New York Non-competition Law

posted by Neil Klingshirn  |  Dec 13, 2009 11:35 AM [EST]  |  applies to Ohio

New York state courts enforce post-employment non-competition agreements under certain circumstances, but their examination of restrictive covenants is rigorous. 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.  That is, New York public policy militates against sanctioning the loss of a person’s livelihood. Thus, a restrictive covenant will be rigorously examined, and enforced only:
BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (N.Y. 1999). Only after determining that a restrictive covenant would serve to protect against such unfair and illegal conduct and not merely to insulate the employer from competition, does the reasonableness of the covenant in terms of its time, space or scope, or the oppressiveness of its operation become an issue.

Protection of the Employer’s Legitimate Interests

An employer may assert four types of legitimate interests under the first prong of the BDO Seidman standard:
A trade secret is "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."  With respect to restrictive covenants, however, New York courts have cautioned against overzealous application of this expansive definition. Thus, recognition of trade secrets in this context does not encompass nearly all confidential business documents. Similarly, mere knowledge of the intricacies of a business operation does not qualify.

New York courts have routinely held that business or financial information, such as market reports, do not trigger the trade-secrets legitimate interest. See, e.g., H. Meer Dental Supply Co. v. Commisso, 269 A.D.2d 662, (N.Y. App. Div. 2000) (modifying an order that preliminarily enjoined defendants from using such information). Similarly, trade-secret protection does not extend to information regarding “market strategies.”

If an employer demonstrates at least one legitimate interest, a court has discretion to partially enforce an otherwise overbroad covenant, but only to the extent necessary to protect the established legitimate interests.  An employer also must demonstrate good faith, which means an absence of overreaching, coercive use of dominant bargaining power, or other anti-competitive misconduct, to warrant the possibility of partial enforcement.

Reasonableness of the Covenant in terms of its Time, Space or Scope

Restrictive covenants will be enforced only if reasonably limited in scope and duration, and then only to the extent necessary to protect the employer from unfair competition resulting from the use or disclosure of trade secrets or confidential customer lists, or if the former employee's services are unique or extraordinary. The party seeking to enforce a restrictive covenant bears the burden of establishing that its provisions are reasonable.

The formulation of reasonableness may vary with the context and type of restriction imposed. For example, where a business is sold, anticompetition covenants will be enforceable, if reasonable in time, scope and extent. These covenants are designed to protect the goodwill integral to the business from usurpation by the former owner while at the same time allowing an owner to profit from the goodwill which he may have spent years creating.

Unique Employee Services

In analyzing whether an employee's services are unique, the focus today is less on the uniqueness of the individual person of the employee but is more focused on the employee's relationship to the employer's business to ascertain whether his or her services and value to that operation may be said to be unique, special or extraordinary. See, e.g., Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 71-73 (2d Cir. 1999) (construing a "star" salesman's extensive client relationships as a sufficient basis for finding him "unique").  Typical of the types of employees whose services may properly be regarded as falling into this category are musicians, professional athletes, actors and members of the learned profession.

Employee Choice Doctrine - An Exception to the Reasonableness Rule

New York courts will enforce a restrictive covenant without regard to its reasonableness if the employee has been afforded the choice between not competing (and thereby preserving his benefits) or competing (and thereby risking forfeiture). This “employee choice doctrine” assumes that an employee who elects to leave a company makes an informed choice between forfeiting a certain benefit or retaining the benefit by avoiding competitive employment.  Post v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 48 N.Y.2d 84 (1979).

An employer can rely on the doctrine only if the employer can demonstrate its continued willingness to employ the party who covenanted not to compete. Thus, when an employee is involuntarily discharged without cause, the employer cannot invoke the benefits of the doctrine. Enforcing the non-competition provision under such circumstances would be “unconscionable” because it would destroy the mutuality of obligation on which a covenant not to compete is based.

Assignment of New York Non-competition Agreements

New York contracts for personal services are not assignable without the consent of the parties.  However, New York courts do not treat a covenant not to compete as a personal services contract  Eisner Computer Solutions, LLC v. Gluckstern, 293 A.D.2d 289 (N.Y. App. Div. 1st Dep't 2002), citing to Norman Ellis Corp. v Lippus, 13 Misc 2d 432).  Therefore, non-competition agreements are assignable in New York without the employee's consent (see, Abalene Pest Control Serv. v Powell, 8 AD2d 734, 734-735).

Because contracts, that do not involve personal services are freely assignable absent a contractual, statutory or public policy prohibition (see, General Obligations Law § 13-101; see also, 6 NY Jur 2d, Assignments, § 5, at 238), a clear and unambiguous prohibition is essential to effectively prevent assignment (see, 6 NY Jur 2d, Assignments, § 10, at 244-245). In other words, unless the non-competition agreement clearly and unambiguously prohibits an assignment, New York courts will permit the assignment.  Special Prods. Mfg. v. Douglass, 159 A.D.2d 847, 849 (N.Y. App. Div. 3d Dep't 1990).

Examples of Non-competition Agreement Enforcement

Although non-competition agreements are strictly construed in New York, the courts have repeatedly enjoined employees from breaching reasonably limited agreements.

• DS Courier Servs., Inc. v.-Seebarran, 40 A.D.3d 271, 272 (N.Y. App. Div. 2007) (enforcing restrictive covenant that prohibits defendant from negotiating directly or indirectly with any of six identified customers of plaintiff for a period of 120 days after termination of defendant's service, voluntary or otherwise);
• South Nassau Control Mgmt. Corp. v. Innovative Control Corp., No. CIV. 95-3724, 1996 WL 496610 (E.D.N.Y. June 20, 1996);
• Innovative Networks Inc. v. Satellite Airlines Ticketing Centers, Inc., 871 F. Supp. 709, 728 (S.D.N.Y. 1995);
• Gelder Medical Group v. Webber, 41 N.Y.2d 680, 394 N.Y.S.2d 867, 363 N.E.2d 573 (1977);
• Schachter v. Lester Witte & Co., 52 A.D.2d  [**45]  121, 383 N.Y.S.2d 316 (1st Dep't 1976) aff'd 41 N.Y.2d 1067, 396 N.Y.S.2d 175, 364 N.E.2d 840 (1977);
• Chernoff Diamond & Co. v. Fitzmaurice, Inc., 234 A.D.2d 200, 651 N.Y.S.2d 504 (1st Dep't 1996);
• Maltby v. Harlow Meyer Savage, Inc., 223 A.D.2d 516, 637 N.Y.S.2d 110 (1st Dep't 1996);
• Deloitte & Touche, L.L.P. v. Chiampou, 222 A.D.2d 1026, 636 N.Y.S.2d 679 (4th Dep't 1995);
• Briskin v. All Seasons Serve., Inc., 206 A.D.2d 906, 615 N.Y.S.2d 166 (4th Dep't 1994);
• Mallory Factor Inc. v. Schwartz, 146 A.D.2d 465, 536 N.Y.S.2d 752 (1st Dep't 1989);
• Composite Panel Fabricators, Inc. v. Webb, 118 A.D.2d 615, 499 N.Y.S.2d 765 (2d Dep't 1986);
• Walter Rubin Inc. v. First Coinvesters, Inc., 91 A.D.2d 630, 456 N.Y.S.2d 813 (2d Dep't 1982);
• Sackman v. Maritas, 156 Misc. 2d 939, 595 N.Y.S.2d 655 (Sup. 1992);
• Garvin Guybutler Corp. v. Cowen & Co., 155 Misc. 2d 39, 588 N.Y.S.2d 56, (Sup. 1992).
• Inflight Newspapers v. Magazines In-Flight, L.L.C., 990 F. Supp. 119, 134 (E.D.N.Y. 1997)

posted by Neil Klingshirn  |  Dec 13, 2009 11:35 AM [EST]  |  applies to Ohio