I am frequently called upon to draft and negotiate employment, consulting and joint venture agreements. Most of these agreements contain a noncompete clause in one form or another. Because noncompete clauses can have severe consequences, they are often the subject of heightened scrutiny, concern and, not infrequently, litigation. As such, they warrant close attention. Whether at the negotiation stage or in litigation, my clients usually have the same basic question: if push comes to shove, will this noncompete hold up in court?
By definition, noncompetes restrain trade in a free market and have the potential to prevent individuals from earning a living. For this reason, some states (California, North Dakota and Oklahoma) have outright prohibitions on the enforceability of non-compete clauses in personal employment contracts. But most states, including Connecticut and New York, do not have such broad prohibitions and courts in these states will enforce a noncompete clause, provided it is not "unreasonably restrictive."
No Bright-Line Rule
Courts tasked with assessing the reasonableness of a noncompete clause do not look to any bright-line rule, but instead consider and balance a variety of factors. While the specific factors vary from state to state, the overall analysis is practically the same in most states. In Connecticut, for example, the court considers five factors of reasonableness:
The first two - length of time and geographic scope - are highly intertwined considerations. For example, a restriction that covers a large geographic area might be found reasonable if in effect for a brief period of time, while a restriction that covers a longer period of time might be found reasonable if it covers a relatively small or confined geographic area.
Customer-Specific Noncompete Clauses
Generally, in order to be found reasonable, a noncompete clause must be limited to an identified geographic area. However, in some situations, a party may be interested in restricting the other’s ability to transact business with the employer’s customers, or with certain competitors, wherever they may be. In these circumstances, the noncompete can be reasonable even without specifying a certain geographic area – in these situations the customer/competitor list essentially serves as the geographic component. Of course the duration of the restriction will still be a necessary aspect, and a variety of facts must be considered to determine if a customer/competitor-specific noncompete is excessive and unreasonable.
Additionally, with customer lists that are confidential, an employer may seek protection, apart from a noncompete clause, under trade secret law and there is often provision for this in the agreement.
Can an Overbroad Noncompete Clause Be Saved?
Some parties believe they can impose an aggressive non-compete clause- with a long duration or a broad geographic scope, or both, with the expectation that if a court finds the clause unreasonable, it will simply reduce the restrictions to make them "reasonable." But I caution clients considering this approach. It is true that some courts will modify and enforce an otherwise excessive noncompete clause. But there are no guarantees and some courts will do this only if the party seeking to enforce the noncompete proves that the clause was negotiated at arm's length and without coercion or other misconduct.
Some courts will simply refuse to enforce a noncompete clause at all when it finds that the clause in issue has multiple problems. Given that, it is important to give careful consideration to the scope of any noncompete introduced into a contract.
There is no indication that more states are moving any time soon towards a general prohibition of noncompete clauses like California. Undoubtedly, these clauses will continue to be important aspects of employment, consulting and joint venture agreements for years to come.
Please contact us you would like more information about noncompete law in Connecticut or New York, or if you need assistance with the negotiation or litigation of a noncompete matter.
Posted: March 17, 2016
Every so often, a client comes to me with questions about a Letter of Intent. The questions usually arise in the context of negotiations toward significant contracts - joint ventures, business mergers/sales and large customer contracts. Typically, my client wants to understand the extent to which a Letter of Intent could result, unintentionally or otherwise, in contractual liability, and whether the letter serves any real purpose. These are legitimate questions.
A good faith
As Arthur Corbin, the esteemed professor of contract law (Yale Law School, 1909-1943), once noted, it certainly is true that Letters of Intent have led to much misunderstanding, litigation and commercial chaos. But Prof. Corbin also recognized that a Letter of Intent, if carefully prepared and properly used, can provide an outline for a yet-to-be-finalized agreement – a road map leading to a contract. Once executed, each party can be relatively certain that the other has a good faith desire to continue the negotiations to achieve the objective or final agreement outlined in the letter.1 Thus, as a mechanism to help advance contract negotiations, a Letter of Intent can indeed be a useful document.
Is it a
Generally speaking, a Letter of Intent imposes no binding contractual obligation on the parties except perhaps the obligation to continue negotiating in good faith. However, there are circumstances where a Letter of Intent does create more significant contractual obligations. Whether and the extent to which a Letter of Intent results in a binding contractual commitment depends on the language used in the letter and the circumstances surrounding the transaction.
Can disputes be
Disputes arising from a Letter of Intent most often occur when one of the parties signs the letter believing it creates a contractual commitment, or when the parties impatiently proceed to perform the terms outlined in the letter without finalizing their agreement in a further and more comprehensive contract. Where neither party intends the Letter of Intent to create any binding obligations, other than to negotiate in good faith, disputes can be avoided by including specific language in the Letter of Intent that makes this clear.
It can support contractual obligations.
Aside from the obligation to negotiate in good faith, a Letter of Intent can be used as a basis to impose certain contractual obligations relating to the parties’ ongoing negotiations. These might include agreements pertaining to the handling and disclosure of confidential information or an agreement not to solicit business from customers/clients of the other party. The parties might also agree in the Letter of Intent that one of the parties might take certain preliminary steps toward the ultimate project at a set price.
Letters of Intent do have their rightful place in many contract negotiations. The key is to know when and how to use them, and to craft them in a way that effectively represents your business’s interests.
Contact us if you would like more information on Letters of Intent, or if you would like help in drafting one.
Fn. 1. See 1A Corbin, Contracts (Rev. Ed. 1993), §1.16, pp. 46-47.
Milford, CT, January 7, 2016 – attorney Robert M. Fleischer, formerly of Pryor Cashman, LLC (Manhattan) has opened his own legal practice in Milford, Connecticut. Fleischer Law will be focused on general business guidance, business bankruptcy and commercial litigation matters in Connecticut, New York and other jurisdictions. A seasoned practitioner with more than two decades of experience representing sophisticated business clients, Robert takes a no-nonsense, consultative approach to meeting his clients’ legal needs.
“My guiding principles are to provide insightful and cost effective legal guidance by understanding my clients’ businesses and goals,” says Rob. “Timely response to client communications will be a priority for the firm - important business should not be delayed waiting for counsel to respond.”
Robert earned his undergraduate degree from Northeastern University and his law degree from Pace University School of Law. He was admitted to the Connecticut Bar in 1992 and the New York bar in 1993. Robert started his legal career as an associate with the litigation and bankruptcy practice group of Gregory and Adams, P.C. (Wilton). In 1997, Robert joined Jacobs Partners, LLC in Norwalk where he continued to focus his practice on general business representation, business bankruptcy and litigation. Robert joined the bankruptcy practice group of Pryor Cashman in January of 2008.
Robert and his wife Jennifer, a native of Milford, live in town with their two children.
Robert M. Fleischer, Principal
Direct Dial: (203) 283-3369
12 Centennial Dr
Milford, CT 06461
New York Office:
75 South Broadway
White Plains, NY 10601