Employers often enter into agreements with employees that restrict the ability to perform certain activities after their employment terminates. Generally referred to as “restrictive covenants,” these restrictions may include prohibitions on working for a competitor, solicitation and hiring of the employer’s employees and/or solicitation and servicing of the employer’s clients. To enforce restrictive covenants in New York, employers must show that both the duration and scope of the restriction are reasonable.
Traditionally, New York courts have provided employers with an “out” even when a restrictive covenant is overbroad (i.e., not reasonable in duration or scope). In these instances, the court would revise the covenant (striking the parts that would make the covenant unenforceable) so that it can be enforced. This practice is commonly referred to as “bluepenciling.” Recent decisions in New York, however, suggest that courts are becoming less willing to blue-pencil overly broad restrictive covenants. As a result, employers should review their current agreements and ensure that they are consistent with applicable New York law.
New York law disfavors terms in an employment agreement that seek to prevent an employee from pursuing his or her chosen occupation after termination of employment. Although restrictive covenants are common, and a useful tool for employers to protect their client and employee relationships and confidential information, these covenants will be enforced only if they are “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.”
In 1999, in the landmark case of BDO Seidman v. Hirshberg, the New York State Court of Appeals held, among other things, that a restrictive covenant is overly broad where it purports to restrict an employee from the post-employment solicitation of any of the employer’s clients. The court found that restrictions on soliciting clients need to distinguish between those clients with which the employee developed a relationship as a result of his or her employment (an employer rightfully could restrict post-employment solicitation of these clients), as opposed to clients with which the employee had a pre-existing relationship or never acquired a relationship (restrictions with respect to those clients would be unenforceable). However, in BDO Seidman and many subsequent cases, when restrictions did not make this required distinction, courts blue-penciled the restrictions to make them reasonable and, therefore, enforceable.
Two recent decisions suggest a trend in which New York courts are moving away from “blue-penciling” overbroad provisions and instead striking them completely:
BROWN & BROWN, INC. V. JOHNSON
In this case, decided in February 2014, the defendant Johnson was hired by the plaintiffs, insurance intermediaries, to provide actuarial analysis. On her first day of work, Johnson signed an employment agreement containing a non-solicitation provision that prohibited her from soliciting any of the company’s customers for two years following termination. The restriction did not delineate between clients with which Johnson acquired relationships during her employment and those she did not. Accordingly, when Brown & Brown attempted to enforce the restriction, the New York State Appellate Court (Fourth Department) held that the restrictions were overbroad and, therefore, not enforceable.
The court rejected Brown & Brown’s argument that the court should blue-pencil the overbroad restriction. The court explained that courts’ partial enforcement of an otherwise overbroad restriction may be justified only “if 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.” The Brown & Brown court held that Johnson’s restriction did not meet these requirements. The court found that Brown & Brown had not presented the restriction to Johnson until after she had resigned a prior job and began working for Brown & Brown. Additionally, the court found that Brown & Brown had prepared the restriction more than seven years after the decision in BDO Seidman, so the employer should have been fully aware of the requirements for enforceable non-solicitation restrictions.
The court further held that the inclusion of language in the agreement that, if a court found the restrictions overbroad, “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” did not require the court to engage in this modification. Instead, the court held that allowing for partial enforcement of covenants employers knew to be overbroad would allow employers to “use their superior bargaining position to impose unreasonable anti-competitive restrictions, uninhibited by the risk that a court will void the entire agreement.” The court would not permit employers to maintain the deterrent effect of an overbroad covenant without the risk of losing the ability to enforce restrictions altogether.
VERAMARK TECHNOLOGIES, INC. V. BOUK
In April 2014, another court refused to blue-pencil an overbroad postemployment restrictive covenant. In Veramark Technologies, Inc. v. Bouk, the United States District Court for the Western District of New York refused to modify a non-competition agreement because “[o]n its face, the non-compete is overreaching and coercive, and partial enforcement would not be appropriate.” The restriction at issue in Veramark prohibited a 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 refused to blue-pencil the restriction because:
- Quoting, Brown & Brown, it would permit employers to “use their superior bargaining position to impose unreasonable anticompetitive restrictions, uninhibited by the risk that a court will void the entire agreement;”
- The non-solicitation provisions in the agreement sufficiently protected the employer’s client good will; and
- The employer prepared the contract nine years after the decision in BDO Seidman.
The court concluded that there was no excuse for the employer’s attempt to impose an unreasonable and unenforceable restriction
THE BOTTOM LINE
The decisions in Brown & Brown and Veramark should serve as warnings to
employers. New York courts have now repeatedly explained their concerns over
employers using their superior bargaining position to require employees to sign
agreements containing unreasonable and unenforceable restrictions. Courts are
apparently less willing than they once were to permit employers to require employees
to agree to unreasonable restrictions and assume that the courts will blue-pencil them. Accordingly, employers need to review their restrictive covenant agreements to make sure that they are narrowly tailored and consistent with the standards for enforceability.