6 Chapter Restrictive Covenants

Transcription

Chapter
6
Restrictive Covenants
Under New York Law
M. Alexander Bowie, II, Day Pitney LLP1
6-1
Introduction
Absent an agreement to the contrary, New York law does not
prohibit former employees from engaging in competition with
a former employer, so long as the former employee does not
use improper means, such as misappropriating confidential
information or revealing trade secrets.2 As a result, many employers
include clauses in employment agreements restricting a former
employee’s ability to compete with the employer after the end of
the employment relationship. This chapter will address how the
New York courts treat restrictive covenants in agreements between
employers and employees.
1.
The author wishes to thank Michael A. Weiss and Chelsea E. Mullarney for their
invaluable assistance in preparing this chapter.
2.
Reed, Roberts Assocs., Inc. v. Strauman, 353 N.E.2d 590, 592-93 (N.Y. 1976); see
also Innoviant Pharmacy, Inc. v. Morganstern, 390 F. Supp. 2d 179, 194 (N.D.N.Y. 2005)
(“Absent a written agreement precluding or restricting such activities, New York law
does not prohibit an employee from engaging in head to head competition with a former
employer, provided that the employee does not unfairly compete such as through the use
of proprietary information misappropriated from the former employer.”); Pearlgreen
Corp. v. Yau Chi Chu, 778 N.Y.S.2d 516, 517 (N.Y. App. Div. 2004) (“In the absence of
a restrictive covenant, an employee may freely compete with a former employer ‘unless
trade secrets are involved or fraudulent methods are employed.’”) (internal citations
omitted).
New York Business Litigation 2013
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Chapter 6 6-1:1
Restrictive Covenants Under New York Law
Definition
Restrictive covenants are express agreements or provisions
between an employer and an employee under which the employee
is precluded, often for a specified period of time within a specific
geographic area, from certain forms of competition with the
employer following the end of the employment relationship.3
New York statutory law does not restrict a former employee’s
right to compete with a former employer or a former employer’s
right to restrict that competition by contract. As a result, the law
governing the enforceability of restrictive covenants has been
developed by the courts.4
New York courts disfavor restrictive covenants that prevent a
former employee from pursuing a similar profession after the end
of the employment relationship,5 although they have recognized
that there are situations in which enforcement of such covenants
is essential.6 Therefore, courts undertake a fact intensive,
“reasonableness” analysis to determine whether the covenant
should be enforced.7 To be enforceable, the restrictions must be
necessary to protect the former employer from unfair competition
by the former employee.8 If the former employer can show that the
restriction is necessary to protect a legitimate interest, then the
3.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999); Columbia Ribbon & Carbon
Mfg. Co. v. A-1-A Corp., 369 N.E.2d 4, 6 (N.Y. 1977).
4.
See, e.g., BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999); American Broad.
Cos. v. Wolf, 420 N.E.2d 363 (N.Y. 1981); Columbia Ribbon & Carbon Mfg. Co. v. A-1-A
Corp., 369 N.E.2d 4 (N.Y. 1977); Reed, Roberts Assocs., Inc. v. Strauman, 353 N.E.2d 590
(N.Y. 1976); Purchasing Assocs., Inc. v. Weitz, 196 N.E.2d 245 (N.Y. 1963).
5.
Reed, Roberts Assocs., Inc. v. Strauman, 353 N.E.2d 590, 593 (N.Y. 1976) (stating that
restrictive covenants are disfavored and should not be enforced where they interfere with
a former employee’s right to use the skills and techniques acquired while working for the
former employer); Eastman Kodak Co. v. Carmosino, 909 N.Y.S.2d 247, 249 (N.Y. App. Div.
2010); Windshield Installation Network, Inc. v. Goudreau, 654 N.Y.S.2d 442, 442 (N.Y. App.
Div. 1997) (“It is well settled that ‘restrictive covenants which tend to prevent an employee
from pursuing a similar vocation after termination of employment are disfavored by the
law.’”) (internal citations omitted).
6.
Purchasing Assocs., Inc. v. Weitz, 196 N.E.2d 245, 247-48 (N.Y. 1963) (“At one time, a
covenant not to compete, basically an agreement in restraint of trade, was regarded with high
disfavor by the courts and denounced as being ‘against the benefit of the commonwealth’. It
later became evident, however, that there were situations in which it was not only desirable
but essential that such covenants not to compete be enforced.”) (internal citations omitted);
Tech. for Measurement, Inc. v. Briggs, 737 N.Y.S.2d 197, 199 (N.Y. App. Div. 2002).
7.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1222-23 (N.Y. 1999); see infra § 6-2.
8.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999); Eastman Kodak Co. v.
Carmosino, 909 N.Y.S.2d 247, 249 (N.Y. App. Div. 2010); Zinter Handling, Inc. v. Britton,
847 N.Y.S.2d 271, 274 (N.Y. App. Div. 2007).
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Introduction
6-1
restriction will typically be enforced only to the extent that it is
reasonable in scope (geographic, temporal, and type of competitive
activity).9
6-1:2
Types of Restrictive Covenants
Employment agreements may contain one or more of the types
of covenants discussed in the sections below.
6-1:2.1 Noncompete Covenants
A noncompete covenant prevents a former employee from
competing with a former employer directly or through subsequent
employment with a competitor of the former employer.10 Generally,
these types of covenants will be enforceable if they are reasonable
in duration and geographic scope and necessary to protect a
legitimate interest of the former employer.11 The definition of
“competition” has been interpreted broadly, and may include such
activities as attending industry events.12
New York courts have found that a former employer may waive
the enforcement of a restrictive covenant where the former employer
knowingly aids the former employee in obtaining a position with
a competitor.13
6-1:2.2 Nondisclosure Covenants
A nondisclosure covenant prevents a former employee from
revealing information he or she obtained in the course of his or
her employment.14 A New York court has enforced “reasonable
restrictions related to the disclosure of trade secrets or confidential
9.
Rochester Tel. Mobile Commc’ns, Inc. v. Auto Sound Sys., Inc., 583 N.Y.S.2d 327, 328
(N.Y. App. Div. 1992); see infra § 6-3.
10.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1222-24 (N.Y. 1999) (generally discussing
restrictive covenants in New York); Reed, Roberts Assocs., Inc. v. Strauman, 353 N.E.2d 590,
593 (N.Y. 1976) (same).
11.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1222-24 (N.Y. 1999) (discussing the
requirements for enforcement of a restrictive covenant); Reed, Roberts Assocs., Inc. v.
Strauman, 353 N.E.2d 590, 593 (N.Y. 1976) (same).
12.
World Auto Parts, Inc. v. Labenski, 629 N.Y.S.2d 896 (N.Y. App. Div. 1995).
13.
See e.g., Empire Fin. Servs., Inc. v. Bellantoni, 861 N.Y.S.2d 898, 900 (N.Y. App. Div.
2008) (“[P]laintiffs waived their right to enforce the restrictive covenants by knowingly aiding
and, indeed, encouraging the individual defendants to obtain competing employment”);
Int’l Shared Servs., Inc. v. McCoy, 686 N.Y.S.2d 828, 829 (N.Y. App. Div. 1999) (same).
14.
Perfect Fit Glove Co. v. Post, 635 N.Y.S. 2d 917, 918 (N.Y. App. Div. 1995).
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Chapter 6 Restrictive Covenants Under New York Law
customer information.”15 Additionally, for such a provision to
be enforced, the data or information the former employer seeks
to protect must be confidential and unavailable through public
sources.16
6-1:2.3 Nonsolicitation Covenants
6-1:2.3a Nonsolicitation of Customers
A nonsolicitation covenant prohibits a former employee from
soliciting business from customers of the former employer for a
set period after the end of the employment relationship.17 Such
covenants will usually be enforced if they are reasonable in scope
and the names of the customers are not easily ascertainable.18
A trend in New York cases suggests that the greater the time, effort
or resources expended by an employer in developing customer lists
and relationships, the more likely the court will find a legitimate
interest in protecting those customer relationships.19 Whether the
former employer has a legitimate interest in protecting itself from
competition by a former employee (hired by a competitor) who
developed client relationships at the former employer’s expense is
a fact-dependent determination.20
6-1:2.3b Nonsolicitation of Employees of Former Employer
Few courts in New York have reviewed covenants barring
a former employee from soliciting or recruiting employees of
Perfect Fit Glove Co. v. Post, 635 N.Y.S.2d 917, 917-18 (N.Y. App. Div. 1995).
See infra § 6-3:1-1a; see also Comcast Sound Commc’ns, Inc. v. Hoeltke, 572 N.Y.S.2d
189 (N.Y. App. Div. 1991) (a nondisclosure covenant is unenforceable where a list of
customer names is readily ascertainable from sources available to the general public).
17.
Kelly v. Evolution Mkts., Inc., 626 F. Supp. 2d 364, 373 (S.D.N.Y. 2009).
18.
Kelly v. Evolution Mkts., Inc., 626 F. Supp. 2d 364, 373 (S.D.N.Y. 2009); Leo Silfen, Inc. v.
Cream, 278 N.E.2d 636, 639-40 (N.Y. 1972).
19.
Marsh USA Inc. v. Karasaki, No. 08 Civ. 4195, 2008 U.S. Dist. LEXIS 90986, at *50
(S.D.N.Y. Oct. 30, 2008) (noting that an employer has a legitimate interest in protecting
client relationships cultivated by the former employee with resources invested by the former
employer); BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1224-25 (N.Y. 1999) (explaining
“[t]he employer has a legitimate interest in preventing former employees from exploiting or
appropriating the goodwill of a client or customer, which had been created and maintained
at the employer’s expense, to the employer’s competitive detriment.”); Town & Country
House & Home Serv., Inc. v. Newbery, 147 N.E.2d 724, 726 (N.Y. 1958).
20.
Renaissance Nutrition, Inc. v. Jarrett, No. 08-cv-800S, 2012 U.S. Dist. LEXIS 2490, at
*9-10 (W.D.N.Y. Jan. 7, 2012).
15.
16.
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Introduction
6-1
the former employer.21 Courts that have considered such nonrecruitment covenants, tend to analyze them as a species of
covenants not to compete.22 As a result, the reasonableness test
articulated by the Court of Appeals in BDO Seidman v. Hirshberg23
is used to determine whether such a nonrecruitment covenant will
be enforced.24
When applying that analysis, one court determined that a former
employer’s interest in retaining at-will employees is not a legitimate
interest per se for the purposes of enforcing a nonsolicitation or
nonrecruitment covenant.25 However, the same court went on to
hold that when “dishonest” means are used by the former employee
to solicit at-will employees of the former employer, the covenant
may be enforced.26
Where the current employee solicited by the former employee
does not possess confidential information, was not in a position
to acquire (or did not acquire) trade secrets, and is not a unique
or valuable employee, there may be no legitimate interest for the
employer to protect.27 If the former employee’s new employer is not
a competitor of the former employer, the nonrecruitment covenant
is even less likely to be enforced.28
One court has, however, determined that in general,
nonrecruitment clauses are “inherently more reasonable and less
restrictive” than noncompete clauses, because the public policy
21.
*7 (W.D.N.Y. Jan. 7, 2012) (noting “[t]here appears to be no New York Court of Appeals
case discussing the applicable standard for non-recruitment covenants. In fact, both parties
can point to only one New York case discussing the standard, Lazer Inc. v. Kesselring, 823
N.Y.S.2d 834 (N.Y. Sup. Ct. 2005)”).
22.
*7-8 (W.D.N.Y. Jan. 7, 2012); Lazer Inc. v. Kesselring, 823 N.Y.S.2d 834, 837-38 (N.Y. Sup.
Ct. 2005) (“Accordingly, a covenant not to solicit former coemployees is a species, albeit a
limited one, of a covenant not to compete in the broad sense”).
23.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999).
24.
Lazer Inc. v. Kesselring, 823 N.Y.S.2d 834, 837-38 (N.Y. Sup. Ct. 2005) (applying BDO
Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999) to a nonrecruitment covenant); see also
Renaissance Nutrition, Inc. v. Jarrett, No. 08-cv-800S, 2012 U.S. Dist. LEXIS 2490 (W.D.N.Y.
Jan. 7, 2012) (stating that post employment covenants, even non-recruitment covenants, are
“subject to the ‘overriding requirement of reasonableness’”) (internal citations omitted).
25.
Lazer Inc. v. Kesselring, 823 N.Y.S.2d 834, 839 (N.Y. Sup. Ct. 2005).
26.
27.
Lazer Inc. v. Kesselring, 823 N.Y.S.2d 834, 839 (N.Y. Sup. Ct. 2005) (highlighting New
York cases regarding the legitimate interests of a former employer).
28.
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concern of restricting a former employee’s livelihood is not
implicated in a nonrecruitment covenant.29
6-1:2.4 Restrictions Placed on the Seller of a Business
A business purchase transaction that includes the good will
of the business may include a reasonable restriction ancillary to
the sale prohibiting the previous owner from competing with the
new owner, which goes beyond the so-called “implied covenant”
in all such transactions permanently prohibiting the seller from
soliciting the customers of the sold business.30 Agreements
restricting the former owner from competing with the new owner
are enforced to the extent they are reasonable and do not form a de
facto monopoly.31 Courts have found that purchasers of a business
have a legitimate interest in protecting the value of the good will
they have purchased.32 The standard of reasonableness used when
analyzing such restrictive covenants is less strict than the test
governing agreements between employees and employers.33 The
focus in evaluating the reasonableness of a noncompete agreement
29.
*15 (W.D.N.Y. Jan. 7, 2012).
30.
See e.g. Mohawk Maint. Co. v. Kessler, 419 N.E.2d 324, 328 (N.Y. 1981) (Explaining
“the important distinction between the duty to refrain from soliciting former customers,
which arises upon the sale of the ‘good will’ of an established business, and separate duty
to refrain from competing with the purchaser, which may only arise out of an express
agreement” and which must be reasonable.); Manhattan Real Estate Equities Grp. LLC v.
Pine Equity, N.Y., Inc., 791 N.Y.S.2d 418 (N.Y. App. Div. 2005); Mammolito v. McHugh, 779
N.Y.S.2d 533, 534 (N.Y. App. Div. 2004).
31.
Mammolito v. McHugh, 779 N.Y.S.2d 533, 534 (N.Y. App. Div. 2004) (“An agreement
restricting the right of a seller of a commercial enterprise to compete with the purchaser is
enforceable depending on its duration and scope.”); Larido Corp. v. Crusader Mfg. Co., 155
N.Y.S.2d 715 (N.Y. Sup. Ct. 1956).
32.
Mohawk Maint. Co. v. Kessler, 419 N.E.2d 324, 328-29, n. 6 (N.Y. 1981) (“When
the intangible asset of good will is sold along with the tangible assets of a business, the
purchaser acquires the right to expect that the firm’s established customers will continue
to patronize the business … The purchaser of a business may protect himself at least
against the possibility that some of his customers will voluntarily follow the seller by
negotiating a reasonable express covenant restricting the seller’s freedom to engage
in a competing business.”); Weiser LLP v. Coopersmith, 859 N.Y.S.2d 634, 635 (N.Y.
App. Div. 2008) (protecting the good will acquired pursuant to a merger is a legitimate
interest); Sager Spuck Statewide Supply Co. v. Meyer, 751 N.Y.S.2d 318, 320 (N.Y. App.
Div. 2002).
33.
Reed, Roberts Assocs., Inc. v. Strauman, 353 N.E.2d 590, 593 (N.Y. 1976) (comparing
the reasonableness standard as applied to a covenant ancillary to the sale of a business and
in an employment agreement); Purchasing Assocs., Inc. v. Weitz, 196 N.E.2d 245, 247 (N.Y.
1963) (same).
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Introduction
6-1
in the context of a sale of a business is on whether the agreement is
necessary to protect a legitimate interest of a former employer.34
6-1:2.5 Invention Assignments
An invention assignment gives an employer the legal rights to all
discoveries or intellectual property developed by an employee in
the course of the employment agreement.35 At least one New York
court has enforced this type of agreement where it was supported
by consideration.36
6-1:3
Purpose of Restrictive Covenants
6-1:3.1 Public Policy
The Court of Appeals has noted that “restrictive covenants which
tend to prevent an employee from pursuing a similar vocation
after termination of employment are disfavored by the law.”37 The
reasonableness analysis used by the courts when evaluating the
enforceability of such agreements is driven by the courts’ desire
not to “‘sanction[] the loss of a man’s livelihood.’”38
While New York public policy weighs against enforcement of
restrictive covenants, courts have recognized the value in protecting
a former employer from unfair competition by a former employee
where the former employer supplied the former employee with
substantial resources.39 Circumstances in which courts have found
Purchasing Assocs., Inc. v. Weitz, 196 N.E.2d 245, 247 (N.Y. 1963).
United States v. Dubilier Condenser Corp., 289 U.S. 178, 187 (1933); Nat’l Cash
Register Co. v. Remington Arms Co., 151 N.E. 144 (N.Y. 1926).
36.
Magnolia Anti-Friction Metal Co. v. Singley, 17 N.Y.S. 251 (N.Y. Sup. Ct. 1981).
37.
Columbia Ribbon & Carbon Mfg. Co. v. A-1-A Corp., 369 N.E.2d 4, 6 (N.Y. 1977); see
also Gramercy Park Animal Ctr., Inc. v. Novick, 362 N.E.2d 608, 609 (N.Y. 1977) (highlighting
the strong public policy against limiting a person’s ability to pursue their livelihood); Reed
Roberts Assocs., Inc. v. Strauman, 353 N.E.2d 590, 592-93 (N.Y. 1976); Karpinski v. Ingrasci,
268 N.E.2d 751, 753 (N.Y. 1971); Purchasing Assocs., Inc. v. Weitz, 196 N.E.2d 245, 247
(N.Y. 1963); Marietta Corp. v. Fairhurst, 754 N.Y.S.2d 62, 65 n.3 (N.Y. App. Div. 2003); see
also Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 70 (2d Cir. 1999); Kelly v. Evolution Mkts.,
Inc., 626 F. Supp. 2d 364, 371-72 (S.D.N.Y. 2009); Estee Lauder Cos., Inc. v. Batra, 430 F.
Supp. 2d 158, 177 (S.D.N.Y. 2006).
38.
Columbia Ribbon & Carbon Mfg. Co. v. A-1-A Corp., 369 N.E.2d 4, 6 (N.Y. 1977)
(quoting Purchasing Assocs., Inc. v. Weitz, 196 N.E.2d 245, 247 (N.Y. 1963)).
39.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1225-26 (N.Y. 1999); Gundermann &
Gundermann Ins. v. Brassill, 853 N.Y.S.2d 82, 83 (N.Y. App. Div. 2007) (where customer
information and good will was generated and maintained by the former employee at the
former employer’s expense, the restrictive covenant was found to be reasonable).
34.
35.
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that a former employer supplied substantial resources, and therefore
had a legitimate interest to protect, include: where the former
employee built relationships with clients using the employer’s
“entertainment” account;40 where the former employer provided
financial and support services to an employee to develop customer
relationships;41 where the former employer devoted a substantial
amount of time and support to projects tailored directly to specific
clients;42 and where the former employer substantially invested
time and money in maintaining a support staff dedicated to aiding
employee representatives in addressing the needs of clients.43
Due to the fact-intensive nature of the enforcement of restrictive
covenants, courts are tasked with weighing the public policy issues
implicated by a particular covenant against the interests of the
former employer.44 As one court noted, “[a]lthough agreements
that restrain free employment are enforceable under certain
circumstances, the Court’s examination of restrictive covenants is
rigorous.”45
The Second Circuit has summarized the practice of New York
courts as follows:
New York courts adhere to a strict approach to
enforcement of restrictive covenants because their
enforcement conflicts with the general public policy
favoring robust and uninhibited competition, and
powerful considerations of public policy which
militate against sanctioning the loss of a man’s
livelihood. Thus, a restrictive covenant will be
rigorously examined, and enforced only to the
extent necessary to protect the employer from
unfair competition . . . .46
Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 71 (2d Cir. 1999).
Johnson Controls, Inc. v. A.P.T. Critical Sys., 323 F. Supp. 2d 525, 535-36 (S.D.N.Y.
2004).
42.
Group Health Solutions Inc. v. Smith, 938 N.Y.S.2d 227 (N.Y. Sup. Ct. 2011).
43.
Ikon Office Solutions, Inc. v. Usherwood Office Tech., Inc., 875 N.Y.S.2d 820 (N.Y. Sup.
Ct. 2008).
44.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999); see infra § 6-3.
45.
Kelly v. Evolution Mkts., Inc., 626 F. Supp. 2d 364, 371 (S.D.N.Y. 2009).
46.
American Inst. of Chem. Eng’rs v. Reber-Friel Co., 682 F.2d 382, 386-87 (2d Cir. 1982)
(internal quotation marks and citations omitted).
40.
41.
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Case Law Governing the Enforcement
of Restrictive Covenants
6-2
As a result, a former employer must have a legitimate interest to
protect; and until a legitimate interest is shown, the reasonableness
of the scope of the covenant will not be an issue.47
The following sections of this chapter will discuss the
reasonableness analysis used by courts applying New York law, as
well as the application of that analysis in the context of specific
professions, followed by the remedies for breach of a restrictive
covenant.
6-2
Case Law Governing the
Enforcement of Restrictive
Covenants
6-2:1
Absence of Statutory Law
New York statutory law does not limit a former employee’s
right to compete with a former employer or the former employer’s
right to limit that competition by contract. Therefore, with a few
narrow exceptions where employees in specific fields are subject
to regulatory regimes (such as the Financial Industry Regulatory
Authority (“FINRA”) rules48 or Rules of Professional Conduct
for attorneys49), the law governing the enforceability of restrictive
covenants has been developed by the courts.50
New York courts adopted and have developed a common law
standard of reasonableness to determine whether a restrictive
covenant will be enforced.51
47.
American Inst. of Chem. Eng’rs v. Reber-Friel Co., 682 F.2d 382, 386-87 (2d Cir.
1982).
48.
FINRA Rule 2140 states, “No member or person associated with a member shall
interfere with a customer’s request to transfer his or her account in connection with the
change in employment of the customer’s registered representative where the account is not
subject to any lien for monies owed by the customer or other bona fide claim.”
49.
See infra § 6-4:4.
50.
See BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999); AmericanBroad. Cos. v.
Wolf, 420 N.E.2d 363 (N.Y. 1981); Columbia Ribbon & Carbon Mfg. Co. v. A-1-A Corp., 369
N.E.2d 4 (N.Y. 1977); Reed, Roberts Assocs., Inc. v. Strauman, 353 N.E.2d 590 (N.Y. 1976);
Purchasing Assocs., Inc. v. Weitz, 196 N.E.2d 245 (N.Y. 1963).
51.
USI Ins. Servs., LLC v. Miner, 801 F. Supp. 2d 175, 187 (S.D.N.Y. 2011) (citing
BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999)) (“To determine whether a postemployment covenant is specifically enforceable under New York law, courts have adopted
the prevailing common law reasonableness standard.”)
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6-2:2Court of Appeals Decisions Regarding
Reasonableness
The Court of Appeals articulated the modern standard for the
enforcement of restrictive covenants in BDO Seidman v. Hirshberg.52
The Court explained that a restrictive covenant will be found
reasonable if the restraint (1) “is no greater than is required for
the protection of a legitimate interest of the employer,” (2) “does
not impose undue hardship on the employee,” and (3) does not
injure the public.53 Additionally, the Court noted that a restrictive
covenant will only be enforced to the extent that it is “‘reasonable
in time and area, necessary to protect the employer’s legitimate
interests, not harmful to the general public and not unreasonably
burdensome to the employee.’”54
6-2:3
Expansion of the Reasonableness Factors
New York courts have expounded on the BDO Seidman test
and explained that the first step is to determine whether there
is a necessary and legitimate interest that the former employer
seeks to protect.55 Generally, legitimate interests of the former
employer include the protection against misappropriation of
trade secrets or confidential information and protection from
competition by a former employee whose services are unique or
extraordinary.56
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1223 (N.Y. 1999) (emphasis in
original).
54.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1223 (N.Y. 1999) (quoting Reed, Roberts
Assocs., Inc. v. Strauman, 353 N.E.2d 590, 593 (N.Y. 1976)); see also American Broad. Cos.,
Inc. v. Wolf, 420 N.E.2d 363, 367-68 (N.Y. 1981).
55.
1 Model Mgmt., LLC v. Kavoussi, 918 N.Y.S.2d 431, 432 (N.Y. App. Div. 2011)
(explaining that a restrictive covenant is enforceable only to the extent that it is “reasonable
and necessary to protect the employer’s legitimate interest and does not impose undue
hardship on the employee.”); Allways Electric Corp. v. Abrams, 902 N.Y.S.2d 670, 670-71
(N.Y. App. Div. 2010) (concluding that “[s]ince there is no legitimate employer interest to
protect, the restrictive covenants are unenforceable and the issue of partial enforcement
does not arise.”); Sutherland Global Servs., Inc. v. Stuewe, 902 N.Y.S.2d 272, 274 (N.Y. App.
Div. 2010) (same); Natural Organics, Inc. v. Kirkendall, 860 N.Y.S.2d 142, 143-44 (N.Y. App.
Div. 2008) (same).
56.
1 Model Mgmt., LLC v. Kavoussi, 918 N.Y.S.2d 431, 432 (N.Y. App. Div. 2011)
(highlighting interests that New York courts have found to be legitimate to support
enforcement of a restrictive covenant); Sutherland Global Servs., Inc. v. Stuewe, 902 N.Y.S.2d
272, 274 (N.Y. App. Div. 2010) (same); Delfino Insulation Co. v. Jaworowski, 865 N.Y.S.2d
353, 354 (N.Y. App. Div. 2008) (same).
52.
53.
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Components of Reasonableness
6-3
If there is a legitimate interest that the former employer seeks to
protect, the restrictive covenant must also be reasonable in scope.57
In addition to being reasonable in duration, area, and activities
restricted, the agreement cannot be unreasonably burdensome to
the former employee nor harmful to the general public.58 The court
must weigh a former employer’s legitimate interests – which include
protecting goodwill, training, and customer contacts – with the
former employee’s possible loss of livelihood, as well as the harm
to the general public in inhibiting competition.59
6-3
Restrictive covenants will typically be enforced when they are
necessary to protect a former employer’s legitimate interest,60
are reasonable in duration61 and geographic scope,62 are not
unreasonably burdensome to the employee,63 and are not harmful
to the general public.64
57.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1223 (N.Y. 1999) (explaining the
requirements necessary for enforcement of a restrictive covenant); Ashland Mgmt. Inc. v.
Altair Invs. N.A., LLC, 869 N.Y.S.2d 465, 470 (N.Y. App. Div. 2008); Ricca v. Ouzounian,
859 N.Y.S.2d 238, 239 (N.Y. App. Div. 2008).
58.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1223 (N.Y. 1999) (explaining the
requirements necessary for enforcement of a restrictive covenant); Reed, Roberts Assocs., Inc. v.
Strauman, 353 N.E.2d 590, 593 (N.Y. 1976); Ashland Mgmt. Inc. v. Altair Invs. N.A., LLC,
869 N.Y.S.2d 465, 470-71 (N.Y. App. Div. 2008) (“A restrictive covenant is unenforceable if
its duration is unreasonable because of the ‘powerful considerations of public policy which
militate against sanctioning the loss of a man’s livelihood’, as well as the general public
policy favoring robust and uninhibited competition.”) (internal citations omitted); Ricca v.
Ouzounian, 859 N.Y.S.2d 238, 239 (N.Y. App. Div. 2008) (where the potential harm to the
public was “without merit” the former employer was entitled to a preliminary injunction to
enforce the restrictive covenant).
59.
Ashland Mgmt. Inc. v. Altair Invs. N.A., LLC, 869 N.Y.S.2d 465, 470-72 (N.Y. App.
Div. 2008) (noting that the public has an interest in “robust and uninhibited competition.”);
Kanan, Corbin, Schupak & Aronow, Inc. v. FD Int’l, Ltd., 797 N.Y.S.2d 883 (N.Y. Sup.
Ct. 2005).
60.
See infra § 6-3:1.1.
61.
62.
63.
See infra § 6-3:3.
64.
See infra § 6-3:4; see also Ashland Mgmt. Inc v. Altair Invs. N.A., LLC, 869 N.Y.S.2d
465, 470-72 (N.Y. App. Div. 2008) (noting that the public has an interest in “robust and
uninhibited competition”); Ricca v. Ouzounian, 859 N.Y.S.2d 238, 239 (N.Y. App. Div. 2008)
(where an allegation of potential harm to the public was “without merit” a preliminary
injunction could be granted); Riedman Corp. v. Gallager, 852 N.Y.S.2d 510, 511 (N.Y. App.
Div. 2008); Prime Med. Assocs., P.C. v. Ramani, 781 N.Y.S.2d 450, 452 (N.Y. Sup. Ct. 2004)
(where a restrictive covenant violates public policy it will be unenforceable).
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6-3:1Element 1: The Restrictive Covenant Must be
Necessary to Protect a Legitimate Interest
of the Employer
When there is no legitimate interest supporting a restrictive
covenant in an employment agreement, the restriction will not
be enforced regardless of whether the covenant is otherwise
reasonable.65 As discussed in further detail below, legitimate interests
include possession of trade secrets or confidential customer lists,
and protection from competition by a former employee whose
services are unique or extraordinary.66
6-3:1.1Protecting Trade Secrets, Confidential Information,
and Customer Lists
Restrictive covenants can be used to protect a former employer
from unfair competition or loss of good will resulting from a
former employee’s use or disclosure of trade secrets or confidential
information.67 Where a former employer has sought to protect this
type of information, New York courts have typically found that the
covenant is reasonable, so long as the information was not publicly
available and the covenant was limited in scope.68
65.
Sutherland Global Servs., Inc. v. Stuewe, 902 N.Y.S.2d 272, 274 (N.Y. App. Div. 2010)
(where a former employer failed to demonstrate that a restrictive covenant was necessary
to protect a legitimate interest, a preliminary injunction would not be awarded); Natural
Organics, Inc. v. Kirkendall, 860 N.Y.S.2d 142, 143 (N.Y. App. Div. 2008) (recognizing,
“defendants met their prima facie burden of establishing their entitlement to judgment as
a matter of law by demonstrating that the noncompete agreement does not serve to protect
a legitimate employer interest”); TMP Worldwide Inc. v. Franzino, 703 N.Y.S.2d 183, 184
(N.Y. App. Div. 2000) (where a former employer does not show that the former employee
misappropriated customer lists, trade secrets or other confidential information, or that the
former employee’s skills are unique or special, a motion seeking a preliminary injunction to
enforce a restrictive covenant will be denied).
66.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1223-24 (N.Y. 1999) (discussing the
legitimate interests of a former employer that support enforcement of a restrictive covenant);
Columbia Ribbon & Carbon Mfg. Co. v. A-1-A Corp., 369 N.E.2d 4 (N.Y. 1977) (same); Reed,
Roberts Assocs., Inc. v. Strauman, 353 N.E.2d 590, 593 (N.Y. 1976) (same); 1 Model Mgmt.,
LLC v. Kavoussi, 918 N.Y.S.2d 431, 432 (N.Y. App. Div. 2011) (same); Henson Grp., Inc. v.
Stacy, 887 N.Y.S.2d 582, 583 (N.Y. App. Div. 2009) (same).
67.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1224-25 (N.Y. 1999); Columbia Ribbon &
Carbon Mfg. Co. v. A-1-A Corp., 369 N.E.2d 4 (N.Y. 1977); Reed, Roberts Assocs., Inc. v.
Strauman, 353 N.E.2d 590, 593 (N.Y. 1976).
68.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999); ICS/Executon Telecom, Inc. v.
Mancuso, 578 N.Y.S.2d 334, 334 (N.Y. App. Div. 1991); Comcast Sound Commc’ns, Inc. v.
Hoeltke, 572 N.Y.S.2d 189 (N.Y. App. Div. 1991).
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6-3
The term “trade secret” is defined in common law and federal law.69
The Economic Espionage Act of 1996 defines a trade secret as business
information, in most forms, that a company has taken reasonable
efforts to keep secret and from which the company derives economic
value.70 New York courts have generally adopted the similar definition
found in the Restatement of Torts,71 which suggests six factors to
consider when determining whether information is considered a
trade secret, including: (1) whether the information is known outside
of the business, (2) the extent to which current employees and others
involved in the business know the information, (3) the measures taken
to keep the information secret, (4) the value of the information to the
business and the employer’s competitors, (5) the amount of money
expended developing the information, and (6) the ease by which
competitors may duplicate or acquire the information.72
An employee’s prior access to confidential employer information
will not necessarily result in the employee being deemed to possess
a trade secret of the employer; for example, a former employee’s
“recollection of information pertaining to specific needs and business
habits of particular customers” has been held not to be confidential,
even where the former employee was shown to have had access to
detailed reports concerning the former employer’s customers.73
See infra Chpt. 15, discussing trade secrets generally.
Economic Espionage Act of 1996, 18 U.S.C. §1839(3), specifically defines trade secrets as:
[A]ll forms and types of financial, business, scientific, technical, economic, or
engineering information, including patterns, plans, compilations, program devices,
formulas, designs, prototypes, methods, techniques, processes, procedures, programs,
or codes, whether tangible or intangible, and whether or how stored, compiled, or
memorialized physically, electronically, graphically, photographically, or in writing if –
(A)the owner thereof has taken reasonable measures to keep such information
secret; and
(B)the information derives independent economic value, actual or potential,
from not being generally known to, and not being readily ascertainable
through proper means by, the public[.]
71.
Ashland Mgmt. Inc. v. Janien, 624 N.E.2d 1007, 1013 (N.Y. 1993) (quoting Restatement
of Torts § 757 cmt. b (1939) and stating that a trade secret is defined as “‘any formula,
pattern, device or compilation of information which is used in one’s business, and which
gives him an opportunity to obtain an advantage over competitors who do not know or use
it.’”). New York is one of the few states that has not adopted the Uniform Trade Secrets
Act. Faiveley Transp. USA, Inc. v. Wabtec Corp., 758 F. Supp. 2d 211, 220 (S.D.N.Y. 2010).
72.
Restatement of Torts § 757, cmt. b (1939).
73.
Natural Organics, Inc. v. Kirkendall, 860 N.Y.S.2d 142, 143-44 (N.Y. App. Div. 2008)
(“Although the plaintiff submitted evidence that Kirkendall was privy to reports containing
detailed sales information concerning the plaintiff’s customers, ‘an employee’s recollection
of information pertaining to specific needs and business habits of particular customers is
not confidential.’”) (internal citations omitted).
69.
70.
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In many cases customer lists are considered a trade secret—
particularly where a former employee used wrongful conduct to
gain possession of the list.74 Where a former employer’s list of
customers was built over many years with significant financial
expenditures and other efforts by the employer, the list is more
likely to be considered a trade secret.75 However, if a customer
list is readily discoverable through public sources, then it is not
generally protected as a trade secret unless the employee stole the
customer lists.76
When a former employee does not possess any trade secrets or
confidential information, and there has been no other improper
action in obtaining information (such as a breach of trust),77 courts
have found no legitimate interest to support the enforcement of a
restrictive covenant.78
Occasionally, a former employer may attempt to enjoin a
former employee from working for a competitor by asserting
the doctrine of “inevitable disclosure,” under which a former
employee is prevented for some period of time from working for or
74.
Marcone APW, LLC v. Servall Co., 925 N.Y.S.2d 752, 756 (N.Y. App. Div. 2011) (where
the former employee misappropriated proprietary information it may be entitled to trade
secret protection); see also Reed, Roberts Assocs., Inc. v. Strauman, 353 N.E.2d 590, 593-94
(N.Y. 1976) (where there is no showing that a former employee acted wrongfully including
either pilfering or memorizing customer lists, the information will not be protected); Leo
Silfen, Inc. v. Cream, 278 N.E.2d 636, 637, 639 (N.Y. 1972) (where an allegation that a
former employee made copies of confidential files or recorded details in those files was
dropped, trade secret protection is improper).
75.
See, e.g., Renaissance Nutrition, Inc. v. Kurtz, No. 08-cv-800S, 2012 U.S. Dist.
LEXIS 2490, at *9 (W.D.N.Y. Jan. 7, 2012) (the court found that a former employer
had a legitimate interest in protecting client relationships developed through significant
resources expended training and educating the former employees); Town & Country
House & Home Serv., Inc. v. Newbery, 147 N.E.2d 724, 726 (N.Y. 1958); Marcone APW,
LLC v. Servall Co., 925 N.Y.S.2d 752, 756 (N.Y. App. Div. 2011) (where information is
compiled with considerable effort by the former employer over several years the former
employer has a legitimate interest in protecting that information); Eastern Bus. Sys., Inc.
v. Specialty Bus. Solutions, LLC, 739 N.Y.S.2d 177, 179 (N.Y. App. Div. 2002) (the former
employer “presented evidence showing that the information in question was not available
to the public, was available to limited personnel inside [the former employer], was highly
valuable to [the former employer] and its competitors, and that considerable effort and
money was expended in obtaining the information. Thus, the [former employer] showed
that trade secrets existed”).
76.
Columbia Ribbon & Carbon Mfg. Co. v. A-1-A Corp., 369 N.E.2d 4 (N.Y. 1977).
77.
Reed, Roberts Assocs., Inc. v. Strauman, 353 N.E.2d 590, 594 (N.Y. 1976).
78.
See, e.g., Reed, Roberts Assocs., Inc. v. Strauman, 353 N.E.2d 590 (N.Y. 1976); IVI
Envtl., Inc. v. McGovern, 707 N.Y.S.2d 107 (N.Y. App. Div. 2000) (finding that there was
no legitimate interest to be protected where the client list was ascertainable from outside
sources and the former employee was not in possession of confidential information).
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6-3
associating with a competitor of the former employer where there
is an imminent risk the former employee will disclose the former
employer’s trade secret(s).79 The inevitable disclosure doctrine
has been asserted in combination with a post-employment
noncompete agreement, and where no such agreement is in
place.80 The relatively few courts that have analyzed the doctrine
under New York law appear to require, at a minimum, a showing
of misappropriation of trade secrets by the departing employee.81
Absent a showing of actual misappropriation of trade secret
information, the inevitable disclosure doctrine is disfavored
because it seeks to imply a restrictive covenant and thus runs
counter to the strict scrutiny such agreements face in New York.82
As expressed by one court, “the inevitable disclosure doctrine
treads an exceedingly narrow path through judicially disfavored
territory.”83
6-3:1.2 Limiting the Solicitation of Customers
New York courts recognize that former employers have a
significant interest in protecting customers gained by former
employees using the former employer’s resources, especially
financial resources.84 However, absent an express agreement to the
Marietta Corp. v. Fairhurst, 754 N.Y.S.2d 62, 65 (N.Y. App. Div. 2003).
EarthWeb, Inc. v. Schlack, 71 F. Supp. 2d 299, 309-12 (S.D.N.Y. 1999) (discussing the
inevitable disclosure doctrine in cases where there was a noncompete agreement in place
and where there was no express covenant); Marietta Corp. v. Fairhurst, 754 N.Y.S.2d 62
(N.Y. App. Div. 2003) (discussing the application of the inevitable disclosure doctrine in a
case where there was no restrictive covenant in effect).
81.
EarthWeb, Inc. v. Schlack, 71 F. Supp. 2d 299, 310 (S.D.N.Y. 1999) (the inevitable
disclosure doctrine cannot be a run-around to the inclusion of a restrictive covenant in an
employment agreement); Marietta Corp. v. Fairhurst, 754 N.Y.S.2d 62, 65-66 (N.Y. App. Div.
2003) (noting that the record was insufficient to support a preliminary injunction where no
evidence was proffered alleging that the former employee had misappropriated trade secrets
or breached the confidentiality agreement); DoubleClick, Inc. v. Henderson, No. 116914/97,
1997 N.Y. Misc. LEXIS 577, at *13-17 (N.Y. Sup. Ct. Nov. 5, 1997) (seeking relief under a
misappropriation of trade secrets cause of action).
82.
EarthWeb, Inc. v. Schlack, 71 F. Supp. 2d 299, 310-11 (S.D.N.Y. 1999) (noting that
restrictive covenants should be the “product of open negotiation” not implied through the
use of the inevitable disclosure doctrine and refusing to “re-write the parties’ employment
agreement under the rubric of inevitable disclosure”); Marietta Corp. v. Fairhurst, 754
N.Y.S.2d 62, 65-66 (N.Y. App. Div. 2003).
83.
EarthWeb, Inc. v. Schlack, 71 F. Supp. 2d 299, 310 (S.D.N.Y. 1999).
84.
Ayco Co., L.P. v. Frisch, 795 F. Supp. 2d 193, 206 (N.D.N.Y. 2011) (a former employee’s
services are “generally deemed unique” where client relationships are built in significant part
through the use of the former employer’s resources); Johnson Controls, Inc. v. ATP Critical
Sys., 323 F. Supp. 2d 525, 534 (S.D.N.Y. 2004) (concluding “it is now clear that under
79.
80.
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contrary, a former employee may typically solicit customers of the
former employer provided the former employee does not do so by
means of wrongful conduct or through the use of a customer list
that is considered a trade secret.85
When a restrictive covenant limits a former employee’s ability to
solicit customers of the former employer and is reasonable in all
other respects, it can be enforced.86 However, a covenant restricting
solicitation of “all present and potential customers” without a
geographic limitation has been found to be overly broad and was
not enforced as written.87
Typically, a former employer may not prevent a former employee
from soliciting customers that the former employee brought to the
former employer through efforts that the former employer did not
subsidize or financially support.88 Similarly, where a customer
makes a personal choice to follow a former employee to his or her
new employer, there is no violation of a nonsolicitation covenant.89
A newspaper or Internet advertisement, not directed at anyone in
particular, has been found not to constitute solicitation of a former
employer’s customers.90
New York law an employer also has a legitimate interest in protecting client relationships
developed by an employee at the employer’s expense.”); Good Energy, L.P. v. Kosachuk, 853
N.Y.S.2d 75, 77 (N.Y. App. Div. 2008).
85.
Leo Silfen, Inc. v. Cream, 278 N.E.2d 636, 641 (N.Y. 1972); Starlight Limousine Serv. v.
Cucinella, 713 N.Y.S.2d 195 (N.Y. App. Div. 2000) (where a former employee engaged in
no wrongful conduct and the customer lists were not confidential trade secrets the former
employee was not enjoined from soliciting customers of a former employer); Amana Express
Int’l, Inc. v. Pier-Air Int’l, Ltd., 621 N.Y.S.2d 108 (N.Y. App. Div. 1995).
86.
Willis of N.Y., Inc. v. DeFelice, 750 N.Y.S.2d 39, 42 (N.Y. App. Div. 2002).
87.
NCR Corp. v. Rotondi, 450 N.Y.S.2d 198 (N.Y. App. Div. 1982).
88.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1225 (N.Y. 1999); Willis of N.Y.,
Inc. v. DeFelice, 750 N.Y.S.2d 39, 42 (N.Y. App. Div. 2002) (where the former employee
brought clients to the former employer he cannot be prevented from soliciting those
clients).
89.
Investor Access Corp. v. Doremus & Co., 588 N.Y.S.2d 842, 845 (N.Y. App. Div. 1992)
(where the court found that clients of the former employer would have left upon the end
of the relationship with the former employee, the restrictive covenant was unenforceable);
Walter Karl, Inc. v. Wood, 528 N.Y.S.2d 94, 98 (N.Y. App. Div. 1988) (where the record
contained letters from clients noting that they chose to leave the former employer, injunctive
relief for the former employer was unwarranted).
90.
Slomins, Inc. v. Gray, 575 N.Y.S.2d 545, 547 (N.Y. App. Div. 1991) (an advertisement
in a local newspaper concerning a former employee’s new employment); Melvin D. Hiller &
Jeffrey Hiller LLC v. Buel, 939 N.Y.S.2d 740, No. 500410/09, 2011 N.Y. Misc. LEXIS 4970
(N.Y. Sup. Ct. Sept. 28, 2011) (Internet advertisement).
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6-3
6-3:1.3Limiting Competition from Former Employees
with Unique or Extraordinary Services or Skills
Even when a former employee does not possess trade secrets
or confidential information, a restrictive covenant may still be
enforced where the former employee has skills that are unique
or extraordinary.91 A former employee’s skills are typically
considered unique where the employee’s relationship with his or
her customers is such that there is a “substantial risk” that the
employee could divert all or part of the customers’ business.92 In
such a case, the former employer may have a legitimate interest
in protecting itself from competition by that former employee.93
Courts have typically supported former employers’ interests in such
protection,94 and many give wide latitude to a covenant seeking to
protect a former employer from a former employee whose skills
are unique.95
Where the employee’s services are general or commonplace, a
particular employee’s skills in providing those services will not be
considered “extraordinary” or “unique.”96 Rather, the employee’s
91.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999); 1 Model Mgmt., LLC v.
Kavoussi, 918 N.Y.S.2d 431, 432 (N.Y. App. Div. 2011) (where a former employer raises
an issue of fact as to whether a former employee’s services were unique or special, even
where customer lists were readily available to others in the industry, a claim for breach of a
restrictive covenant could withstand a summary judgment motion); Crown IT Servs., Inc. v.
Koval-Olsen, 782 N.Y.S.2d 708, 711 (N.Y. App. Div. 2004).
92.
93.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1224-25 (N.Y. 1999); 1 Model
Mgmt., LLC v. Kavoussi, 918 N.Y.S.2d 431, 432 (N.Y. App. Div. 2011); Henson Grp.,
Inc. v. Stacy, 887 N.Y.S.2d 582, 583 (N.Y. App. Div. 2009) (stating that where evidence
showed that the former employee’s services were unique or irreplaceable because of
his relationships with customers cultivated partially through the use of his expense
account with his former employer, the former employer could recover for breach of the
restrictive covenant).
94.
1 Model Mgmt., LLC v. Kavoussi, 918 N.Y.S.2d 431, 432 (N.Y. App. Div. 2011); Henson
Grp., Inc. v. Stacy, 887 N.Y.S.2d 582, 583 (N.Y. App. Div. 2009).
95.
See BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1223 (N.Y. 1999); Ashland Mgmt.
Inc. v. Altair Invs. N.A., LLC, 869 N.Y.S.2d 465, 477 (N.Y. App. Div. 2008) (commenting that
[a] “an anticompetition covenant between an employer and an employee whose services are
‘unique or extraordinary’ is one type of restrictive covenant that is not subject to exacting
scrutiny.”).
96.
See, e.g., Briskin v. All Seasons Servs., 615 N.Y.S.2d 166 (N.Y. App. Div. 1994)
(being a knowledgeable and experienced sales representative did not make the former
employee’s skills unique); ABC Mobile Breaks, Div. of D.A. Mote, Inc. v. Leyland,
446 N.Y.S.2d 660 (N.Y. App. Div. 1981) (skills acquired by a former employee in high
school and prior to his work with the former employer were not “special, unique or
extraordinary”).
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profession itself must require some special skills or training.97
Furthermore, it is not sufficient for a former employee to simply be
a good and valuable employee;98 the skills of the former employee
must be of high value to the industry generally, not just the former
employer, for a court to enforce a restrictive covenant on the basis
of the employee’s skills.99 Whether a former employee’s skills are
unique, special or extraordinary is usually an issue of fact.100
The mere fact that a former employee may have acquired
certain skills during his or her employment is not sufficient to
render a restrictive covenant reasonable, though it is a factor to be
considered.101
Where a former employee’s skills are general in nature, the former
employee is not highly compensated, or no special skills or training
is needed for a job, then that former employee’s skills will generally
not be considered unique or special.102 A former employee who
is simply effective, experienced, well trained and knowledgeable is
not, ipso facto, considered to possess special or unique skills.103
97.
Briskin v. All Seasons Servs., 615 N.Y.S.2d 166 (N.Y. App. Div. 1994); ABC Mobile
Breaks, Div. of D.A. Mote, Inc. v. Leyland, 446 N.Y.S.2d 660 (N.Y. App. Div. 1981).
98.
Columbia Ribbon & Carbon Mfg. Co. v. A-1-A Corp., 369 N.E.2d 4, 6 (N.Y. 1977);
Empire Farm Credit, ACA v. Bailey, 657 N.Y.S.2d 211, 212 (N.Y. App. Div. 1997).
99.
Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 70-71 (2d Cir. 1999); BDO Seidman v.
Hirshberg, 712 N.E.2d 1220 (N.Y. 1999); Columbia Ribbon & Carbon Mfg. Co. v. A-1-A
Corp., 369 N.E.2d 4, 6 (N.Y. 1977); Purchasing Assocs., Inc. v. Weitz, 196 N.E.2d 245, 249
(N.Y. 1963).
100.
1 Model Mgmt., LLC v. Kavoussi, 918 N.Y.S.2d 431, 432 (N.Y. App. Div. 2011); Crown
IT Servs., Inc. v. Koval-Olsen, 782 N.Y.S.2d 708, 711 (N.Y. App. Div. 2004).
101.
Reed, Roberts Assocs., Inc. v. Strauman, 353 N.E.2d 590, 593 (N.Y. 1976) (“[N]
o restrictions should fetter an employee’s right to apply to his own best advantage the
skills and knowledge acquired by the overall experience of his previous employment.”);
Purchasing Assocs., Inc. v. Weitz, 196 N.E.2d 245 (N.Y. 1963).
102.
Columbia Ribbon & Carbon Mfg. Co. v. A-1-A Corp., 369 N.E.2d 4, 6 (N.Y. 1977);
Purchasing Assocs., Inc. v. Weitz, 196 N.E.2d 245, 249 (N.Y. 1963) (high performance and
producing good quality work did not make an employee’s skills unique). See, e.g., Accent
Stripe, Inc. v. Taylor, 612 N.Y.S.2d 533 (N.Y. App. Div. 1994) (where a former employee’s
position required no unique skills or specialized training, the former employee’s services
were not unique or irreplaceable); Comcast Sound Commc’ns, Inc. v. Hoeltke, 572 N.Y.S.2d
189, 189-90 (N.Y. App. Div. 1991) (simply being a valuable sales person did not make
the former employee unique or cause the former employer special harm at the end of the
employment relationship).
103.
Savannah Bank, N.A. v. Sav. Bank of Fingerlakes, 691 N.Y.S.2d 227, 229 (N.Y. App.
Div. 1999) (being knowledgeable and experienced did not make a former employee’s services
unique or extraordinary); Empire Farm Credit, ACA v. Bailey, 657 N.Y.S.2d 211, 212 (N.Y.
App. Div. 1997); Ken J. Pezrow Corp. v. Seifert, 602 N.Y.S.2d 468 (N.Y. App. Div. 1993)
(being highly successful and valuable did not make a former employee “irreplaceable” or
cause the former employer special harm).
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6-3
6-3:2Elements 2 and 3: Duration and Geographic Scope
Must Be Proportional to Protected Interest
Once a court finds that the former employer has a legitimate
interest to be protected by a restrictive covenant, then the court
must determine whether the restrictions contained in the covenant,
including the duration and geographic scope, are no greater than
is necessary to protect that legitimate interest, given the totality of
the circumstances.104
6-3:2.1 Duration
The determination of whether the duration of the restrictive
covenant is reasonable requires a fact-intensive analysis that looks
at the variables of each case and each agreement.105 In determining
whether the time period of a covenant is reasonable, courts may
look to its length (i.e., no longer than necessary to protect the
former employer’s legitimate interest),106 or to the point at which
the knowledge possessed by a former employee may no longer be
relevant.107
One court has noted that, “[u]nder New York law, the durational
reasonableness of a non-compete agreement is judged by the length
of time for which the employer’s confidential information will be
competitively valuable.”108
The absence of a durational limit in an agreement does not
automatically make that agreement unreasonable.109
104.
Estee Lauder Cos. v. Batra, 430 F. Supp. 2d 158, 179-80 (S.D.N.Y. 2006) (analyzing the
requirements necessary to enforce a restrictive covenant); BDO Seidman v. Hirshberg, 712
N.E.2d 1220, 1224-25 (N.Y. 1999) (same); 1 Model Mgmt., LLC v. Kavoussi, 918 N.Y.S.2d
431 (N.Y. App. Div. 2011) (same).
105.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1224 (N.Y. 1999) (highlighting how
the analysis of the enforcement of a restrictive covenant must be determined on case-bycase basis); Karpinski v. Ingrasci, 268 N.E.2d 751, 753-54 (N.Y. 1971); Ashland Mgmt.
Inc. v. Altair Invs. N.A., LLC, 869 N.Y.S.2d 465, 472 (N.Y. App. Div. 2008); see also Bus.
Intelligence Servs. v. Hudson, 580 F. Supp. 1068, 1072 (S.D.N.Y. 1984) (“The reasonableness
of [a restrictive covenant] must be measured by the circumstances and the context in which
enforcement is sought.”).
106.
Scott, Stackrow & Co., C.P.A.’s, P.C. v. Skavina, 780 N.Y.S.2d 675, 677 (N.Y. App.
Div. 2004).
107.
Business Intelligence Servs., Inc. v. Hudson, 580 F. Supp. 1068, 1072-73 (S.D.N.Y.
1984).
108.
Estee Lauder Cos, Inc. v. Batra, 430 F. Supp. 2d 158, 180 (S.D.N.Y. 2006).
109.
Karpinski v. Ingrasci, 268 N.E.2d 751, 753-54 (N.Y. 1971) (“It is settled that such a
covenant will not be stricken merely because it ‘contains no time limit or is expressly made
unlimited as to time.’”) (internal citations omitted); Ashland Mgmt. Inc. v. Altair Invs. N.A.,
287
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Generally, so long as the rest of the covenant is enforceable, a
time limitation of up to and including one year has been regarded
as reasonable.110 Even covenants up to five years have been
enforced.111 Thus, there is no bright line test for the maximum
“reasonable” length of a restrictive covenant.112
6-3:2.2 Geographic Reach
To be enforceable, a restrictive covenant must be reasonable in
its geographic scope.113 The area covered by the covenant must
be no larger than necessary for the protection of the legitimate
interest articulated by the employer.114 A covenant is likely to
be considered reasonable if the area covered coincides with the
location of a former employer’s customers or clients.115 Where a
restraint covers the area in which the former employee, during the
term of employment, established significant contacts, the scope
will usually be reasonable.116
LLC, 869 N.Y.S.2d 465, 472 (N.Y. App. Div. 2008) (courts must use the reasonableness
analysis to determine if a duration is reasonable under the circumstances; there is no reason
to assume that an unlimited duration is automatically unreasonable).
110.
See, e.g., Asness v. Nelson, 711 N.Y.S.2d 717 (N.Y. App. Div. 2000) (one year
restriction); Rochester Tel. Mobile Commc’ns, Inc. v. Auto Sound Sys., Inc., 583 N.Y.S.2d
327 (N.Y. App. Div. 1992) (six month restriction).
111.
Good Energy, L.P. v. Kosachuk, 853 N.Y.S.2d 75 (N.Y. App. Div. 2008) (the five-year
duration was reasonable); Borne Chem. Co. v. Dictrow, 445 N.Y.S.2d 406, 411-412 (N.Y.
App. Div. 1981) (three years); Uniform Rental Div. v. Moreno, 441 N.Y.S.2d 538, 539 (N.Y.
App. Div. 1981) (two years).
112.
First Empire Sec., Inc. v. Miele, 851 N.Y.S.2d 57, No. 20247-2007, 2007 N.Y. Misc.
LEXIS 6744, at *11-12 (N.Y. Sup. Ct. Aug. 10, 2007) (“A restrictive covenant limited for
a period of two years has been found to be reasonable but that period of time does not,
prima facie, require a finding that the covenant is enforceable. Instead, the Court is required
to look at all of the facts of the case to determine if the covenant not to compete may be
valid.”) (internal citations omitted).
113.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999) (setting forth the
requirements necessary to enforce a restrictive covenant); Ricca v. Ouzounian, 859 N.Y.S.2d
238 (N.Y. App. Div. 2008); Zinter Handling, Inc. v. Britton, 847 N.Y.S.2d 271 (N.Y. App.
Div. 2007).
114.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999); Battenkill Veterinary Equine
P.C. v. Cangelosi, 768 N.Y.S.2d 504, 506 (N.Y. App. Div. 2003); Alside Div. of Associated
Materials Inc. v. LeClair, 743 N.Y.S.2d 898, 898-99 (N.Y. App. Div. 2002).
115.
Battenkill Veterinary Equine P.C. v. Cangelosi, 768 N.Y.S.2d 504, 507 (N.Y. App.
Div. 2003) (where the area restriction is less than the former employer’s service area, the
covenant will be reasonable in area).
116.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1223 (N.Y. 1999); Alside Div. of Assoc.
Materials Inc. v. LeClair, 743 N.Y.S.2d 898, 898-99 (N.Y. App. Div. 2002) (an area limitation
covering the territory where the former employee worked is reasonable).
288
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6-3
Evaluating the reasonableness of the geographic scope of a
restrictive covenant is a fact-specific inquiry for which courts look
to the totality of the circumstances.117 An unlimited geographic
scope in a restrictive covenant will not automatically render the
restraint invalid.118 At least one court applying New York law
has found a covenant reasonable where it restricted competition
across the United States, because the former employer conducted
business on a national scale.119 Yet, another court has determined
that a restriction covering the entire United States is not reasonable
where the employer’s business only operated in eight states.120
6-3:3Element 4: The Restrictive Covenant May Not Be
Unreasonably Burdensome to the Former Employee
6-3:3.1The Restriction Cannot Be Unduly Harsh or Oppressive
to the Former Employee
To be enforceable, restrictive covenants must be reasonable in the
burden they place on the former employee. The geographic scope
and duration of the agreement cannot be so unduly harsh and
oppressive to the former employee as to interfere with the former
employee’s ability to earn a living.121 Courts are especially skeptical
of covenants that prevent a former employee from engaging in the
same or similar profession.122
117.
See, e.g., Battenkill Veterinary Equine P.C. v. Cangelosi, 768 N.Y.S.2d 504, 507 (N.Y.
App. Div. 2003); Alside Div. of Assoc. Materials Inc. v. LeClair, 743 N.Y.S.2d 898, 898-99
(N.Y. App. Div. 2002) (the court based their decision on a full review of the record including
affidavits submitted by the former employee in a previous action).
118.
See, e.g., Natsource LLC v. Paribello, 151 F. Supp. 2d 465, 471-72 (S.D.N.Y. 2001) (in a
case where the former employer was in the business of brokering energy-related commodities,
which had a finite number of customers, the lack of a geographic limitation did not render that
covenant unreasonable); Malcolm Pirnie, Inc. v. Werthman, 720 N.Y.S.2d 863 (N.Y. App. Div.
2001) (where the restriction was client based, the lack of a geographic limitation did not make
that covenant unreasonable); Deborah Hope Doelker, Inc. v. Kestly, 449 N.Y.S.2d 52, 53 (N.Y.
App. Div. 1982) (where the nature of the business was such that the former employer’s sales
were almost exclusively via telephone, the lack of a geographic area was not unreasonable).
119.
Innovative Networks, Inc. v. Satellite Airlines Ticketing Ctrs., Inc., 871 F. Supp. 709,
728 (S.D.N.Y. 1995); see also Business Intelligence Servs., Inc. v. Hudson, 580 F. Supp.
1068, 1073 (S.D.N.Y. 1984) (where the former employer’s business was international, the
worldwide scope of the restrictive covenant was not unreasonable).
120.
Good Energy, L.P. v. Kosachuk, 853 N.Y.S.2d 75 (N.Y. App. Div. 2008).
121.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999); Ashland Mgmt. Inc. v.
Altair Invs. N.A., LLC, 869 N.Y.S.2d 465, 471 (N.Y. App. Div. 2008).
122.
Reed, Roberts Assocs., Inc. v. Strauman, 353 N.E.2d 590, 593 (N.Y. 1976);
Karpinski v. Ingrasci, 268 N.E.2d 751, 754 (N.Y. 1971) (the restriction was unreasonable
289
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6-3:3.2 Employee Choice Doctrine
While New York courts are generally skeptical of restrictive
covenants, an exception is the employee choice doctrine, under
which courts will typically enforce an agreement conditioning the
former employer’s obligation to pay deferred compensation or
benefits on the former employee’s forbearance from competition
with the former employer for a specified period of time.123
6-3:3.2a Employment Relationship Ended by Employee
When there is an at-will employment relationship, and an
employee chooses to end the relationship, a covenant in which the
employer conditions receipt of a post-employment payment or
benefit on compliance with a restrictive covenant (frequently called
“forfeiture-for-competition” clause) will typically be enforced
without regard to reasonableness.124
Courts look favorably on forfeiture-for-competition clauses
because the former employee is given a choice between receiving
the deferred compensation or benefits, or competing with the
former employer and forfeiting the deferred compensation or
benefits.125
6-3:3.2b Employment Relationship Ended by Employer
An essential requirement for application of the employee choice
doctrine is the employer’s continued willingness to retain the
where the former employee would have been excluded from the only profession for which
he was trained); Savannah Bank, N.A. v. Sav. Bank of Fingerlakes, 691 N.Y.S.2d 227, 229
(N.Y. App. Div. 1999) (“Restrictive covenants contained in employment contracts that
tend to prevent an employee from pursuing a similar vocation after termination are
disfavored in the law.”); Skaggs-Walsh, Inc. v. Chmiel, 638 N.Y.S.2d 698, 699 (N.Y. App.
Div. 1996) (same); Ken J. Pezrow Corp. v. Seifert, 602 N.Y.S.2d 468, 469 (N.Y. App. Div.
1993) (same); Shannon Stables Holding Co., Ltd. v. Bacon, 522 N.Y.S.2d 908 (N.Y. App.
Div. 1987) (same).
123.
Morris v. Schroder Capital Mgmt. Int’l, 859 N.E.2d 503, 506 (N.Y. 2006) (explaining
the application of the employee choice doctrine in New York); Kristt v. Whelan, 164 N.Y.S.2d
239 (N.Y. App. Div. 1957), aff’d, 155 N.E.2d 116 (N.Y. 1958).
124.
Morris v. Schroder Capital Mgmt. Int’l, 859 N.E.2d 503, 506 (N.Y. 2006) (noting that
the employee choice doctrine “rests on the premise that if the employee is given the choice of
preserving his rights under his contract by refraining from competition or risking forfeiture
of such rights by exercising his right to compete, there is no unreasonable restraint upon an
employee’s liberty to earn a living.”).
125.
IBM v. Martson, 37 F. Supp. 2d 613 (S.D.N.Y. 1999); Morris v. Schroder Capital
Mgmt. Int’l, 859 N.E.2d 503, 506-07 (N.Y. 2006).
290
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6-3
employee.126 While some courts have refused to enforce forfeiturefor-competition clauses in situations where the employee is
terminated without cause without any further analysis,127 other
courts addressing the issue have held that where an employee is
terminated without cause, the covenant may be enforced, subject
to a reasonableness analysis.128
Courts have disagreed, however, on the “reasonableness”
standard to apply in such circumstances; some courts have focused
on the reasonableness analysis applied to restrictive covenants
generally,129 and others have focused on the forfeiture as a factor
affecting a reasonableness determination.130
6-3:4Element 5: The Restrictive Covenant Must Not
Harm the General Public
Finally, the enforcement of a restrictive covenant must not result
in harm to the general public.131 Courts seek to limit the effect
that restrictive covenants will have on the interests of the public,
including the public’s interest in competition.132 New York courts
126.
Lucente v. IBM., 310 F.3d 243, 254 (2d Cir. 2002) (noting that the “bedrock question”
was whether the former employee quit or was fired, and also noting that enforcing the doctrine
where the employee is involuntarily discharged would be “unconscionable”); SIFCO Indus.
Inc. v. Advanced Plating Techs. Inc., 867 F. Supp. 155, 158 (S.D.N.Y. 1994) (“New York
courts will not enforce a non-competition provision in an employment agreement where the
former employee was involuntarily terminated.”); Post v. Merrill Lynch, Pierce, Fenner &
Smith, Inc., 397 N.E.2d 358, 360 (N.Y. 1979) (stating, “we now conclude that our own
policies—those in favor of permitting individuals to work where and for whom they please,
and against forfeiture—preclude the enforcement of a forfeiture-for-competition clause
where the termination of employment is involuntary and without cause.”).
127.
Arakelian v. Omnicare, Inc., 135 F. Supp. 2d 22, 41-42 (S.D.N.Y. 2010); SIFCO Indus.,
Inc. v. Advanced Plating Techs., Inc., 867 F. Supp. 155, 158-59 (S.D.N.Y. 1994).
128.
Morris v. Schroder Capital Mgmt. Int’l, 859 N.E.2d 503, 506-07 (N.Y. 2006)
(“[A]lthough a restrictive covenant will be enforced without regard to reasonableness if
an employee left his employer voluntarily, a court must determine whether forfeiture is
‘reasonable’ if the employee was terminated involuntarily and without cause.”).
129.
Lucente v. IBM, 262 F. Supp. 2d 109, 112-16 (S.D.N.Y. 2003) (discussing standards of
reasonableness as advanced by the parties to the case).
130.
York v. Actmedia Inc., No. 88 Civ. 8763, 1990 WL 41760, at *1 (S.D.N.Y. 1990).
131.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999) (setting forth the requirements
for enforcement of a restrictive covenant); Gelder Med. Grp. v. Webber, 363 N.E.2d 573, 576
(N.Y. 1977); Ashland Mgmt. Inc. v. Altair Invs. N.A., LLC, 869 N.Y.S.2d 465, 470 (N.Y. App.
Div. 2008); Ricca v. Ouzounian, 859 N.Y.S.2d 238, 239 (N.Y. App. Div. 2008); D & W Diesel,
Inc. v. McIntosh, 762 N.Y.S.2d 851, 852 (N.Y. App. Div. 2003).
132.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999); Ashland Mgmt. Inc. v.
Altair Invs. N.A., LLC, 869 N.Y.S.2d 465, 471 (N.Y. App. Div. 2008) (highlighting the
“general public policy favoring robust and uninhibited competition.”); Ricca v. Ouzounian,
859 N.Y.S.2d 238, 239 (N.Y. App. Div. 2008) (where there were two other hospitals in a
291
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consider the public to have an interest in the skills that the former
employee may possess and typically analyze whether enforcing
the covenant will deprive the public of access to individuals with
similar skills.133
6-3:5Other Considerations in Evaluating
the Reasonableness of the Restrictive Covenant
6-3:5.1 Salary
One factor that courts often consider is whether a former
employee continues to earn a salary during the duration of the
noncompete restriction.134 The Southern District has recognized
that “[t]he desire to avoid ‘impairing the employee’s ability to earn a
living,’ is largely mitigated where an individual continues to receive
a salary in return for not competing.”135
6-3:5.2 Consideration
Restrictive covenants must be supported by consideration.136
Courts will look to the bargaining power and the consideration
underlying the original agreement (including a meaningful change
in benefits) when determining whether there exists consideration to
support enforcing the agreement.137 Typically, as long as a restrictive
particular area and several other surgeons at the hospital, the allegation of harm to the
general public was without merit); D & W Diesel, Inc. v. McIntosh, 762 N.Y.S.2d 851, 852
(N.Y. App. Div. 2003).
133.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1226 (N.Y. 1999) (the restraint as
narrowed by the court would not “seriously impinge on the availability of accounting
services in the Buffalo area from which the public may draw”); Ricca v. Ouzounian, 859
N.Y.S.2d 238, 239-40 (N.Y. App. Div. 2008) (the public will not be deprived of a former
employee’s skills where there were two other hospitals and several other surgeons in a
particular area that were capable of doing similar work).
134.
Estee Lauder Cos. v. Batra, 430 F. Supp. 2d 158, 180 (S.D.N.Y. 2006) (noting that
whether a former employee continues to receive a salary cannot be overlooked); see also
Payment Alliance Int’l, Inc. v. Ferreira, 530 F. Supp. 2d 477, 485 (S.D.N.Y. 2007) (where a
restrictive covenant does not provide a former employee with a salary for the period of the
covenant, it does not make the covenant automatically unreasonable); Maltby v. Harlow
Meyer Savage, Inc., 637 N.Y.S.2d 110, 111 (N.Y. App. Div. 1996).
135.
Estee Lauder Cos. v. Batra, 430 F. Supp. 2d 158, 180 (S.D.N.Y. 2006) (internal citations
omitted).
136.
Zellner v. Stephen D. Conrad, M.D., P.C., 589 N.Y.S.2d 903, 906 (N.Y. App. Div.
1992).
137.
Iannucci v. Segal Co., No. 06-cv-4720, 2006 U.S. Dist. LEXIS 43339, *14 (S.D.N.Y.
June 26, 2006) (continued employment of an at-will employee is adequate consideration);
Gazzola-Kraenzlin v. Westchester Med.l Grp., P.C., 782 N.Y.S.2d 115, 117 (N.Y. App. Div.
292
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Applicability to Specific Professions
6-4
covenant was included as part of an employment agreement that
provided consideration as a whole, courts have found adequate
consideration.138
A restrictive covenant entered into after an employment
relationship has begun may still be enforceable so long as the
employee continues to be employed, even if no other benefits are
exchanged.139 The continuance of an at-will employment can be
considered sufficient consideration.140
Where an employee entered into a restrictive covenant in an equal
bargaining position and consulted with independent counsel, the
restriction will usually be considered reasonable.141
6-4
Applicability to Specific
Professions
Courts in New York give more weight to the interests of a former
employer in evaluating restrictive covenants where the former
employee is a member of a “learned profession.”142 This approach
is favored by the courts because “professionals” are ordinarily seen
as providing unique or extraordinary services.143 Therefore, when a
covenant between an employer and a professional is reasonable in
time and area, the legitimate interest of the employer typically will
2004) (same); Zellner v. Stephen D. Conrad, M.D., P.C., 589 N.Y.S.2d 903 (N.Y. App.
Div. 1992) (same); Fullman v. R & G Brenner Income Tax Consultants, 897 N.Y.S.2d 669,
No. 106634/07, 2009 N.Y. Misc. LEXIS 1776 (N.Y. Sup. Ct. June 23, 2009) (continued
employment under an agreement that is signed as the product of superior bargaining power
on the part of the former employer is not adequate consideration).
138.
Gazzola-Kraenzlin v. Westchester Med. Grp., P.C., 782 N.Y.S.2d 115, 117 (N.Y. App.
Div. 2004) (citing Zellner v. Stephen D. Conrad, M.D., P.C., 589 N.Y.S.2d 903 (N.Y. App.
Div. 1992)).
139.
Arthur Young & Co. v. Galasso, 538 N.Y.S.2d 424, 427 (N.Y. Sup. Ct. 1989).
140.
Zellner v. Stephen D. Conrad, M.D., P.C., 589 N.Y.S.2d 903 (N.Y. App. Div. 1992);
see also Iannucci v. Segal Co., No. 06-cv-4720, 2006 U.S. Dist. LEXIS 43339 (S.D.N.Y.
June 26, 2006).
141.
142.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1223 (N.Y. 1999) (“With agreements
not to compete between professionals, however, we have given greater weight to the interests
of the employer in restricting competition within a confined geographical area . . . The
rationale for the differential application of the common-law rule of reasonableness . . .
was that professionals are deemed to provide ‘unique or extraordinary’ services.”); see also
Gelder Med. Grp. v. Webber, 363 N.E.2d 573 (N.Y. 1977); Karpinski v. Ingrasci, 268 N.E.2d
751 (N.Y. 1971).
143.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1223 (N.Y. 1999); Peconic Surgical Grp.,
P.C. v. Cervone, 930 N.Y.S.2d 175, No. 7026-11, 2011 N.Y. Misc. LEXIS 2821 (N.Y. Sup.
Ct. June 1, 2011).
293
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be presumed.144 Courts do still weigh whether the covenant harms
the public because of the loss of a professional’s unique skills;
however, many courts are not persuaded where there are other
capable professionals in a close radius (i.e., at the same hospital
as a surgeon whose employment agreement contained a restrictive
covenant).145
Whether a particular type of work is considered a “profession”
is usually a question of fact, with courts looking to whether
the activity requires formal education, training, or licensure, is
regulated, has a code of conduct or ethics including an obligation
to the public interest, and has a system of discipline.146 Even where a
particular activity appears to meet the requirements for a “learned
profession,” additional facts can undermine the rationale for
presuming the employer’s interest. For example, in BDO Seidman
v. Hirshberg,147 the Court of Appeals found that while accountancy
“closely correspond[s] to the criteria for a learned profession,” the
fact that the former employer was a “national accounting firm
seeking to enforce the agreement within a market consisting of
the entirety of a major metropolitan area” meant that the court
applied “independent scrutiny” of the covenant at issue.148
6-4:1
Health Care Professionals
Restrictions on the employment of health care professionals
may pose a significant public policy concern.149 Public policy
144.
Gelder Med. Grp. v. Webber, 363 N.E.2d 573 (N.Y. 1977); Karpinski v. Ingrasci,
268 N.E.2d 751 (N.Y. 1971) (stating that restrictive covenants are enforceable against
professionals, specifically physicians, so long as they are reasonable in scope); Novendstern v.
Mr. Kisko Med. Grp., 576 N.Y.S.2d 329, 330 (N.Y. App. Div. 1991).
145.
Ricca v. Ouzounian, 859 N.Y.S.2d 238 (N.Y. App. Div. 2008) (where other surgeons
practice at the same hospital and there are other accessible hospitals in the area, there is
no harm to the public); see also Gelder Med. Grp. v. Webber, 363 N.E.2d 573, 577 (N.Y.
1977) (where the former employee is not the only physician in the area, as there were other
accessible surgeons in neighboring areas, there is no harm to the public); Peconic Surgical
Grp., P.C. v. Cervone, 930 N.Y.S.2d 175, No. 7026-11, 2011 N.Y. Misc. LEXIS 2821 (N.Y.
Sup. Ct. June 1, 2011) (same).
146.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1223 (N.Y. 1999) (setting forth factors
indicating that a particular occupation is a “profession”).
147.
148.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1224 (N.Y. 1999).
149.
See Muller v. N.Y. Heart Ctr. Cardiovascular Specialists, P.C., 656 N.Y.S.2d 464, 465
(N.Y. App. Div. 1997) (holding that a restrictive covenant preventing a cardiologist from
providing proper care to the patients he served in a particular area was harmful to the
general public).
294
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Applicability to Specific Professions
6-4
emphasizes patient choice and access to competent professionals,
so courts have been wary of enforcing restrictive covenants against
such professionals.150 Although a number of courts have enforced
these covenants in circumstances where the restrictions were found
to be reasonably limited in duration and territorial reach, courts
typically carefully scrutinize the potential for harm to the public
and the burden on the employee.151 Courts have enforced restrictive
covenants where the restriction coincides with a territory in which
the medical practice of the former employer extends.152 The same
analysis has been applied to restrictive covenants for optometrists153
and veterinarians.154
6-4:2
Salespersons
The unique relationship that salespersons have with customers of
their employers has caused some courts to give deference to former
employers when determining whether to enforce covenants not to
compete applicable to sales professionals.155 Former employers can
be especially harmed by salespersons, because the salesperson is
the direct contact with the customer.156 While salespersons are not
150.
Muller v. N.Y. Heart Ctr. Cardiovascular Specialists, P.C., 656 N.Y.S.2d 464, 464 (N.Y.
App. Div. 1997).
151.
See Gelder Med. Grp. v. Webber, 363 N.E.2d 573, 577 (N.Y. 1977) (noting the
significance of the fact that there was no harm to the public by enforcing the restrictive
covenant where the public had access to other health care providers); Ricca v. Ouzounian,
859 N.Y.S.2d 238, 239-40 (N.Y. App. Div. 2008) (same); Albany Med. Coll. v. Lobel, 745
N.Y.S.2d 250, 251-52 (N.Y. App. Div. 2002) (same); Muller v. N.Y. Heart Ctr. Cardiovascular
Specialists P.C., 656 N.Y.S.2d 464 (N.Y. App. Div. 1997) (refusing to enforce a covenant where
it prevents a physician from providing proper care to his patients in a certain area); Bollengier
v. Gulati, 650 N.Y.S.2d 56, 57-58 (N.Y. App. Div. 1996) (where there are other professionals
who perform the same services in a given area the restrictive covenant may be enforced).
152.
Karpinski v. Ingrasci, 268 N.E.2d 751, 753 (N.Y. 1971) (noting that the area covered
was the exact area over which the practice of the former employer extended); Bollengier v.
Gulati, 650 N.Y.S.2d 56, 57-58 (N.Y. App. Div. 1996) (stating “inasmuch as the subject
covenant’s reach is confined to . . . the territory over which [the former employer’s] practice
extends . . . it appears to be reasonable”); Novendstern v. Mr. Kisko Med. Grp., 576 N.Y.S.2d
329 (N.Y. App. Div. 1991).
153.
Rudolph Bros. v. Greulic, 21 N.Y.S.2d 971 (N.Y. Sup. Ct. 1940).
154.
Battenkill Veterinary Equine P.C. v. Cangelosi, 768 N.Y.S.2d 504 (N.Y. App. Div. 2003).
155.
Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 71-72 (2d Cir. 1999) (noting that while some
New York courts have not enforced covenants against salespersons, others have determined
that where a salesperson has a relationship with customers of a former employer, such that
the former employee may “divert” business from the former employer, their services can be
unique); Uniform Rental Div., Inc. v. Moreno, 441 N.Y.S.2d 538, 539 (N.Y. App. Div. 1981)
(where a former employee was the “star” salesman and the covenant was reasonable in other
respects the covenant would be enforced).
156.
295
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normally considered “professionals,” courts have found instances
where the services of a particular salesperson were “unique,” making
it more likely that a restrictive covenant will be enforced.157
6-4:3
Independent Contractors
While not necessarily considered employees, courts have been
willing to enforce restrictive covenants against independent
contractors.158 In such cases, courts will analyze the ongoing
relationship to determine whether the continuing relationship
provided adequate consideration to support the restrictive
covenant.159
6-4:4
Lawyers
Ethical rules prohibit restrictive covenants in employment
agreements among lawyers. The New York Rules of Professional
Conduct prohibit lawyers from offering or making:
(1) a partnership, shareholder, operating, employment,
or other similar type of agreement that restricts the
right of a lawyer to practice after termination of
the relationship, except an agreement concerning
benefits upon retirement; or
(2) an agreement in which a restriction on a lawyer’s
right to practice is part of the settlement of a client
controversy.160
157.
See, e.g.,Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 72 (2d Cir. 1999) (where a former
employee’s relationship with customers was “such that there [was] a substantial risk that the
employee [would] divert all or part of the business” of the former employer); Uniform Rental
Div., Inc. v. Moreno, 441 N.Y.S.2d 538 (N.Y. App. Div. 1981) (where the former employee
was the “star” salesperson of the former employer); Maltby v. Harlow Meyer Savage, Inc.,
633 N.Y.S.2d 926 (N.Y. Sup. Ct. 1995), aff’d, 637 N.Y.S.2d 110 (N.Y. App. Div. 1996) (where
the former employees had unique relationships—that would take at least six months for a
new employee to build—with the customers developed at the former employer’s expense).
158.
See, e.g., Windshield Installation Network v. Goudreau, 654 N.Y.S.2d 442 (N.Y. App.
Div. 1997) (enforcing a restrictive covenant against an independent contractor); Zellner v.
Stephen D. Conrad, M.D., P.C., 589 N.Y.S.2d 903, 906 (N.Y. App. Div. 1992) (noting that
independent contractors can be bound by restrictive covenants).
159.
Windshield Installation Network v. Goudreau, 654 N.Y.S.2d 442 (N.Y. App. Div. 1997);
Zellner v. Stephen D. Conrad, M.D., P.C., 589 N.Y.S.2d 903 (N.Y. App. Div. 1992) (noting
that for the purposes of restrictive covenants, independent contractors and at-will employees
are the same, and as a result, a continuing relationship is adequate consideration to support
the enforcement of a restrictive covenant against an independent contractor).
160.
New York Rules of Prof’l Conduct R. 5.6(a) (2009); see also Model Rules of Prof’l
Conduct R. 5.6 (2009) (same).
296
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Remedies for Violation of a Restrictive
Covenant
6-5
However, a restrictive covenant may be enforced if it is ancillary
to the sale of a legal practice.161
Courts in New York have strictly enforced the prohibition on
restrictive covenants in employment or partnership agreements
between lawyers.162 The Court of Appeals has ruled that even a
monetary penalty can constitute an impermissible restriction of
the practice of law.163 The policy underlying this rule is that the
general public’s access to the legal system should be unhindered,
including the right to choose a lawyer.164
6-5
Remedies for Violation of a
Restrictive Covenant
6-5:1
Generally
Courts strictly construe restrictive covenants and will not
extend enforcement beyond the literal reading of the contract.165
Ambiguous provisions in such covenants are most often construed
against the former employer, as the former employer usually prepared
the covenant and had the stronger bargaining position.166
6-5:2
Enforceability of Arbitration Agreements
The Supreme Court of the United States has determined that
arbitration clauses in employment agreements may be enforceable.167
New York Rules of Prof’l Conduct R. 5.6 (b) (2009).
Denburg v. Parker Chapin Flattau & Klimpl, 624 N.E.2d 995 (N.Y. 1993) (referring to
the similar prohibition from the previously effective New York Lawyer’s Code of Professional
Responsibility); Cohen v. Lord, Day & Lord, 550 N.E.2d 410 (N.Y. 1989) (same).
163.
Cohen v. Lord, Day & Lord, 550 N.E.2d 410 (N.Y. 1989) (a forfeiture-for-compensation
clause can constitute an impermissible restriction on the practice of law and was therefore
unenforceable).
164.
Denburg v. Parker Chapin Flattau & Klimpl, 624 N.E.2d 995, 999-1000 (N.Y. 1993)
(noting that the professional responsibility codes preventing a lawyer from entering a
restrictive covenant reflect the important public policy of a client’s choice of counsel);
Cohen v. Lord, Day & Lord, 550 N.E.2d 410, 411 (N.Y. 1989) (“The purpose of the rule is
to ensure that the public has the choice of counsel.”); Judge v. Bartlett, Pontiff, Stewart &
Rhodes, P.C., 610 N.Y.S.2d 412, 414 (N.Y. App. Div. 1994) (same).
165.
Elite Promotional Mktg., Inc. v. Stumacher, 779 N.Y.S.2d 528, 530 (N.Y. App. Div.
2004) (“A covenant against competition must be construed strictly and should not be
extended beyond the literal meaning of its terms.”); see also Gramercy Park Animal Ctr.,
Inc. v. Novick, 362 N.E.2d 608, 609 (N.Y. 1977) (same).
166.
Battenkill Veterinary Equine, P.C. v. Cangelosi, 768 N.Y.S.2d 504, 506 (N.Y. App. Div.
2003).
167.
Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001).
161.
162.
297
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In New York, some courts have recognized the applicability of
such clauses to restrictive covenants.168 In such cases, arbitrators
have the authority to award damages or enjoin individuals from
engaging in employment for a period of time.169 While arbitration
decisions are subject to review by the courts, the Court of Appeals
has stated that arbitration decisions regarding restrictive covenants
should not be vacated on public policy grounds.170
6-5:3
Injunctive Relief
One potential recourse for a former employer who is concerned
that a former employee plans to violate a restrictive covenant is to
seek a temporary restraining order. Courts may issue an injunction
to prevent a former employee from breaching a restrictive covenant,
where the underlying agreement was supported by consideration
when made, is reasonable in scope, and is equitable in all other
respects171—particularly in cases where a former employee was in
possession of a trade secret or confidential information, or that
employee’s services were unique or extraordinary.172
168.
Sprinzen v. Nomberg, 389 N.E.2d 456, 459-60 (N.Y. 1979) (noting that “by mutual
consent of the parties” disputes about enforcement of restrictive covenants can be submitted
to arbitration); Pine Street Pediatric Assoc., P.C. v. De Agostini, 570 N.Y.S.2d 740 (N.Y.
App. Div. 1991) (affirmed the lower court’s grant of the former employer’s application to
confirm an arbitration award upholding the validity of a restrictive covenant).
169.
Sprinzen v. Nomberg, 389 N.E.2d 456, 460 (N.Y. 1979) (allowing arbitration awards
specifically enforcing the covenants and enjoining former employees); Pine Street Pediatric
Assoc., P.C. v. De Agostini, 570 N.Y.S.2d 740 (N.Y. App. Div. 1991).
170.
Sprinzen v. Nomberg, 389 N.E.2d 456, 459-60 (N.Y. 1979) (citing Matter of
Port Jeffersonson Sta. Teachers Ass’n v. Brookhaven-Comsewogue Union Free School
District, 383 N.E.2d 553, 553-54 (N.Y. 1978) (“an arbitrator’s award which specifically
enforces [a restrictive covenant] . . . will not be vacated on public policy grounds.”
The Court of Appeals explained that arbitration awards enforcing restrictive
covenants are not among the “few matters of concern which have been recognized
as so intertwined with overriding public policy considerations as to either place
them beyond the bounds of the arbitration process itself or mandate the vacatur
of awards which do violence to the principles upon which such matters rest.”); see
also Pine Street Pediatric Assoc., P.C. v. De Agostini, 570 N.Y.S.2d 740 (N.Y. App.
Div. 1991).
171.
Delta Enter. Corp. v. Cohen, 940 N.Y.S.2d 43, 43 (N.Y. App. Div. 2012) (where there
was evidence that the former employee consulted independent counsel, received $50,000
in consideration, and there were indications of bad faith by the former employee, the
restrictive covenant is not unenforceable as a matter of law); Gundermann & Gundermann
Ins. v. Brassill, 853 N.Y.S.2d 82 (N.Y. App. Div. 2007) (where a former employer can show a
probability of success on the merits, a danger of irreparable harm, and a balance of equities
in its favor, an injunction will be granted); Crown IT Servs. v. Koval-Olsen, 782 N.Y.S.2d 708,
712 (N.Y. App. Div. 2004).
172.
Reed, Roberts Assocs., Inc. v. Strauman, 353 N.E.2d 590, 593 (N.Y. 1976) (stating
that injunctions are enforceable “to the extent necessary to prevent the disclosure or use
298
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Covenant
6-5
6-5:3.1 Preliminary Injunctions
A former employer can seek a preliminary injunction to enforce
a restrictive covenant against a former employee.173 Preliminary
injunctions to enforce restrictive covenants may be granted if the
employer can demonstrate a likelihood of success on the merits,
irreparable injury without injunctive relief, and that the balance of
equities is in the former employer’s favor.174 However, preliminary
injunctions are typically not granted unless the right to enforce the
covenant is clear from the undisputed facts and the resulting injury
from a breach would be irreparable.175
6-5:3.2 Permanent Injunctions
A permanent injunction enforcing a restrictive covenant, either
as written or as reformed by the court, will be granted in cases
where the agreement was supported by adequate consideration
when made, is reasonable in the scope of restraint and is equitable
in all other respects.176 To get a permanent injunction, the former
employer must show that the former employee’s breach will result
in irreparable damage to the business without an injunction
because of the nature of the business and the former employee’s
connection to that business.177
of trade secrets or confidential customer information [or] . . . where an employee’s services
are unique or extraordinary and the covenant is reasonable.”); Battenkill Veterinary Equine
P.C. v. Cangelosi, 768 N.Y.S.2d 504 (N.Y. App. Div. 2003) (to get an injunction the former
employer had to show that the former employee “improperly appropriated its customer list
or used confidential client information.”).
173.
Delta Enter. Corp. v. Cohen, 940 N.Y.S.2d 43, 43 (N.Y. App. Div. 2012) (seeking an
injunction preventing the former employee from breaching a restrictive covenant); Battenkill
Veterinary Equine P.C. v. Cangelosi, 768 N.Y.S.2d 504 (N.Y. App. Div. 2003) (same).
174.
Delta Enter. Corp. v. Cohen, 940 N.Y.S.2d 43 (N.Y. App. Div. 2012) (outlining the
requirements for a preliminary injunction); Sutherland Global Servs., Inc. v. Stuewe, 902
N.Y.S.2d 272, 273-74 (N.Y. App. Div. 2010) (same); Battenkill Veterinary Equine P.C. v.
Cangelosi, 768 N.Y.S.2d 504 (N.Y. App. Div. 2003) (same).
175.
Orkin Exterminating Co. v. Dayton, 527 N.Y.S.2d 883, 884 (N.Y. App. Div.
1988) (“Within the context of enforcement of a noncompetition clause, the motion
[for a preliminary injunction] should be granted only where the right is plain from the
undisputed facts.”); see also Gundermann & Gundermann Ins. v. Brassill, 853 N.Y.S.2d
82, 83-84 (N.Y. App. Div. 2007); TMP Worldwide Inc. v. Franzino, 703 N.Y.S.2d 183, 184
(N.Y. App. Div. 2000) (a preliminary injunction will not be granted where the former
employer simply makes “conclusory” assertions of entitlement to enforcement of a
restrictive covenant).
176.
Ticor Title Ins. Co. v. Cohen, 173 F.3d 63 (2d Cir. 1999).
177.
Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 68-69 (2d Cir. 1999); Willis of N.Y., Inc. v.
DeFelice, 750 N.Y.S.2d 39, 42 (N.Y. App. Div. 2002).
299
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The inclusion of a liquidated damages clause in a restrictive
covenant does not automatically prevent the issuance of an
injunction.178
6-5:4
Damages
6-5:4.1 Calculation
The most common means of calculating the damages owed
to a former employer from a breach of a restrictive covenant is
to compute the net profit the former employer was deprived of
by the improper competition by the former employee.179 In one
case where a former employer was unable to prove damages, the
former employer was still able to recover nominal damages where
it established a breach of the agreement.180
The agreement may also discuss the damages in the event of
a breach. An agreement that requires an employee to pay “all
compensation, profits, monies, accruals or other benefits received
. . .” is enforceable as to that measure of damages.181 While these
formulas are a guidepost, the damages to the former employer
need not be proven with mathematical certainty.182
6-5:4.2 Liquidated Damages Clauses
Employment agreements with restrictive covenants may contain
liquidated damages clauses. A liquidated damages clause is “‘an
estimate, made by the parties at the time they enter into their
agreement, of the extent of the injury that would be sustained as a
result of breach of the agreement.’”183 A liquidated damages clause
178.
Karpinski v. Ingrasci, 268 N.E.2d 751, 755 (N.Y. 1971); Crown IT Servs. v. Koval-Olsen,
782 N.Y.S.2d 708, 711 (N.Y. App. Div. 2004). See infra § 6-5:4.2, for a general discussion of
liquidated damages clauses in restrictive covenants.
179.
See Earth Alterations, LLC v. Farrell, 800 N.Y.S.2d 744, 745 (N.Y. App. Div. 2005)
(noting that the former employer met its burden in proving net loss of profits due to
competition by the former employee); Pencom Sys., Inc. v. Shapiro, 598 N.Y.S.2d 212 (N.Y.
App. Div. 1993) (noting that the proper measure of damages is “the net profit of which
plaintiff was deprived by reason of defendant’s improper competition with plaintiff.”);
Support Sys. Assocs., Inc. v. Tavolacci, 522 N.Y.S.2d 604, 606 (N.Y. App. Div. 1987) (same).
180.
Meteor Indus. v. Metalloy Indus., 539 N.Y.S.2d 972 (N.Y. App. Div. 1989).
181.
World Auto Parts, Inc. v. Labenski, 689 N.Y.S.2d 582, 583 (N.Y. App. Div. 1999).
182.
Special Prods. Mfg., Inc. v. Douglass, 564 N.Y.S.2d 615, 616 (N.Y. App. Div. 1991);
Borne Chem. Co. v. Dictrow, 445 N.Y.S.2d 406, 413-14 (N.Y. App. Div. 1981).
183.
Crown IT Servs., Inc. v. Koval-Olsen, 782 N.Y.S.2d 708, 712 (N.Y. App. Div. 2004) (quoting
Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 361 N.E.2d 1015, 1018 (N.Y. 1977)).
300
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Covenant
6-5
may be enforced if it was a reasonable estimate of the anticipated
loss at the time that the agreement was negotiated and executed.184
However, if the liquidated damages are grossly disproportionate to
the probable loss, such provision will not usually be enforced.185
6-5:5
Partial Enforcement
A court’s fact-intensive analysis to determine whether to enforce
a restrictive covenant may result in only a portion of a restrictive
covenant being found reasonable. For example, the restriction may
be reasonable as to time and area, but not as to scope of activities
covered,186 or the covenant may be reasonable in duration, but
unreasonable in geographic area.187 Courts in New York have
reserved the power to partially enforce a restrictive covenant in
certain circumstances.188
Courts can now “sever” the unreasonable or overbroad portion
of a restrictive covenant and uphold the covenant to the extent
the remaining provisions are reasonable.189 This approach allows
courts to consider the best interests of all of the parties and
the general public, and requires a case-specific analysis.190 This
184.
Crown IT Servs., Inc. v. Koval-Olsen, 782 N.Y.S.2d 708, 712 (N.Y. App. Div. 2004)
(finding that a liquidated damages clause was enforceable because it “was a reasonable
estimate at the time the contract was negotiated and executed.”).
185.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1227-28 (N.Y. 1999) (noting that
whether a clause is grossly disproportionate to the actual damages is a matter to be
determined by a review of the record, and simple averments that the clause is not grossly
disproportionate is inconclusive); Clubb v. ANC Heating & Air Conditioning, 675 N.Y.S.2d
176, 178 (N.Y. App. Div. 1998) (refusing to enforce a liquidated damages clause that was
grossly disproportionate); Curtis v. Amela-Bouyea, 525 N.Y.S.2d 69, 71 (N.Y. App. Div.
1988) (where a liquidated damages clause bears “no reasonable relationship to the probable
loss” and the losses are not difficult to calculate, the clause will not be enforced).
186.
Karpinski v. Ingrasci, 268 N.E.2d 751 (N.Y. 1971).
187.
Baker’s Aid v. Hussmann Foodserv. Co., 730 F. Supp. 1209, 1216 (E.D.N.Y. 1990).
188.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1226 (N.Y. 1999) (courts have the power
to sever and grant partial enforcement of an overbroad restrictive covenant); Karpinski v.
Ingrasci, 268 N.E.2d 751, 755 (N.Y. 1971) (same); see, e.g., Weiser LLP v. Coopersmith, 902
N.Y.S.2d 74, 77 (N.Y. App. Div. 2010) (finding that even though the covenant was overbroad
it could be partially enforced).
189.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1226 (N.Y. 1999) (analyzing the
New York law on the concept of judicial severance of a partially unreasonable restrictive
covenant); Karpinski v. Ingrasci, 268 N.E.2d 751, 755 (N.Y. 1971).
190.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1226 (N.Y. 1999) (stating that when “the
unenforceable portion is not an essential part of the agreed exchange, a court should conduct
a case specific analysis, focusing on the conduct of the employer in imposing the terms of the
agreement.”); Weiser LLP v. Coopersmith, 902 N.Y.S.2d 74, 77 (N.Y. App. Div. 2010) (partially
enforcing the covenant “upon consideration of the equities and the record”); Ashland Mgmt.
Inc. v. Altair Invs. N.A., LLC, 869 N.Y.S.2d 465, 472-73 (N.Y. App. Div. 2008).
301
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analysis is focused on the conduct of the employer in the making
of the original covenant, including whether there is an absence
of overreaching by the former employer, no coercive use of a
dominant bargaining position, and no other misconduct.191
Courts can pare the unreasonable restraint down to the
appropriate size and enforce that restraint.192 Courts retain the
power to alter a restriction to limit which customers can be served
or solicited, and courts can modify the type of business activity in
which the former employee may engage following the end of the
relationship.193
6-6
Defenses to Enforcement
Beyond challenging the reasonableness of the covenant or the
interests the employer is attempting to protect, former employees
may raise the following defenses to enforcement of restrictive
covenants:
1. Expiration of the statute of limitations;194
2.
Lack of jurisdiction;195
3.
Waiver;196
4.
Lack of consideration;197
191.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1226 (N.Y. 1999) (“If the employer
demonstrates an absence of overreaching, coercive use of dominant bargaining power, or
other anti-competitive misconduct, but has in good faith sought to protect a legitimate
business interest, consistent with reasonable standards of fair dealing, partial enforcement
may be justified.”); Ashland Mgmt. Inc. v. Altair Invs. N.A., LLC, 869 N.Y.S.2d 465, 472
(N.Y. App. Div. 2008) (same).
192.
Baker’s Aid v. Hussmann Foodserv. Co., 730 F. Supp. 1209, 1216 (E.D.N.Y 1990);
BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1226 (N.Y. 1999) (noting that a court can
sever the portions of a restrictive covenant that are overbroad); Karpinski v. Ingrasci, 268
N.E.2d 751, 754-55 (N.Y. 1971); Ashland Mgmt. Inc. v. Altair Inv. N.A., LLC, 869 N.Y.S.2d
465 (N.Y. App. Div. 2008) (recognizing that a court can sever an unreasonable duration
term by reducing it to a more reasonable one).
193.
BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999) (narrowing the class
of customers to whom the covenant was enforced against); Karpinski v. Ingrasci, 268
N.E.2d 751 (N.Y. 1971) (narrowing the scope of activity covered by the covenant); Ashland
Mgmt. Inc. v. Altair Inv. N.A., LLC, 869 N.Y.S.2d 465 (N.Y. App. Div. 2008) (limiting
duration).
194.
See infra § 6-6:1.
195.
See infra § 6-6:1.
196.
See infra § 6-6:2.
197.
See infra § 6-6:3.
302
12/1/12 6:44:58 PM
6-6:1
5.
Unconscionability of the agreement;198 or
6.
An employee’s involuntary discharge without
cause.199
6-6
Statute of Limitations and Jurisdiction Issues
The statute of limitations applicable to actions for a breach
of a noncompete clause or agreement is the six-year limitation
applicable to breach of contract actions.200
Where a defendant allegedly misappropriates a trade secret,
some courts have noted that the defendant becomes liable to the
plaintiff upon the first disclosure.201 However, where the defendant
uses the trade secret to his own “commercial advantage,” rather
than disclosing the trade secret publicly, each subsequent use may
constitute a new tort to toll the limitations period.202
As a breach of an agreement not to compete is governed by state
or common law, federal courts will usually only exercise jurisdiction
over the action when the parties satisfy the diversity requirements
of 28 U.S.C. § 1332.203
6-6:2
Waiver
Where the former employer is responsible for a former employee’s
breach of a restrictive covenant, the employer cannot later attempt
to enforce the covenant.204 However, an employer’s history
See infra § 6-6:4.
See infra § 6-6:5.
200.
Thaler v. Skydell, 541 N.Y.S.2d 420, 421 (N.Y. App. Div. 1989).
201.
Lemelson v. Carolina Enters., Inc., 541 F. Supp. 645, 659 (S.D.N.Y. 1982) (noting that
in New York the rule is that where a former employee misappropriates and discloses a trade
secret, the former employee became liable upon disclosure).
202.
Lemelson v. Carolina Enters., Inc., 541 F. Supp. 645, 659 (S.D.N.Y. 1982) (also noting,
that where the trade secret is kept confidential, but the former employee uses the trade
secret to his commercial advantage, then each use constitutes a “new, actionable tort for the
purpose of the running of the Statute of Limitations.”).
203.
See, e.g., Arakelian v. Omnicare, Inc., 735 F. Supp. 2d 22, 30 (S.D.N.Y. 2010) (as
restrictive covenants are governed by state law, the case could only proceed because there
was diversity jurisdiction); Sarfraz v. Vohra Health Servs., P.A., 663 F. Supp. 2d 147, 151
(E.D.N.Y. 2009) (jurisdiction over an action seeking a declaratory judgment regarding the
enforceability of a restrictive covenant was proper where the plaintiffs alleged an amount in
controversy over $75,000).
204.
International Shared Servs., Inc. v. McCoy, 686 N.Y.S.2d 828, 829 (N.Y. App. Div.
1999) (where a former employer pledged to aid a former employee in seeking subsequent
employment, and put the former employee in touch with competitors, the former
employer waived its right to enforce the restrictive covenant); Horne v. Radiological
198.
199.
303
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of nonenforcement of restrictive covenants typically will not
constitute a waiver of such covenants.205 If an employee resigns in
reliance on the history of nonenforcement of restrictive covenants
by the former employer, the former employer may be estopped
from enforcing the covenant.206
6-6:3
Lack of Consideration
An agreement not to compete must usually be supported
by consideration in order to be valid.207 However, as noted in
Section 6-3:5.2, an employer’s continued employment of the
employee may provide sufficient consideration.208
6-6:4
Unconscionability
Usually both procedural and substantive unconscionability must
be established for courts in New York to find that an agreement
will not be enforced.209 Procedural unconscionability is where
a party entering a contract did not have a “meaningful” choice.210
Substantive unconscionability requires a showing that the
Health Servs., P.C., 371 N.Y.S.2d 948, 960 (N.Y. Sup. Ct. 1975), aff’d, 379 N.Y.S.2d 374
(N.Y. App. Div. 1976).
205.
Horne v. Radiological Health Servs, P.C., 371 N.Y.S.2d 948, 960 (N.Y. Sup. Ct. 1975),
aff’d, 379 N.Y.S.2d 374 (N.Y. App. Div. 1976) (waiver of the enforcement of restrictive
covenants to certain former employees on a case-by-case basis does not preclude a former
employer from seeking to enforce a restrictive covenant against a subsequent employee).
206.
Horne v. Radiological Health Servs, P.C., 371 N.Y.S.2d 948, 961 (N.Y. Sup. Ct. 1975),
aff’d, 379 N.Y.S.2d 374 (N.Y. App. Div. 1976).
207.
Zellner v. Stephen D. Conrad, M.D., P.C., 589 N.Y.S.2d 903, 906 (N.Y. App. Div. 1992)
(stating, “restrictive covenants are, first and foremost, contracts. As with any contract, the
promise not to compete must be supported by adequate consideration on the part of the
promisee.”).
208.
Iannucci v. Segal Co., No. 06-cv-4720, 2006 U.S. Dist. LEXIS 43339 (S.D.N.Y. June 26,
2006) (noting that New York law is clear that an employer’s forbearance of their right to
terminate an employee at any time is adequate consideration for a restrictive covenant);
Gazzola-Kraenzlin v. Westchester Med. Grp., P.C., 782 N.Y.S.2d 115 (N.Y. App. Div. 2004)
(an employer’s continued employment of the former employee after the end of the
termination date contained in a contract constituted sufficient consideration); Zellner v.
Stephen D. Conrad, M.D., P.C., 589 N.Y.S.2d 903 (N.Y. App. Div. 1992) (noting that
continued retention of an independent contractor is sufficient consideration); Arthur Young &
Co. v. Galasso, 538 N.Y.S.2d 424 (N.Y. Sup. Ct. 1989) (discussing that financial benefits and
certain intangibles such as increased knowledge, skill, or status provided to an employee
may constitute sufficient consideration).
209.
Gillman v. Chase Manhattan Bank, N.A., 534 N.E.2d 824, 828 (N.Y. 1988) (setting
forth the elements of unconscionability); Lawrence v. Miller, 853 N.Y.S.2d 1, 5 (N.Y. App.
Div. 2007) (same).
210.
Gillman v. Chase Manhattan Bank, N.A., 534 N.E.2d 824, 828 (N.Y. 1988); Lawrence v.
Miller, 853 N.Y.S.2d 1, 5 (N.Y. App. Div. 2007).
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6-6
contract terms are “unreasonably favorable” to the other party to
the contract.211
In the context of restrictive covenants, the same analysis has
been used.212 That a contract containing a restrictive covenant was
offered to a former employee on a “take it or leave it” basis is not
usually sufficient alone to void the contract; the employee must
also show the absence of a meaningful choice.213 Additionally,
because courts conduct a reasonableness analysis in determining
whether a noncompete clause should be enforced, there can be
some overlap between that analysis and the substantive aspect of
unconscionability.214
6-6:5Effect of Employee’s Involuntary Discharge
Under a Contract
One federal court sitting in New York has found that usually
“courts will not enforce a non-competition provision in an
employment agreement where the former employee was involuntarily
terminated.”215 Specifically, when an at-will employee subject to a
restrictive covenant is involuntarily discharged without cause the
“mutuality of obligation on which a covenant not to compete is based”
would be destroyed.216 If a former employee has been discharged
with cause, however, the covenant may still be enforced.217
Recall, as discussed above at § 6-3:3.2b, that the employee choice
doctrine will not be invoked to uphold a restrictive covenant
forfeiting deferred compensation for a former employee’s
competition in violation of the covenant in circumstances where
the employee is involuntarily discharged without cause.218
211.
Gillman v. Chase Manhattan Bank, N.A., 534 N.E.2d 824, 828 (N.Y. 1988); Lawrence v.
Miller, 853 N.Y.S.2d 1, 5 (N.Y. App. Div. 2007).
212.
Carvel Corp. v. Rait, 503 N.Y.S.2d 406, 410-11 (N.Y. App. Div. 1986) (discussing
whether a particular restrictive covenant was procedurally and substantively unconscionable,
and ultimately deciding that it was not).
213.
Carvel Corp. v. Rait, 503 N.Y.S.2d 406, 410-11 (N.Y. App. Div. 1986) (conclusory
allegations are not enough to support a claim that there was a lack of meaningful choice).
214.
Carvel Corp. v. Rait, 503 N.Y.S.2d 406, 410-11 (N.Y. App. Div. 1986).
215.
SIFCO Indus. Inc. v. Advanced Plating Technologies, Inc., 867 F. Supp. 155, 158
(S.D.N.Y. 1994).
216.
Arakelian v. Omnicare, Inc., 735 F. Supp. 2d 22, 41-42 (S.D.N.Y. 2010).
217.
J. H. Goldberg Co. v. Stern, 385 N.Y.S.2d 427 (N.Y. App. Div. 1976).
218.
Morris v. Schroder Capital Mgmt. Int’l, 859 N.E.2d 503 (N.Y. 2006); Post v. Merrill
Lynch, Pierce, Fenner & Smith, Inc., 397 N.E.2d 358 (N.Y. 1979).
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6-7
Other Issues Related to Restrictive
Covenants
6-7:1
Tortious Interference
Third parties that hire a former employee subject to a restrictive
covenant without knowledge of the covenant may be immune
from liability under an intentional interference with contract cause
of action.219
Additionally, where a former employer successfully pursues
a cause of action against the former employee for breach of a
restrictive covenant, the former employer may be foreclosed from
also pursuing a cause of action for tortious interference with
contractual relations based on the same agreement.220
6-7:2
Antitrust
Federal Courts sitting in New York have rejected arguments that
restrictive covenants are per se221 violations of the Sherman Act.222
Additionally, because of the reasonableness analysis conducted
by courts to determine whether a restrictive covenant should be
enforced, at least one court has found that the covenant necessarily
meets the rule of reason under the Sherman Act.223 Inasmuch as
New York’s Donnelly Act224 is “modeled after the Sherman Act
. . . .”,225 a similar argument that a restrictive covenant per se
violates the Donnelly Act could also be expected to fail.
219.
Anderson Props., Inc. v. Sawhill Tubular Div., Cyclops Corp., 540 N.Y.S.2d 82, 83
(N.Y. App. Div. 1989) (stating that where a third party had no knowledge of the restrictive
covenant, the former employer could not show “the essential elements” of an intentional
interference claim).
220.
Mallory Factor Inc. v. Schwartz, 536 N.Y.S.2d 752, 754 (N.Y. App. Div. 1989).
221.
Some restraints on competition, “because of their ‘pernicious effect on competition
and lack of any redeeming virtue are conclusively presumed to be unreasonable.’” Bradford v.
N.Y. Times Co., 501 F.2d 51, 60 (2d Cir. 1974) (internal citations omitted).
222.
Sherman Antitrust Act, 15 U.S.C. §§ 1-7 (2012); Bradford v. N.Y. Times Co., 501 F.2d
51, 59 (2d Cir. 1974).
223.
Baker’s Aid v. Hussmann Foodserv. Co., 730 F. Supp. 1209, 1217 (E.D.N.Y. 1990).
224.
Donnelly Act, N.Y. Gen. Bus. L §§ 340-347 (2012).
225.
Venture Tech. Inc. v. Nat’l Fuel Gas Co., 685 F.2d 41, 42 n.1 (2d Cir. 1982).
306
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6 Chapter Restrictive Covenants

Transcription

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