02 Jun 2014-2015 Restrictive Covenant Cases of Note (NY, NJ, CT)
By Michael A. Naclerio and Richard M. Reice
Employers often include restrictive covenants in their employment agreements in an effort to protect investments in employees, trade secrets, and customer information. These covenants can restrict a former employee’s ability to work for competitors, prevent solicitation of past clients, and otherwise limit the former employee’s labor rights. This post surveys how courts in New York, Connecticut, and New Jersey have enforced restrictive covenants in 2014 and early 2015.
In the employment context, New York courts only enforce restrictive covenants that are reasonable in duration and geographic scope, necessary to protect the employer’s legitimate interests, not harmful to the public, and not unreasonably burdensome on the employee. See BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (1999).
Identifying a Legitimate Employer Interest
New York law recognizes four broad and exclusive categories of interests that justify enforcement of restrictive covenants: protecting trade secrets, preserving confidential customer information, protecting a client base, and preventing irreparable harm that would result when the departing employee is highly specialized or unique. In 2014 and 2015, courts applying New York law further elaborated what interests fit into these broad categories.
Veramark Technologies, Inc. v. Bouk, 10 F. Supp. 3d 395 (W.D.N.Y. 2014) and Fewer v. GFI Grp. Inc., 458, 2 N.Y.S.3d 428 (N.Y. App. Div. 2015) clarified what types of employees a court would consider “unique.” In Veramark, the Western District of New York rejected the employer’s argument that Mr. Bouk was “unique” solely by virtue of his top sales rank. The court in Fewer maintained that the company could no longer argue that an employee was unique after they had demoted him from the position that employed his unique skills.
In DS Parent, Inc. v. Teich, no. 5:13-CV-1489 LEK/DEP, 2014 WL 546458 (N.D.N.Y. Feb. 10, 2014), the United States District Court for the Western District of New York clarified what interests can be valid and protectable “trade secrets.” The court determined that general knowledge of strategy only merits protection as a trade secret when it accompanies a technological trade secret or if the strategy “involve[s] detailed information about new products.” Id at *9.
Partial Enforcement When the Restriction is Unreasonably Broad
When New York courts find that a restriction is unenforceable, they may still partially enforce it by striking only the unreasonable or overbroad clauses. In the past year, courts have hesitated to use this practice, known as “blue penciling.”
In Brown & Brown, Inc. v. Johnson, 980 N.Y.S.2d 631 (4th Dep’t 2014), the court declined to partially enforce an overbroad restriction, holding that blue penciling was only appropriate where the plaintiff could demonstrate “an absence of overreaching, coercive use of bargaining power, or other anti-competitive conduct.” In this case, the court inferred coercion, because the employer offered the employment agreement containing the restrictive language only after the employee had resigned her previous job in order to work for Brown & Brown.
“No Hire” Agreements
New York Courts apply the same test to “no hire” agreements that they apply to restrictive covenants. In Reed Elsevier Inc. v. TransUnion Holding Co. Inc., No. 13 CIV. 8739 PKC, 2014 WL 97317 (S.D.N.Y. Jan. 9, 2014), the United States District Court for the Southern District of New York applied the same three-prong reasonableness standard analysis used to assess non-compete clauses to determine the enforceability of the no-hire agreement between the two companies. The court neither completely nor partially enforced the two-year term of the no-hire agreement, because Reed Elsevier Inc. could not show that the agreement protected any legitimate interest. The court also rejected Reed Elsevier Inc.’s assertion that preventing attrition of current employees could be a legitimate protectable interest.
Connecticut courts balance the competing needs of the parties and the public, including the employer’s desire to protect legitimate business interests, the employee’s need to find alternative employment, and public policy virtue of ensuring a competitive labor pool. See Scott v. Gen. Iron & Welding Co., 171 Conn. 132 (1976). Unlike New York, Connecticut courts have tended to favor employers in restrictive covenant disputes.
In early 2015, the Superior Court of Waterbury strictly enforced a covenant not to compete against a nail salon technician in Imperial Coast, Inc. v. Hong Nga Nguyen, 59 Conn. L. Rptr. 709 (2015). The court declined to examine whether the restraint was necessary to protect legitimate employer interests, focusing instead on the burdens to the employee. The covenant only banned competition within a ten mile radius of the plaintiff’s nail salon, a distance that the court determined did not unduly burden the former employee.
The United States District Court for the District of Connecticut enforced a two-year, 100-mile noncompetition and non-sales agreement against a former employee of a building materials distributor in A.H. Harris & Sons, Inc. v. Naso, No. 3:14CV304 AWT, 2015 WL 1420132 (D. Conn. Mar. 30, 2015). Ms. Naso had challenged both restrictions on the grounds that previous courts had deemed even weaker restrictions unreasonable. The court rejected this argument, citing evidence that the industry was especially dependent on strong relationships between suppliers and customers to suggest that the covenants were reasonable to protect the employer’s interests.
Like New York, New Jersey courts will only enforce reasonable restrictive covenants that protect an employer’s legitimate interests, do not impose an excessive burden on the employee, and are consistent with public policy. In 2014 and 2015 the United States District Court for the District of New Jersey made several rulings on restrictive covenant issues.
In American Financial Resources, Inc. v. Money Source, Inc., No. CIV.A. 14-1651 JLL, 2014 WL 1705617 (D.N.J. Apr. 29, 2014), the court clarified that an employer could have a legitimate business interest in information that was generally available to the public. Even though the public could readily discover American Financial Resources’ customers and mortgage rates, the previous employees had used such knowledge about specific rates offered to specific clients to gain an unfair competitive edge at their new company.
The District Court of New Jersey partially enforced a broad non-compete agreement in Interlink Group Corp. USA, Inc. v. American Trade and Financial Corp, No. CIV.A. 12–6179 JBC, 2015 WL 733469. The court determined that a five year non-compete agreement effective anywhere in the world was unreasonable, but the judge elected to partially enforce the competition restriction as a three year ban on competing in countries in which the plaintiff operates.
While New York, Connecticut, and New Jersey courts did not make any radical doctrinal changes in 2014 and 2015, they did give important signals about how they will apply existing law to new cases. Courts in New York remain hesitant to wholly or partially enforce restrictive covenants, while Connecticut and New Jersey maintained a more employer-friendly view.