New York Employers Could Soon Have More Difficulty Enforcing Restrictive Covenants
Earlier this Spring, the New York Court of Appeals heard oral argument in Brown & Brown, Inc. v. Johnson, a case that could make it harder for employers to obtain partial enforcement of restrictive covenants. For many years, courts regularly exercised their judicial power to sever and grant partial enforcement of otherwise over-broad restrictive covenants. However, recent developments in restrictive covenant jurisprudence demonstrate an increasing willingness by lower courts to invalidate covenants that are facially unenforceable without considering any “blue penciling” or partial enforcement.
In Brown & Brown, the Appellate Division invalidated an overbroad and unenforceable non-solicitation clause because it sought to bar the employee from soliciting or providing services to clients with whom the employee never acquired a relationship through his or her employment. The court then refused the employer’s request to partially enforce the restrictive covenant, and this appeal ensued. A decision is expected later this year.
Restrictive covenants in employment—also referred to as non-compete clauses—are generally not favored, and will be enforced by the courts only to the extent they are reasonable and necessary to protect legitimate business interests, such as the protection of an employer’s trade secrets or confidential customer lists, or protection from an employee whose services are unique or extraordinary. Courts have also held that employers have a legitimate interest in preventing former employees from exploiting the goodwill of a client or customer, which had been created and maintained at the employer’s expense, to the employer’s competitive detriment.
However, the Court of Appeals long ago held that extending a non-compete to the employer’s clients with whom the former employee never developed a relationship would not be permitted because doing so would constitute a restraint greater than is needed to protect these legitimate interests. BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 392 (1999). It is equally well-settled that it would be unreasonable to extend a non-compete clause to personal clients of a former employee who came to the company solely to avail themselves of his services and only as a result of his own independent recruitment efforts, which the company neither subsidized nor otherwise financially supported as part of a program of client development. Id. at 393.
The Court of Appeals has expressly recognized and applied the judicial power to sever and grant partial enforcement for an overbroad employee restrictive covenant. But, partial enforcement of an otherwise overbroad restrictive covenant may be justified only if the employer demonstrates an absence of overreaching, coercive use of dominant bargaining power, or other anti-competitive misconduct, and that it has in good faith sought to protect a legitimate business interest, consistent with reasonable standards of fair dealing. BDO Seidman, 93 N.Y. 2d at 394. “The determination of whether an overly broad restrictive covenant should be enforced to the extent necessary to protect an employer’s legitimate interest involves ‘a case specific analysis, focusing on the conduct of the employer in imposing the terms of the agreement.” Scott, Stackrow & Co., C.P.A.’s, P.C. v. Skavina, 9 A.D.3d 805, 807 (3d Dep’t 2004).
“A legitimate consideration against [partial enforcement of an otherwise overbroad restrictive covenant] is the fear that employers will use their superior bargaining position to impose unreasonable anti-competitive restrictions, uninhibited by the risk that a court will void the entire agreement, leaving the employee free of restraint.” BDO Seidman, 93 N.Y.2d at 394. More recently, courts have increasingly declined partial enforcement where an employer attempts to prohibit solicitation of its entire customer base after the BDO Seidman decision.
In Brown & Brown, the Appellate Division refused to partially enforce the restrictive covenant, even thought the agreement specifically authorized severance and partial enforcement, noting that the employer presented the agreement to its employee “more than seven years after BDO Seidman was decided” and that “the issuance of the decision in BDO Seidman ‘served as notice to plaintiff[s] that the agreement at issue here was overly broad.’” Id. at 640 (quoting Scott, Stackrow & CO., C.P.A.’s, P.C. v. Skavina, 9 A.D.3d 805, 808 (3d Dep’t 2004)). In refusing to partially enforce the covenant, the Appellate Division put employers on notice regarding future requests for partial enforcement:
Furthermore, allowing a former employer the benefit of partial enforcement of overly broad restrictive covenants simply because the applicable agreement contemplated partial enforcement would eliminate consideration of the factors set forth by the Court of Appeals in BDO Seidman, and would enhance the risk that “employers will use their superior bargaining position to impose unreasonable anti-competitive restrictions, uninhibited by the risk that a court will void the entire agreement, leaving the employee free of any restraint.”
Brown & Brown, 115 A.D.3d at 640-41 (quoting BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 394 (1999)).
While it is possible that the Court of Appeals could decide Brown & Brown without addressing the partial enforcement issue at all, as this is not the only issue on appeal, employers should still heed the warning of the Fourth Department. Courts are likely to continue to closely scrutinize overly broad restrictive covenants regardless of the outcome of Brown & Brown. Employers with legitimate interests to protect, must carefully and narrowly tailor these agreements to avoid the risk that a court will void the entire agreement, leaving the employee free of any restraint.
UPDATE: The Court of Appeals decided the case on June 11, 2015. For a link to the decision, and a discussion of its impact, we invite you to read our most recent article: Court of Appeals: Florida Choice-of-Law in Non-Solicitation is Unenforceable.
If you would like to schedule a consultation to talk about restrictive covenants in employment, please feel free to contact Peter Weishaar at firstname.lastname@example.org or (585) 512-3542. Peter also writes a law blog, the Rochester Law Review, covering legal developments, cases of interest, and events happening in all of the key areas of his practice. You can follow the blog on Facebook and Twitter.
Peter's employment practice includes the representation of businesses and individuals in matters involving restrictive covenants, non-compete agreements, discrimination and failure to pay wages in State and Federal Courts, and before administrative agencies, including the New York State Division of Human Rights and the United States Equal Employment Opportunity Commission.
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