Should New York Restrict Restrictive Covenants?
Recent news about Crystal Run Healthcare suing Orange Regional Medical Center, for hiring one of their former doctors, raises the issue of the use of restrictive covenants in employment contracts. News reports say the doctor’s employment agreement with Crystal Run prohibits her from practicing medicine within 15 miles of any Crystal Run office for one year after leaving. Earlier this year there was news reports of a different lawsuit between Crystal Run and several of its doctors. It was reported that their restrictive covenants lasted for two years following employment.
Restrictive covenants were not enacted into law by a legislature, but were developed by creative lawyers trying to protect their clients’ interests. Employers often invest heavily in educating and training their employees. They have a legitimate interest in not having such an employee bring all that benefit to a competitor, or to their own start-up. Employers also invest in acquiring clients, and do not want to lose those clients to former employees. Employers also have trade secrets which they share with employees and which they are entitled to protect in order to maintain their competitive advantage. Also, employers sometimes have special relationships with vendors and suppliers. All these are legitimate employer interests and good arguments for restrictive covenants.
When employees brought litigation challenging restrictive covenants, judges made up the rules as they went in the tradition of our inherited English common law. Against the employer’s interests, it was recognized that employees should have the ability to earn a living and advance in their chosen field. Often, real advancement only comes when changing employers. Employees also invest in their own education and training. Also, the State does not want to have to support a former employee unable to take new work, and her family, on public assistance. There is also a public interest in making the services of the employee readily available to consumers. Judges basically established “rules of reason”: restrictive covenants will be enforced if they are reasonable as to geographic scope, duration in time, and the activities impacted. Every case must be assessed on its own merits.
Some state legislatures did enact legislation, and their laws are all across the board. Some states are considered employer-friendly and other states are considered employee-friendly. New York has no legislation, only judge-made case law.
In recent years, restrictive covenants have been in the news as being overused. Cooks and servers in fast food restaurants have been restricted from going to work for competitors. It is hard to see what legitimate employer interests are at stake in such circumstances.
Another interesting observation concerns two centers of high-tech start-ups here in the U.S. California has largely prohibited restrictive covenants, while Massachusetts enforces them. Many believe Silicon Valley is a more successful, creative, and vibrant tech community than Boston’s Route 128, partly because in California the employees are more free to strike out on their own and create their own start-ups, or join other firms. Massachusetts and other states are considering legislation to restrict restrictive covenants.
Here at home it is distressing to think that good doctors might be prohibited from treating local patients for a year or more. Do the interests of the employer in such a case really outweigh the interests of the doctors, and their patients, and the public? Did the employer really invest heavily in the doctors’ education and training? Has it shared confidential trade secrets with them? None of this seems likely.
Whatever the results of the current litigation, our State legislature should consider whether our current laws about restrictive covenants are doing more social and economic harm than good.
This is not intended to be legal advice. You should contact an attorney for advice regarding your specific situation.
Gary Schuster is a Partner with the firm and practices Business Law, and Arts & Entertainment. He can be reached by phone at 866-303-9595 toll free or 845-764-9656 and by email.