In two recent opinions the New York courts refused to 'blue pencil' – or edit and correct – overbroad restrictive covenants to make them enforceable. Thus, it is now more important than ever for employers to carefully craft restrictive covenants that fall squarely within the requirements of BDO Seidman v Hirshberg (93 NY 2d 382, 389 (1999)).
In February 2014 the New York Appellate Division refused to enforce an overbroad non-solicitation agreement against an employee who provided actuarial analysis to insurance intermediaries (Brown & Brown, Inc v Johnson, 115 A D 3d 162 (4th Dept 2014)). The defendant had been asked by Brown & Brown to sign a non-solicitation provision on her first day of work. The restriction prohibited the defendant from soliciting, either directly or indirectly ",any insurance or bond business of any kind or character from any person, firm, corporation, or other entity that is a customer or account of the New York offices of the Company" for two years after termination. The covenant did not distinguish between clients with which the defendant had acquired relationships during her employment with Brown & Brown and those with which she had not.
The court rejected Brown & Brown's request that the court blue pencil the covenant and enforce a narrower restriction. The court reasoned, quoting BDO Seidman, that courts should partially enforce overbroad covenants only where:
"the employer demonstrates an absence of overreaching, coercive use of bargaining power, or other anti-competitive misconduct, but has in good faith sought to protect a legitimate business interest, consistent with reasonable standards of fair dealing."
In the case at hand the defendant was asked to sign the restrictive covenant on her first day of work, after she had resigned from her previous position. Brown & Brown had made no showing that in exchange for signing the agreement, the defendant received any benefit from the plaintiff beyond her continued employment. Moreover, given that more than a decade had passed since BDO Seidman, Brown & Brown should have known the requirements for drafting an enforceable restrictive covenant.
The court also rejected Brown & Brown's argument that the agreement allowed the court to blue pencil an overbroad restrictive covenant. The agreement provided that "the parties agree that such court shall be authorized to modify such covenants so as to render [them] valid and enforceable to the maximum extent possible". But the court ruled that:
"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 for by the Court of Appeals in BDO Seidman."
Quoting BDO Seidman, the court concluded that to do so 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."
The court pointedly commented that the fact that the agreement contemplated partial enforcement demonstrates that Brown & Brown knew that the covenant was overbroad at the time of the agreement.
A few months later, in Veramark Technologies v Bouk (10 F Supp 3d 395 (WDNY 2014), the US District Court for the Western District of New York refused to blue pencil a covenant not to compete. The case involved a non-compete prohibiting the former employee from "directly or indirectly performing services for any enterprise that engages in competition with the business conducted by Veramark or its affiliates". The court rejected Veramark's argument that it needed this worldwide non-compete to protect "customer goodwill" because the restriction was not targeted to protect customer goodwill. Finding that the non-compete was "overreaching and coercive" on its face, the court refused to partially enforce the covenant because Veramark should have been aware of the standard set forth in BDO Seidman. The court also found that a non-solicitation provision adequately protected Veramark. Thus, while the court refused to blue pencil the overly broad non-compete, it severed and enforced the remaining restrictive covenants.
When drafting restrictive covenants, employers should carefully consider whether a restrictive covenant is reasonable pursuant to the standard articulated by the appeal court in BDO Seidman, particularly whether the restrictive covenant is no greater than is required to protect a legitimate interest of the employer and whether it imposes an undue hardship on the employee.The employer should consider restrictive covenants on a case-by-case basis to ensure that they are reasonable in time and area and are narrowly tailored to the specific circumstances of the employee. Given the decision in Veramark, employers are advised to draft each restrictive covenant as a standalone provision and include language specifically authorising a court to sever any provision found to be overbroad.
For further information on this topic please contact Kevin B Leblang or Robert N Holtzman at Kramer Levin Naftalis & Frankel LLP by telephone (+1 212 715 9100) or email (firstname.lastname@example.org or email@example.com). The Kramer Levin Naftalis & Frankel LLP website can be accessed at www.kramerlevin.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.