HSE LEGALcurrents

Court of Appeals ruling addresses enforcement questions.

New York’s highest court just reiterated that employers should be careful when drafting and presenting restrictive covenants to their employees if they hope to enforce them in the future. On June 11, 2015, the New York Court of Appeals issued its decision in the case of Brown & Brown, Inc. v. Johnson, 2015 NY Slip Op 04876 (2015). The High Court’s answer when asked whether a restrictive covenant may be partially enforced even if the covenant is overly broad on its face? “It depends.”

General Law in New York

Generally, New York is considered an “employee-friendly” state. Courts are careful not to overstep their boundaries and invade upon an employee’s right to make a living in his or her chosen occupation. For this reason, when determining whether a particular restrictive covenant is enforceable, New York courts set out to determine whether the covenant is reasonable, a finding which depends upon whether the covenant: (1) is greater than is required for the protection of the legitimate interest of the employer; (2) imposes undue hardship on the employee, or (3) is injurious to the public. If one of these questions is answered in the affirmative, the restrictive covenant is unreasonable and will not be enforced as written.

Of the mindset that there is no harm in shooting for the moon, employers often draft restrictive covenants as broadly as possible to maximize the protection of their business interests. In doing so, employers bank on employees complying with the covenants without any challenge, reasoning that should a challenge arise, courts will effectively rewrite the provision so that it is enforceable under New York law. That, however, is not always guaranteed, as Brown most recently illustrates.

Background of Brown

In Brown & Brown, Inc. v. Johnson, defendant Johnson was a former Brown & Brown employee who provided actuarial analysis for the company. On her first day of work, the company presented Johnson with an employment agreement to sign. Of relevance here, the agreement contained a non-solicitation covenant that prohibited Johnson from soliciting or servicing any client of Brown & Brown’s New York offices for two years after termination of her employment. The company terminated Johnson from her position and, shortly thereafter, she was hired by a competitor of Brown & Brown and allegedly violated the non-solicitation clause of her agreement.

On appeal to the Fourth Department, the appellate division determined first that the agreement’s Florida choice-of-law provision was unenforceable because Florida’s law with respect to restrictive covenants was against New York public policy. Applying New York law instead, the appellate court went on to hold that the non-solicitation clause was overly broad and unenforceable because it purported to restrict the defendant from soliciting all customers of the plaintiff without regard to whether defendant even acquired a relationship with those clients. Of note, the Fourth Department then refused to partially enforce the covenant (even where the agreement specifically provided for partial enforcement) because the covenant was, in the court’s opinion, a product of the plaintiff’s “overreaching.”

Court of Appeals’ Decision

The Court of Appeals agreed that the restrictive covenant was overbroad and unenforceable to the extent that it prohibited the defendant from working with any of the plaintiff’s New York customers, even those with whom she did not have any relationships (i.e., customers she had never met and for whom she had done no work). Regarding the Fourth Department’s refusal to partially enforce the covenant at issue, the Court of Appeals reversed, but not because it was improper for the lower court to make such a finding if overreaching was involved. Rather, the Court of Appeals remanded the issue to the Supreme Court to determine factual issues regarding the alleged overreaching. These issues included whether the defendant understood the agreement, whether the plaintiff discussed or explained it to her, whether the defendant was required to sign the agreement the same day it was proposed to her and whether she could have sought advice from counsel. The Court’s opinion makes clear that if Brown & Brown did, in fact, overreach or use coercive dominant bargaining power to obtain the restrictive covenant, the covenant will not be partially enforced.

Take-Aways

Drafting enforceable restrictive covenants in New York requires careful attention. Employers should not simply draft as broad of a covenant as possible and present it to all employees, hoping that a court will modify the covenant later after a successful challenge. Given the courts’ concern with employer “overreaching,” this is not a wise strategy. Instead, after determining which employees need to be bound by a covenant, employers should seriously consider the nature of their protectable legitimate interests and scope their restrictive covenants accordingly. For example, in terms of protecting customer goodwill, the actual time required to build a customer relationship is important when determining the temporal scope of a covenant.

Moreover, employers should take care that their representatives, including those with human resource responsibilities, do not engage in any coercive conduct when presenting a restrictive covenant to an employee. Employees need adequate time to review the agreement before being required to sign it, and the agreement should expressly acknowledge that the employee received an adequate opportunity to consult with counsel.

Finally, representatives should be ready to answer questions that an employee may ask and should know when to involve a supervisor. Involving knowledgeable inside and/or outside counsel before presenting an employee with a restrictive covenant will help maximize the chances of the court enforcing it in the future.

If you have any questions regarding this LEGALcurrents®, please contact Ken Africano at 716-844-3739 / This email address is being protected from spambots. You need JavaScript enabled to view it. or Dan Altieri at 716-844-3741 / This email address is being protected from spambots. You need JavaScript enabled to view it..

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Attorney Advertising. Prior results do not guarantee a similar outcome. This publication is provided as a service to clients and friends of Harter Secrest & Emery LLP. It is intended for general information purposes only and should not be considered as legal advice. The contents are neither an exhaustive discussion nor do they purport to cover all developments in the area. The reader should consult with legal counsel to determine how applicable laws relate to specific situations. ©2015 Harter Secrest & Emery LLP

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