On March 27, 2024, the Second Department issued a decision in Twitchell Tech. Prods., LLC v. Mechoshade Sys., LLC, 2024 NY Slip Op. 01744, analyzing the enforceability of a restrictive covenant in a commercial contract:
Under New York law, the enforceability of a restrictive covenant depends in part upon the nature of the underlying contract. Restrictive covenants may be enforceable in three types of contacts: (a) contracts for the sale of a business, (b) employment contracts, and (c) ordinary commercial contracts. Restrictive covenants in contracts for the sale of a business, which involve the transfer of goodwill, are enforceable because a buyer of a business should be permitted to restrict its seller’s freedom of trade so as to prevent the latter from recapturing and utilizing, by competition, the good will of the very business which it transferred for value. By contrast, with employment agreements, as the element of good will, or its transfer, is not involved and since there are powerful considerations of public policy which militate against sanctioning the loss of a person’s livelihood, the courts have generally displayed a much stricter attitude with respect to covenants of this type. In the context of employment agreements, the Court of Appeals holds that a covenant not to compete is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public.
The parties agree that this case falls into the third category, restrictive covenants in ordinary commercial contracts. As has been recognized by other courts, New York law does not contain a large body of guidance on the assessment of covenants not to compete within ordinary commercial contracts. However, we agree with those courts that have analyzed these types of covenants under a simple rule of reason, balancing the competing public policies in favor of robust competition and freedom to contract.
Under this rule of reason, courts should consider: (1) whether the covenant protects a legitimate business interest; (2) the reasonableness of the covenant with respect to geographic scope and temporal duration; and (3) the degree of hardship upon the party against whom the covenant is enforced. Although this simple rule of reason analysis is similar to the factors examined in the context of employment contracts, in cases involving restrictive covenants in ordinary commercial contacts, courts should accord more deference to parties’ freedom to contract. Further, the application of these factors depends entirely on the totality of circumstances.
(Internal quotations and citations omitted).