New York Court Continued Employment is Sufficient Consideration 2018

What is a Non-Compete?

As all of our readers undoubtedly know, a non-compete provision is a type of restrictive covenant that many employers include in employment and severance agreements. The purpose of a non-compete provision is to restrict a former employee's ability to work for a competitor after the cessation of his or her employment.

When are Non-Competes Enforceable?

New York courts tend to disfavor non-compete provisions.¹ However, as is also well known, non-compete provisions have been enforced where they have found to:

1. Impose no greater restrictions than required to protect an employer's legitimate protectable interests;
2. Not impose undue hardship on the employee or be harmful to the general public; and
3. Be reasonably limited temporally and geographically.²

Employer's Legitimate Protectable Interests

In New York, employer's legitimate protectable interests include:³

1. Protection of trade secrets;
2. Protection of customer relationships;
3. Confidential customer; and
4. "Unique" services.

The latter category has rarely been invoked by employers since it is very difficult to prove that an employee rendered unique services that cannot easily be replaced.

Scope of Restrictions

If a New York court determines that a non-compete is necessary to protect a legitimate interest, it will then examine the following three factors:

1. Geographic scope of the restriction. New York courts generally conduct a fact-based analysis to determine if a geographic restriction in a non-compete provision is reasonable. New York courts may be willing to enforce a broad geographic restriction so long as the duration of the restrictions is short. For example, in Interga Optics, Inc v. Nash, a Northern District of New York Judge, applying New York law, stated that "[e]ven if the geographic scope were found to be somewhat broad (due to the evidence that the vast majority of Plaintiff's current clients appear to be limited to North and South America), the restriction is tempered by the brief duration of it."⁴ In a February 2020 decision in Markets Grp., Inc. v. Oliveira, a Southern District of New York Judge, also applying New York law, held a non-compete provision unenforceable because it did not contain a geographical limit."⁵
2. Duration of the restriction. When reviewing the temporal period of non-competes, New York courts have held repeatedly that restrictions of six months or less are generally reasonable. However, like the geographic limitation, this analysis is conducted on a case-by-case basis and courts have also found certain longer non-compete provisions reasonable in light of other circumstances. For instance, an Eastern District of New York Judge held in March 2020 that a five year non-compete clause was reasonable in the context of the sale of a business.⁶
3. The scope of the business activity impacted. New York courts will not enforce a non-compete provision where the scope of the business activity impact is deemed to be too broad or it is not shown to be necessary to protect trade secrets or other confidential information such as customer lists. For example, the New York Appellate Division Fourth Department held that a non-compete provision precluding a former employee of a staffing agency (a physician assistant) from providing medical services to any hospital at which he had provided services through his prior employer was overly broad and therefore not enforceable.⁷

Other Factors and Situations Considered by NY Courts

Sale of a Business. When there has been a sale of a business, non-compete provisions are more likely to be considered reasonable because they are designed to (i) protect the new owner from having its business usurped by the former owner, and (ii) enable the former owner to extract a higher price in the sale to reward him or her for the goodwill which he or she may have spent years creating.⁸

Terminated Without Cause. An issue arises when an employee with a non-compete is terminated without cause. The Second Department and at least three judges in the Southern District of New York have ruled that non-compete clauses are categorically precluded from enforcement when an employee has been involuntarily discharged without cause.⁹ However, the New York Court of Appeals has not issued a per se rule applicable to non-compete provisions in such circumstances. Indeed, in Morris v. Schroder Capital Management International,¹⁰ the Court of Appeals stated that "a court must determine whether forfeiture is 'reasonable' if the employee was terminated involuntarily without cause."

In two very recent cases, judges in the United States District Court for the Southern District of New York considered whether non-compete provisions should be enforced where an employee was terminated without cause. In both cases the judges enforced restrictive covenants because they were not persuaded that the former employees had actually been terminated without cause.

In Beirne Wealth Consulting Servs., LLC v. Englebert, ¹¹ the relationship between the employees and employer had deteriorated beyond repair. After they were terminated, the defendants argued that the restrictive covenants in their employment agreements were not binding because they were terminated without cause. However, the Court disagreed that the former employees had been terminated without cause and enforced the non-compete provisions.

In a similar case, Kelley-Hilton v. Sterling Infosystems Inc,¹² the plaintiff, a former employee, claimed she was wrongfully terminated by the defendant. The plaintiff moved for a preliminary injunction preventing her former employer from enforcing any contractual provisions that would prohibit her from competing with it, soliciting its customers, or hiring its employees. The plaintiff's motion for a preliminary injunction was denied because the plaintiff failed to show she would be likely to prove she was terminated without cause.

Future of Non-Competes

A proposed New York statute would invalidate no-poach provisions which are sometimes found in contracts between employers. The bill would "prohibit agreements between employers that directly restrict the current or future employment of any employee and allows for a cause of action against employers who engage in such agreements."¹³ The purpose of a no-poach provision is to restrict employers from soliciting or hiring another employer's employees or former employees. But the proposed legislation would outlaw only no-poach agreements between employers and not apply to non-compete provisions in contracts between employers and current or former employees.¹⁴

In 2017, the New York Attorney General's Office proposed BILL A07864A in the New York State Assembly which would substantially limit the enforceability of non-compete provisions. However, the failure of the legislature to adopt that or any similar proposal leads this commentator to believe that such legislation is unlikely to become law in New York in the foreseeable future.

Nonetheless, in view of the historically high unemployment rates caused by the COVID-19 pandemic and the attendant economic hardships being experienced by millions of New Yorkers, this commentator also believes that many New York courts are likely to become much less willing to enforce non-compete provisions other than (i) where the former employee is being paid during the period covered by the non-compete and (ii) in connection with the sale of a business.

Richard B. Friedman
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¹ Long Island Minimally Invasive Surgery, P.C. v. St. John's Episcopal Hosp., 83 N.Y.S.3d 514, 516 (N.Y. App. Div. 2018) ( medical practice brought action against surgeon and his subsequent employer, seeking damages and injunctive relief for an alleged breach of a restrictive covenant in the employment contract ).

² Harris v. Patients Med. P.C., 93 N.Y.S.3d 299, 301 (N.Y. App. Div. 2019)(medical group appealed the denial of a motion for preliminary injunction enjoining former employee, a doctor, from breaching restrictive covenants in her employment agreement; the court ruled plaintiff did not have substantial likelihood of success on merits of its claim); see also Intertek Testing Servs., N.A., Inc. v. Pennisi, 2020 WL 1129773 (E.D.N.Y. Mar. 9, 2020).

³ Cortland Line Holdings LLC v. Lieverst, 2018 WL 8278554, at 6 (N.D.N.Y. Apr. 6, 2018). Intertek Testing Servs., N.A., Inc. v. Pennisi, 2020 WL 1129773 (E.D.N.Y. Mar. 9, 2020).

⁴ Integra Optics, Inc. v. Nash, 2018 WL 2244460, at 7 (N.D.N.Y. Apr. 10, 2018) (court enforced an employer's preliminary injunction against a former employer as the non-compete agreement was deemed reasonable; specifically, the restriction on geographic scope was considered necessary to protect the employer's government interest).

⁵ Markets Grp., Inc. v. Oliveira, 2020 WL 815732 (S.D.N.Y. Feb. 19, 2020) (court affirmed a summary judgement motion in favor of the defendant, a former employee, because the court found the defendant did not violate the non-compete provision of his employment agreement).

⁶ Intertek Testing Servs., N.A., Inc. v. Pennisi, 2020 WL 1129773, at 19 (E.D.N.Y. Mar. 9, 2020) (building and construction service provider brought action against employee of entity acquired by provider, former employees of provider, and competitor seeking injunctive relief non-compete provision of the contract, the provider was successful).

⁷ Delphi Hospitalist Servs., LLC v. Patrick, 80 N.Y.S.3d 616, 617–18 (N.Y. App. Div. 2018) (medical staffing agency brought action against physician assistant, seeking to enforce restrictive covenant in assistant's employment agreement after assistant terminated his contract with agency; the defendant prevailed).

⁸ UAH-Mayfair Mgmt. Grp. LLC v. Clark, 110 N.Y.S.3d 849, 850 (N.Y. App. Div. 2019)(court granted former employer a preliminary injunction enforcing the non-compete provision of the employment agreement and awarded the plaintiff costs); see also 4D N.Y.Prac., Com. Litig. in New York State Courts § 105:21 (4th ed.).

⁹ See, e.g., Kelly-Hilton v. Sterling Infosystems Inc., 426 F. Supp. 3d 49 (S.D.N.Y. 2019); Beirne Wealth Consulting Servs., LLC v. Englebert, 2020 WL 506639, at 1 (S.D.N.Y. Jan. 30, 2020).

¹⁰ 7 N.Y. 3d 616, 621 (2006).

¹¹ Beirne Wealth Consulting Servs., LLC v. Englebert, No. 19 CIV. 7936 (ER), 2020 WL 506639 (S.D.N.Y. Jan. 30, 2020)

¹² Kelley-Hilton v Sterling Infosystems Inc., 426 F.Supp 3d 49 (S.D.N.Y. 2019).

¹³ NY State Senate Bill S3937C, NY State Senate (2020), https://www.nysenate.gov/node/7677776; see also NY State Assembly Bill A05776, NY State Assembly (2020), https://nyassembly.gov/leg/?bn=A05776&term=&Summary=Y&Actions=Y&Votes=Y&Memo=Y&Text=Y&leg_video=1.

¹⁴ Ronald W. Zdrojeski et al., The evolving landscape of non-compete agreements-change is underway in New York State-could non-compete clauses become unenforceable? Lexology (2019), https://www.lexology.com/library/detail.aspx?g=222535b1-92aa-47b0-a521-27692a2bd2c4.

What is a Non-Compete?

As all of our readers undoubtedly know, a non-compete provision is a type of restrictive covenant that many employers include in employment and severance agreements to restrict a former employee's ability to work for a competitor after the cessation of his or her employment.

Enforceability of a Non-Compete?

Although non-compete provisions are generally disfavored in New York¹, such a provision is likely to be enforced if "'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.'"² The common law standard of reasonableness was articulated by the New York Court of Appeals twenty years ago in BDO Seidman v. Hirshberg ³ in which it held that a non-compete is reasonable only if it:

1. Is no greater than required to protect an employer's legitimate protectable interests;
2. Does not impose undue hardship on the employee or is harmful to the general public; and
3. Is reasonably limited temporally and geographically.

This approach is in sharp contrast to that of several states such as California, Montana, North Dakota, and Oklahoma which ban non- competes for employees either outright or under very limited circumstances.

Employer's Legitimate Protectable Interests

In New York, an employer's legitimate protectable interests include⁴:

• Protection of trade secrets;
• Protection of customer relationships;
• Confidential customer information; and
• "Unique" services.
  • This latter category is rarely invoked since the employee must render unique services that cannot be easily replaced.

Scope of Restrictions

New York courts will only enforce non-competes to the extent that they are reasonably necessary and narrowly tailored. If the court determines that a non-compete is necessary to protect a legitimate interest, it will then examine the following three factors:

1. Geographic scope of the restriction. New York courts generally conduct a fact-based analysis on a case-by-case basis. For example, when the "nature of the business requires that the restriction be unlimited in geographic scope," courts may be willing to enforce a broad geographic restriction so long as the duration of the restrictions are short. Natsource LLC v. Paribello, 151 F.Supp.2d 465 471-72. This is in contrast with Power Boot Camp, Inc. v. Warrior Fitness Boot Camp, LLC, 813 F. Supp. 2d 489, 507 (S.D.N.Y. 2011), where the court held a non-compete unreasonable because the unlimited geographic scope prevented former employees from accepting "any job in the fitness industry that uses obstacle courses … or employs the term boot camp."
2. Duration of the restriction. When reviewing the length of non-competes, New York courts have held repeatedly that restrictions of six months or less are generally reasonable. However, like the geographic limitation, this analysis is conducted on a case-by-case basis and courts have found certain longer non-compete provisions reasonable in light of other circumstances. For instance, applying New York law, the U.S. District Court for the Southern District of New York held non-compete provisions of three and five years arising out of an employment agreement and an asset purchase agreement, respectively, with the employer's former president were not excessive even though the longer period was equal to one-third of the former president's 15 years of experience in the industry.⁵
   
3. The scope of the business activity impacted. Courts will not enforce a non-compete covenant where the scope of the business activity impact is deemed to be too broad or it is not shown to be necessary to protect trade secrets or confidential customer lists.⁶
   • Example where a non-compete was found to be unreasonable:
     • A non-compete that prohibited the former employee from soliciting an employee's entire former client base where the restriction included client relationships which were established by and maintained by the employee.⁷

Other Factors and Situations Considered by New York Courts

In addition to the factor tests New York courts use to determine whether a non-compete is reasonable, a number of other factors come into play.

Sale of a Business. When there has been a sale of a business, non-compete provisions are more likely to be considered reasonable because they 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."⁸ Additionally, non-compete provisions incidental to the sale of a business by a stock purchase agreement may also be enforced against shareholders with minority stock ownership.⁹

Consideration. Under New York law, future employment is sufficient consideration for a non-compete clause.¹⁰ Continued employment of an at-will employee has likewise been found to be sufficient consideration to support a covenant not to compete.¹¹

An issue arises when an employee with a non-compete is terminated without cause. As stated in my blog article entitled "ENFORCEABILIY OF NON-COMPETE PROVISIONS IN NY WHEN INVOLUNTARY TERMINATION IS WITHOUT CAUSE," which is posted on our website, the Second Department and at least three judges in the Southern District of New York have ruled that non-compete clauses are categorically precluded from enforcement when an employee has been involuntarily discharged without cause.¹² However, other New York courts have ruled that there is not a per se rule applicable to all non-compete provisions. Most notably, in Morris v. Schroder Capital Management International,¹³ the Court of Appeals stated that "a court must determine whether forfeiture is 'reasonable' if the employee was terminated involuntarily without cause."¹⁴

Future of Non-Competes in New York

In September 2018, the New York Attorney General's Office announced a settlement with WeWork Companies that ended its use of overly broad non-compete provisions. This ended the company's routine practice of requiring all levels of employees to sign a contract including a non-compete restriction regardless of job duties, knowledge of confidential information, or compensation.

This settlement was further evidence of a commitment by the New York AG's Office to combat the use of non-competes for low-level and low-wage employees. In 2017, the AG's Office had proposed BILL A07864A to limit non-competes. The bill provided the following:

• Non-competes would be void for employees with earnings of less than $75,000/year (to be increased each year for inflation);
• Non-competes must be provided to prospective employees by the earlier of a formal offer of employment or 30 days before the non-compete goes into effect;
• Non-competes would be unenforceable upon termination without cause; and
• Employees would have a private cause of action seeking to invalidate non-competes that violate the statute.

The passage of time since the bill was proposed without its enactment leads this commentator to believe that it is unlikely to become law in the foreseeable future.

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¹Sutherland Global Services, Inc. v. Stuewe, 73 A.D.3d 1473, 1474 (4th Dep't 2010).

² Riedman Corp. v. Gallager, 48 A.D.3d 1188, 1189 (4th Dep't 2008), quoting Reed, Roberts Associates, Inc. v. Strauman, 40 N.Y.2d 303, 307 (1976).

³ BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 389 (1999).

⁴ Arthur J. Gallagher & Co. v. Marchese, 96 A.D.3d 791, 792 (2d Dep't 2012); 1 Model Management, LLC v. Kavoussi, 82 A.D.3d 502, 503 (1st Dep't 2011).

⁵ Uni-World Capital L.P. v. Preferred Fragrance, Inc., 73 F.Supp.3d 209, 232 (S.D.N.Y. 2014).

⁶ Sutherland, 73 A.D.3d at 1473.

⁷ Good Energy, L.P. v. Kosachuk, 49 A.D.3d 331, 332 (1st Dep't 2008).

⁸ Reed, Roberts Associates, Inc. v. Strauman, 40 N.Y.2d 303, 307 (1976); 4D N.Y.Prac., Com. Litig. in New York State Courts § 105:21 (4th ed.).

⁹ See Shearson Lehman Bros. Holdings, Inc. v. Schmertzler, 116 A.D.2d 216, 223 (1st Dep't 1986) (stating that refusing to enforce a non-compete against someone with "so small an ownership interest … would place an unacceptable barrier in the path of sale of businesses in which ownership is widely diversified … and good will is clearly a central concern in the acquisition").

¹⁰ See Poller v. BioScrip, Inc., 974 F. Supp. 2d 204, 224 (S.D.N.Y. 2013).

¹¹ Id.

¹² See, e.g., Grassi & Co., CPAs, P.C. v. Janover Rubinroit, LLC, 82 A.D.3d 700 (2d Dep't 2011); Arakelian v. Omnicare, Inc., 735 F. Supp. 2d 22 (S.D.N.Y. 2010).

¹³ 7 N.Y. 3d 616,621 (2006).

¹⁴ See also Hyde v. KLS Professional Advisors Group, LLC, 500 Fed.Appx. 24 (2d Cir. 2012); Brown & Brown, Inc. v. Johnson, 115 A.D.3d 162 (4th Dep't 2014), rev'd on other grounds, 2015 WL 3616181 (2015).

Many employers try to limit former employees' actions at the conclusion of the employment relationship through restrictive covenants. A restrictive covenant is a contractual agreement restricting the post-employment activities of a former employee for a fixed period after the termination of an employment relationship in order to protect the employer's legitimate business interests.

A. Protectable Interests

Non-compete agreements offer the widest range of protection for employers by limiting a prior employee's ability to work for a competitor after the employment relationship ends. However, this type of restrictive covenant is often the most difficult to enforce and is generally disfavored in New York. New York courts will enforce non-compete provisions only to the extent necessary to protect an employer's legitimate interests and where they are reasonable in time and geographic area. Such courts consider the protection of the following kinds of information to be legitimate protectable interests:

1) trade secrets;

2) confidential customer relationships; and

3) confidential customer information.

For example, in Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 71 (2d Cir. 1999), the court noted that an employer has sufficient interest in retaining its current customers to support a covenant not to compete where the employee's relationship with the customers is such that there is a substantial risk that the employee may be able to divert all or part of the business.

B. Temporal and Geographic Restrictions

New York courts have repeatedly held that temporal restrictions of six months or less are reasonable. See Ticor Title Ins. Co. v. Cohen, 173 F.3d at 70 (2d Cir. 1999); Natsource LLC, 151 F.Supp.2d at 470-71 (three-month non-compete). However, courts have also enforced non-competes of three years or more, usually where geography is limited. In Novendstern v. Mount Kisco Med. Grp., 177 A.D.2d 623, 576 N.Y.S.2d 329 (1991), the court found that a covenant restricting a physician from competing with his previous employer was enforceable because the prohibition on the physician's practicing in his specialties for three years was in a limited geographic area.

To determine whether a non-compete provision is reasonable in geographic scope, courts in New York examine the particular facts and circumstances of each case. For example, in Natsource LLC v. Paribello, 151 F.Supp.2d 465, 471-72 (S.D.N.Y.2001), the court was willing to enforce very broad geographic restrictions on employees where the "nature of the business requires that the restriction be unlimited in geographic scope," so long as the duration of those restrictions was short. (Emphasis added). However, in Pure Power Boot Camp, Inc. v. Warrior Fitness Boot Camp, LLC, 813 F. Supp. 2d 489 (S.D.N.Y. 2011), the court held that the non-compete provision in a fitness center operator's employment agreement with prior employees, which prohibited employees from working at a competitor center anywhere in world for ten years following employment at center, was unenforceable since it was unreasonable in terms of duration and geographic scope.

C. Consideration

New York courts have also examined whether there was sufficient consideration, whether the agreement was incidental to the sale of a business, and whether an employee was preparing to compete to determine if a non-compete was reasonable. Such courts have found that future employment constitutes sufficient consideration to support a covenant not to compete. See Poller v. BioScrip, Inc., 974 F. Supp. 2d 204 (S.D.N.Y. 2013) (holding that "the fact that a restrictive covenant agreement is a condition of future employment does not automatically render such an agreement coercive and unenforceable"). Similarly, in Ikon Office Solutions v. Leichtnam, 2003 U.S. Dist. LEXIS 1469, *1, 2003 WL 251954 (W.D.N.Y. Jan. 3, 2003), the court found that the non-compete covenant was enforceable because the employee was an at-will employee who received continued employment as consideration. Moreover, financial benefits and an employee's receipt of intangibles such as knowledge, skill, or professional status, are also sufficient consideration to support a non-compete provision under New York law. See Arthur Young & Co. v. Galasso, 142 Misc. 2d 738, 741 (Sup. Ct. N.Y. County 1989).

D. Selling a Business and Preparing to Compete

New York courts are most likely to enforce non-compete agreements that are incidental to the sale of business. See Mohawk Maint. Co. v. Kessler, 52 N.Y.2d 276 (1981) (stating that courts give covenants not to compete made in connection with the sale of a business and its accompanying goodwill "full effect when they are not unduly burdensome").

New York courts have held that an employee preparing to compete violates a non-compete provision where affirmative steps have been taken that would give the individual a head start on competing once the restricted period ends. For example, in World Auto Parts, Inc. v. Labenski, 217 A.D.2d 940 (4th Dep't 1995), the court found that conduct such as making personal loans to the principal owners of competitors and divulging to competitors price information acquired while working with the former employer constituted preparatory behavior that violated the non-compete agreement. However, in some instances, employees may prepare to compete prior to their departure provided that they do not use their employers' time, facilities or proprietary secrets to do so. See Stork H & E Turbo Blading, Inc. v. Berry, 932 N.Y.S.2d 763 (2011).

Of course, we are available to assist in drafting, negotiating, and, if necessary, litigating non-compete and other restrictive covenant agreements. Some of the negotiated and litigated employment-related matters that our lawyers have handled in recent years have involved fiduciary duty claims, allegations of possible officer and/or employee misconduct, the faithless servant doctrine, wrongful discharge claims, confidentiality provisions in employment and severance agreements, trade secrets, and related matters.  One of Richard Friedman's most noteworthy trial victories in the New York County Commercial Division, on whose Advisory Committee he serves with the nine judges of that court as one of about fifteen judicially appointed private practitioners, is the subject of a feature American Lawyer article that is available upon request via email at rfriedman@richardfriedmanlaw.com.

Richard B. Friedman

papkesannater.blogspot.com

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