Executives Moving to a Competitor

A senior executive changing companies carries more risk into the new job than almost anyone else. You know the pricing, the pipeline, the roadmap, and the people. You signed agreements years ago that you have not read since. Your unvested equity, and possibly some of your vested equity, may contain a provision that forfeits it if you go to work for a competitor. And your new employer, which is delighted to have you, will not be paying for your defense unless you negotiated for that in advance.

The Law Offices of Albert Goodwin advises New York City executives before, during, and after a move to a competitor.

Start With What You Actually Signed

Executives typically have obligations in more places than they remember: the offer letter, an employment agreement, a separate confidentiality and invention assignment agreement signed on the first day, the equity incentive plan, each individual award agreement, a bonus or commission plan, and sometimes a stockholders agreement or a partnership agreement. Restrictive covenants appear in all of them, and they do not have to be consistent with each other.

The provisions to locate are the non-compete, the customer non-solicit, the employee non-solicit and no-hire, the confidentiality clause and how it defines confidential information, the invention assignment and whether it reaches work created on your own time, any garden leave or notice period, the forfeiture for competition provisions in the equity documents, and the choice of law and venue clauses. An executive who says confidently that they have no non-compete is, in our experience, wrong roughly half the time, usually because the restriction lives in the equity plan rather than the employment agreement.

How New York Treats Non-Competes

New York has no statute banning employee non-competes. Legislation to enact one has been introduced and has not become law, and the federal rule that would have banned most non-competes nationally was set aside in litigation. Enforceability in New York is therefore governed by common law, and New York courts apply a reasonableness standard that is genuinely a standard rather than a formality.

A restraint is enforceable only if it is no greater than required to protect a legitimate employer interest, does not impose undue hardship on the employee, and is not injurious to the public. Legitimate interests are limited, and generally include protection of trade secrets and confidential customer information, protection against misappropriation of goodwill with customers the employee served, and, in narrow cases, the employee's unique or extraordinary services. Ordinary competitive skill is not a protectable interest. Duration and geography must be tied to the interest asserted, and in New York City, where competitors are frequently within blocks, a broad geographic restriction may be less defensible than a well-drawn customer restriction.

Courts in New York may partially enforce an overbroad covenant, narrowing it rather than voiding it, particularly where there is no evidence of overreaching by the employer. That possibility cuts against the common assumption that an obviously excessive covenant is simply unenforceable. Non-solicitation covenants, which are narrower, are more readily enforced than pure non-competes, and confidentiality obligations are enforceable without regard to the non-compete analysis. See non-compete defense, non-solicitation agreements, and non-compete clauses.

The Equity Forfeiture Problem

Separate from whether a court would enjoin you from taking the job is whether leaving costs you your equity. Many plans provide that unvested awards are forfeited on any termination, that vested but unexercised options expire shortly after departure, and that awards may be cancelled or profits clawed back if the holder competes within a stated period.

New York applies a distinct analysis to these provisions, sometimes called the employee choice doctrine. Where an employee voluntarily leaves, a forfeiture of benefits conditioned on competing may be enforced without the usual reasonableness scrutiny, on the theory that the employee chose between the benefit and the competition. The doctrine generally requires that the employer have been willing to continue the employment, so it typically does not apply where the executive was terminated involuntarily, and a constructive discharge can defeat it as well. The difference between resigning and being terminated can therefore be worth the entire value of an equity position, which is a reason to get advice before submitting a resignation.

Trade Secrets and the Move Itself

Most litigation between an executive and a former employer is not really about a non-compete. It is about what left with the executive. The pattern is familiar and avoidable: documents forwarded to a personal email account in the final weeks, a contacts export, a deck saved to a personal drive, a laptop wiped before return. Even where nothing was used, that conduct converts a defensible departure into a case with forensic evidence and bad optics.

Federal and New York law both provide remedies for trade secret misappropriation, and the federal statute permits claims for actual loss, unjust enrichment, and in exceptional cases of willful misappropriation, exemplary damages and attorney fees. Employers routinely pair those claims with breach of contract, breach of fiduciary duty and the faithless servant doctrine, and tortious interference claims against the new employer.

The rules we give departing executives are simple. Return everything. Take nothing, including material you personally created. Do not forward anything to a personal account, at any point, for any reason. Do not delete or wipe anything, because deletion looks worse than possession. Rebuild your contact list from public sources rather than exporting it. And do not begin recruiting former colleagues before you leave. See trade secret claims and book of business disputes.

Protections to Negotiate With the New Employer

An executive with a known restrictive covenant has leverage to ask for protection, and the request is ordinary rather than presumptuous. Terms worth seeking:

• Indemnification and advancement for claims brought by the prior employer arising from your hiring, with counsel of your choice or at least your consent.
• A make whole provision for equity or bonus you forfeit by leaving, in the form of a signing award structured to replicate what you lost.
• Continued pay if you are enjoined, or an agreed alternative role during any period you cannot perform the intended one.
• Written acknowledgment of your obligations and a mutual commitment that you will not be asked to use or disclose prior employer information, which protects both of you.
• Your own indemnification agreement and D&O coverage at the new company. See indemnification and advancement.

See employment contract review.

Handling the Departure

Sequence matters. Resign cleanly and in writing, without a recitation of grievances if you intend to preserve a claim, and without a statement about where you are going if the agreement does not require one. Comply with any notice or garden leave period rather than treating it as optional, since breaching it hands the former employer an easy claim. Expect a reminder letter enumerating your obligations, and respond to it through counsel rather than personally. Assume your work email, messages, and device activity for the last several months will be reviewed in detail, because they will be.

If a cease and desist letter or a temporary restraining order application follows, the response window is measured in days. Preliminary injunction practice in these cases moves quickly, and the record that matters is the one created before anyone filed anything.

If You Are on the Other Side

We also represent companies protecting legitimate interests when a senior executive leaves, including assessment of what is actually enforceable before a demand is sent, forensic preservation, and injunction practice. Sending an aggressive letter that overstates an unenforceable covenant can produce a declaratory judgment action and a worse position than doing nothing. See non-compete enforcement.

You can contact us by phone at 212-233-1233 or by email at [email protected].