Whether a non-compete binds a departing employee is rarely a single question. In a matter that crosses New York and Delaware, it splits into several: how a court treats a straight bar on competition, how it treats a narrower promise not to solicit clients, how it treats a clause that forfeits deferred pay for competing, and which state's law applies at all. New York and Delaware answer these questions differently, and the answers can diverge within the same agreement. This explainer sets out the reasonableness test, the employee-choice doctrine that governs forfeiture clauses, the limits of a Delaware choice-of-law clause in a New York court, and the federal position after the collapse of the FTC's proposed ban. The doctrine is illustrated through a common fact pattern: an investment-advisory firm, with New York as its forum and Delaware as its chosen law, seeking to enforce covenants against a departing adviser it terminated without cause.
The New York Reasonableness Test
New York courts disfavour non-compete agreements and apply a rigorous three-prong reasonableness test. Under the leading authority, BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (1999), a restrictive covenant is enforceable only if it satisfies each of three conditions:
- it is no greater than necessary to protect a legitimate employer interest;
- it does not impose undue hardship on the employee; and
- it is not injurious to the public.
Courts construe non-competes strictly because of what BDO Seidman called the "powerful considerations of public policy which militate against sanctioning the loss of a person's livelihood". The New York Attorney General's guidance restates the position: a non-compete is enforceable only to the extent necessary to protect legitimate interests such as trade secrets, confidential information and goodwill, and only if reasonable in time period and geographic scope.
Applied to a covenant of moderate duration and limited reach, for example an 18-month restriction over the New York metropolitan area, the duration and the radius are each within the range courts have accepted for financial-services professionals. The difficulty usually lies elsewhere. A pure non-compete bars the employee from practising the profession at all within the covered area, regardless of whether the employee approaches any former client. For an investment adviser, preventing solicitation of established clients is a recognised legitimate interest, but a bar on providing advisory services to anyone at all is broader than that interest requires, and a court may treat it as an unreasonable restraint on the ability to earn a living.