that its geographic scope is unreasonable and unenforceable – i.e., the Restricted Territory (throughout the United States and Canada) is broader than the area that she covered during her employment. In other words, the problem is that that by having the Restricted Territory cover all of the United States and Canada, a territory which is undeniably beyond the area she covered during her active employment period, Ms. Hubbard is not being compensated for this amount of forbearance. Stone Source simply is not paying her for the restriction as it relates to areas she never worked in. Hence, the restriction is overbroad, unreasonable and not enforceable. Put another way, Stone Source can pay Ms. Hubbard to prevent her from doing a job closely approximating the job she was doing, but they cannot use a garden leave provision to stop her from doing every job. Accordingly, the branch of the Defendants’ motion to dismiss the permanent injunction as it relates to the Non-Compete Clause is granted.

(Internal quotations and citations omitted).

Non-compete provisions are subject to a number of limitations, as this decision shows. However, courts will in appropriate circumstances enforce them through an injunction. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the enforcement of an employment contract.