to compete or not to compete - the definitive insider's guide to non-compete agreements in new...

Jonathan M. Cooper, Esq.

to

competeor

not to compete

The Definitive Insider’s Guide to Non-Compete Agreements in New York

INCLUDING:

• WHEN A NON-COMPETE AGREEMENT IS ENFORCEABLE UNDER NY LAW

• HOW A FIDUCIARY CAN PERMISSIBLY SOLICIT HIS OLD CLIENTS

• WHAT AN EMPLOYER CAN DO WHEN AN EMPLOYEE – OR FORMER EMPLOYEE – VIOLATES HIS NON-COMPETE

AND,

• THE MOST POWERFUL WAY TO DEFEAT A NON-COMPETE

AGREEMENT IN NEW YORK

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competeor

not to compete

W O R D A S S O C I A T I O N P U B L I S H E R Swww.wordassociation.com1.800.827.7903

Jonathan Cooper is, first and foremost, a husband and father to seven (yes, that’s right - 7) adorable children with whom he lives in Queens, New York. Less importantly, he has litigated numerous cases arising out of non-compete agreements before New York's courts. He has even had the privilege of arguing a case before New York State's highest court - the Court of Appeals.

Jonathan has published hundreds of articles on the topics related to not only non-compete agreements, but breach of contract and business torts as well. He has been quoted in the Wall Street Journal, and some of his other books have been featured by CNBC. The real public service though, has been Jonathan’s websites, blogs and educational videos, which provide a lot of free, useful information and links on a variety of topics, such as breach of contract, business fraud, defamation, and the different types of tortious interference claims under New York law.

Visit Jonathan’s sites and blogs at:

www.JMCooperLaw.com

www.NYBusinessLitigationLawyer.com

www.NYSmallBusinessAttorney.com

$16.95

TO COMPETE OR NOT TO COMPETE – THE DEFINITIVE INSIDER’S GUIDE TO NON-

COMPETE AGREEMENTS IN NEW YORK

INCLUDING:

· WHEN A NON-COMPETE AGREEMENT IS ENFORCEABLE UNDER

NY LAW

· HOW A FIDUCIARY CAN PERMISSIBLY SOLICIT HIS OLD CLIENTS

· WHAT AN EMPLOYER CAN DO WHEN AN EMPLOYEE – OR FORMER

EMPLOYEE – VIOLATES HIS NON-COMPETE

AND,

· THE MOST POWERFUL WAY TO DEFEAT A NON-COMPETE


to

competeor

not to competeThe Definitive Insider’s Guide to

Non-Compete Agreements in New York

to

competeor

not to competeThe Definitive Insider’s Guide to

Non-Compete Agreements in New York


W O R D A S S O C I A T I O N P U B L I S H E R Swww.wordassociation.com

1.800.827.7903

Copyright © 2013, 2014 by Jonathan M. Cooper

All rights reserved. No part of this book may be used or reproduced in any

manner whatsoever without written permission of the author.

Printed in the United States of America.

ISBN: 978-1-59571-923-2

Designed and published byWord Association Publishers

205 Fifth Avenue

Tarentum, Pennsylvania 15084

www.wordassociation.com

1.800.827.7903

TABLE OF CONTENTS

WHY NOT KNOWING WHETHER YOUR NON-COMPETE AGREEMENT IS ENFORCEABLE IS DANGEROUS ........................................................................ 9

WHAT IS A NON-SOLICITATION, OR NON-COMPETE PROVISION? ..................................... 12

HOW FIDUCIARY DUTY RELATES TO NON-COMPETE AGREEMENTS ................................. 12

WHAT INFORMATION DOES A TYPICAL NON-COMPETE AGREEMENT INCLUDE? ............ 14

WHAT DOES A SAMPLE NON-COMPETE CLAUSE LOOK LIKE? ........................................................................ 15

WHY EMPLOYERS SHOULD CHOOSE CAREFULLY THE PREFERRED FORUM FOR LITIGATING THEIR NON-COMPETE DISPUTES .......................................... 16

WHEN A NON-COMPETE AGREEMENT IS ENFORCEABLE UNDER NEW YORK LAW ............ 20

WHAT HAPPENS WHEN YOUR EMPLOYMENT CONTRACT EXPIRES IN NEW YORK ...................... 21

WHEN NEW YORK COURTS MAY ACTUALLY EXTEND YOUR NON-COMPETE AGREEMENT .. 22

WHY NEW YORK’S COURTS WON’T ENFORCE NON-COMPETES UNLESS IT IS AGAINST “KEY” EMPLOYEES ........................................................................ 24

HOW A NON-COMPETE CAN REMAIN ENFORCEABLE IN NEW YORK - EVEN IF YOU’RE FIRED ..................................................................................... 26

HOW SOME NON-SOLICITATION AGREEMENTS GO TOO FAR ....................................................................... 26

JUST BECAUSE A NON-COMPETE IS OVERLY BROAD DOESN’T MEAN THE EMPLOYEE IS IN THE CLEAR ......................................................................... 27

HOW A FIDUCIARY CAN PERMISSIBLY SOLICIT HIS OLD CLIENTS UNDER NEW YORK LAW ............... 28

WHEN A FIDUCIARY BREACHES A NY NON-COMPETE AGREEMENT – AND LIES ABOUT IT ............................................................................. 29

WHAT AN EMPLOYER CAN DO WHEN ITS (FORMER) EMPLOYEE VIOLATES HIS NON-COMPETE AGREEMENT ................................... 31

I. The Employer Can Seek an Injunction Barring the Employee from Working at His New Job ...................... 31

a) The Most Important Component to Securing a TRO 32

II. The Employer Can Seek to Recoup the Money it Paid the Employee ...................................................................... 33

III. The Employer Can Sue to Recover Lost Profits .... 34

IV. The Employer Can Sue to Recover Liquidated Damages .............................................................................. 35

TWO THINGS THAT AN EMPLOYER CAN’T RECOVER FROM A DISLOYAL EMPLOYEE ........... 36

I. In the Non-Compete Context, Unjust Enrichment Claims Are (Usually) Doomed ......................................... 36

II. You Can’t Recover Damages That You Can’t Prove . 38

3 WAYS AN EMPLOYEE CAN FIGHT BACK AGAINST HIS EMPLOYER’S LAWSUIT OVER HIS NON-COMPETE ................................................................ 39

I. Putting the Employer to its Proofs ............................. 39

II. Demonstrating that the Employer Has “Unclean Hands” ................................................................................. 40

III. Proving that He Didn’t Quit; He Was Fired (a/k/a “The Most Powerful Way To Defeat A Non-compete Agreement in New York”) ............................................... 41

COMPANY WINS OVER $1.3 MILLION FROM FORMER MANAGERS WHO VIOLATED THEIR NON-COMPETES .............................................................. 44

REDUCTION IN PAY MAY VITIATE NON-COMPETE, SAYS NY COURT ............................ 45

WHY A FORMER EMPLOYEE SHOULD FIGHT A TRO IN NEW YORK - EVEN BEFORE IT’S SIGNED ........ 46

WHAT ARE YOUR OPTIONS IF THE COURT RULES AGAINST YOU AT THE BEGINNING OF A NON-COMPETE CASE? .................................................. 48

WHY FORMER EMPLOYERS MAY SUE OVER NON-COMPETES - EVEN UNENFORCEABLE ONES ...................................................................................... 50

CONCLUSION ...................................................................... 52

TO COMPETE OR NOT TO COMPETE

9

WHY NOT KNOWING WHETHER YOUR NON-COMPETE AGREEMENT

IS ENFORCEABLE IS DANGEROUS

Over the last several years, I’ve been privileged to help many good, well-intentioned people who faced litigation over a non-compete agreement.

In many instances, I have witnessed people who were either untrained in a particular area of the law or made wholly unaware of certain laws made mistakes. And that is certainly understandable.

But for some reason, in the realm of non-compete agreements, the mistakes seem more frequent, and the misconceptions more pronounced than in other areas of the law. And this is true from both the vantage of employers as well as employees.

Some employers will stand idly by as their key clients and employees are poached by a disloyal former employee because they (mistakenly) believe that a court will inherently disregard the employee’s non-compete agreement. Conversely, there are some (overly) bold executives or employees who mistakenly assume that their agreement is unenforceable, and proceed to render themselves (and their new employers) vulnerable to significant legal fees and potential damages.

Granted, the realm of non-compete agreements is heavily fact-driven, and perhaps more so than almost any other branch of law in New York. Nevertheless, I decided to commit to writing some of the basic principles that New York’s courts use to analyze these agreements.

I hope you will find this book educational and helpful. And here’s the best part: You can hopefully find answers to your question(s)


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from the privacy of your office or home – even before you consult an attorney.

This Book Is Not Legal Advice

It is also important that you understand the limitations of this book. Although I believe this book is extremely valuable as a resource, every case is unique, and presents its own particular facts and legal issues. Consequently, please do not construe anything in this book to be legal advice about your case until we have mutually agreed in writing that I have accepted your case.

So, where to begin?

I think the best place to start is by de-bunking some myths about non-compete agreements in New York.

Fact #1: Prosecuting or defending a lawsuit over a non-compete agreement is inherently complicated.

New York’s laws regarding breach of contract in general, and non-competes specifically, can be highly technical. Aside from the nature of the relief that each side will from the Court - which will often include a restraining order - non-compete disputes pit several competing legal doctrines against each other.

As a case in point, non-competes is one of those rare areas of the law where cases are often decided shortly after inception (and frequently based on the pleadings alone), it is essential that you plead your claims wisely.

Thus, while there are many types of cases which do not require an attorney’s assistance, you would be ill-advised to try that in the non-compete realm.


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Fact #2: Since the world of business litigation in general, and breach of non-compete agreements in particular, is intricate (see Fact #1), there are relatively few “nuisance value” non-compete dispute cases that are worth pursuing in New York.

Myth #1: If an Employee Signs a Non-Compete Agreement and then Breaks the Agreement, the Employer Has an ‘Open and Shut’ Case for Breach of Contract.

This is just plain wrong.

While New York’s Court of Appeals (New York State’s highest court) has upheld non-compete agreements in order to protect a former employer’s legitimate business interests (this will be discussed in further detail below), they have also expressed their general disfavor for non-compete agreements.

On the other hand …

Myth #2: If the Non-Compete Agreement is Overly Broad, a New York Court Will Automatically Invalidate the Entire Agreement – Right?

Wrong.

But if you didn’t know this, you shouldn’t feel bad; Most of the attorneys I’ve come up against in non-compete cases didn’t know this either.

New York’s highest court has stated unequivocally that in certain cases, the court can “blue-line” the agreement to modify the overbroad clauses, and thereby bring it into line with New York law.


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Before we get to these finer details of how New York’s courts have dealt with non-compete and non-solicitation agreements (or, in legalese, “restrictive covenants”), however, we first need to establish the following:

WHAT IS A NON-SOLICITATION, OR NON-COMPETE PROVISION?

Employment agreements often contain non-solicitation clauses to protect the company after employees leave the business. The risk to the business is that the former employee will “steal” the employees or customers of the business when they are no longer employed by the company. Clearly, companies have a significant financial interest in preventing the employees in whom they invested time, money and effort training and educating from jumping ship. Similarly, businesses stand to lose a great deal if their former employees are able to draw customers away from the business with impunity.

To minimize these risks, many companies (wisely) require their employees and consultants to sign non-solicitation agreements restricting them from soliciting the company’s employees or customers either during or after the employment ends.

In other words, non-compete agreements are designed to keep parties who are working closely together from wrongfully taking advantage of the knowledge they gain from the relationship, breaching their fiduciary duty.

HOW FIDUCIARY DUTY RELATES TO NON-COMPETE AGREEMENTS

There are few legal phrases that are more misunderstood or misapplied than “fiduciary duty.” Albeit in a limited context, non-compete agreements clarify this concept rather nicely.


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But before we can identify a fiduciary’s obligations, we must first define what a fiduciary is – and what it is not. By definition, fiduciary relationships inherently require much greater trust and confidence between two parties than typically exists in arms’ length transactions. Common examples of this heightened and expected degree of trust include the relationships between employee and employer, agent and principal, partners or co-venturers, and officers/ directors and the corporation.

Generally, the existence (or lack) of a fiduciary relationship is a fact-specific inquiry. That said, New York’s courts have held some relationships too attenuated to be considered “fiduciary,” such as the relationship between a property owner and his contractor, as well as the relationship between a condominium seller and purchaser.

Since the relationship between fiduciaries is based on heightened trust, there are correspondingly greater responsibilities to act in the best interests of that fiduciary. Stated differently, the fiduciaries’ mutual responsibilities are directly proportional to the level of expected trust between them.

But when it comes to an employee who seeks to start a competing business, it gets very tricky.

Generally, an employee may not actively solicit or divert his employer’s clients (or proprietary information) while still employed. HOWEVER, he may form a competing business even before leaving his job so long as he does so on his own time, in his own place and on his own nickel. And, strange as it sounds, that will not constitute a breach of fiduciary duty.

There is one important caveat this rule, though: The employee cannot start a competing business if he was bound by an enforceable non-compete agreement.


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WHAT INFORMATION DOES A TYPICAL NON-COMPETE AGREEMENT INCLUDE?

While the specifics may vary, the typical New York non-compete clause covers the following topics:

• Duration: Also known as the “Non-Compete Period,” this is how long an employee has to wait before moving to a competing company.

• Geography: The non-compete should specify the territory where the employee cannot compete during the non-compete period.

• Contacts: This clause, often referred to as the “non-solicitation,” or “anti-poaching” provision, is the heart of a non-compete agreement. It will try to bar an employee from taking the employer’s clients, leads, or customers to a competing company.

• Services: This clause will bar the former employee from performing the same services that he provided while working for his former employer. In other words, this clause sets forth the types of work that will constitute “unfair competition” with the employer.

• Advertising: Typically, this clause prohibits the employee from marketing the prohibited “Services” to any of the company’s “Contacts” or anyone else located in the Geographic Scope within the Non-Compete Period.


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WHAT DOES A SAMPLE NON-COMPETE CLAUSE LOOK LIKE?

One of the most amusing – or sad, depending on your perspective – things about the first year of law school is that you are required to take a full-year course on contracts, but you never review an actual contract for the entire year.

I’m not going to perpetuate that injustice.

So, in response to the question I posed, here is some relatively common language contained in non-compete agreements I adapted from some of the cases I’ve handled:

“In exchange for initial and/or continued employment, at the Termination Date, EMPLOYEE shall not in any way Compete, as defined below, with [Employer] for a period of one year.

“The term “Compete” includes, but is not limited to:

i) providing services directly, indirectly or on behalf of a third party to any person or entity in the Geographic Area that are within the scope of services provided by EMPLOYER (“competing services”);

ii) providing services directly, indirectly or on behalf of a third party to [Employer]’s Customers located anywhere including outside of the Geographic Area;

iii) soliciting directly, indirectly or on behalf of a third party any customer for [Employer]’s services in the Geographic Area, whether or not [Employer] is under contract with them or has a business relationship with them, for any reason whatsoever including but not limited to soliciting contact information, business or referrals;


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iv) advertising and promoting competing services or products in any existing or future advertising medium, including, but not limited to, e-mail, social networking media, radio, television, newspaper, periodical, trade magazine, trade show, convention, flyer and direct mail which is aired, received or takes place, as applicable, in the Geographic Area.”

NOTE: Depending on the particular context, the same exact contractual language can be held inherently enforceable – or unenforceable. Therefore, you cannot make any assumptions about the enforceability of your non-compete agreement.

WHY EMPLOYERS SHOULD CHOOSE CAREFULLY THE PREFERRED FORUM FOR

LITIGATING THEIR NON-COMPETE DISPUTES

You may want to litigate contract disputes in New York because you have a New York attorney that you absolutely love -- assuming you could actually ever “love” a lawyer. Even better, you may want to designate New York as the dispute resolution forum because its courts are more favorably disposed towards an employer’s right to protect its legitimate business interests than many other jurisdictions.

True, most states in the country will still enforce non-compete agreements. But there is an increasing number and trend of states that, in response to perceived overreaching by employers, have introduced new and more restrictive regulations imposing limitations on non-compete agreements. For example, New Jersey legislators have now proposed a bill that would render non-


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compete agreements inherently unenforceable against workers that would otherwise qualify to receive unemployment.

Similarly, Virginia, Massachusetts and Minnesota have proposed laws curtailing non-compete clauses, and an Illinois appellate court recently ruled that a non-compete cannot be enforced against a former employee that worked for a company for under two years.

“Why would the states do this?” you ask.

Because there is a growing body of literature suggesting that non-competes are inherently bad for the economy, as they not only hinder competition, but inhibit those individuals from maximizing the income they can earn from their unique blend of talents.

Anyway, I digress.

But before you pull the trigger and choose the forum, let me be perfectly clear about this next point:

Courts will almost always defer to the parties’ choice of forum for resolving disputes. Therefore, employers (who usually are on the drafting end of these agreements) should take extra care in selecting where they want these disputes to be litigated (or arbitrated, as the case may be).

To drive this point home, a cursory review of the four-part analysis that New York’s Federal courts have endorsed to determine whether to enforce a forum selection clause reveals just how hard it is to invalidate one of them.


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The first three parts of the analysis are as follows:

“The first inquiry is whether the clause was reasonably communicated to the party resisting enforcement. The second step requires us to classify the clause as mandatory or permissive, i.e., to decide whether the parties are required to bring any dispute to the designated forum or simply permitted to do so. Part three asks whether the claims and parties involved in the suit are subject to the forum selection clause.”

“If the forum clause was communicated to the resisting party, has mandatory force and covers the claims and parties involved in the dispute, it is presumptively enforceable” and the court should proceed to the fourth inquiry, which is “whether the resisting party has rebutted the presumption of enforceability by making a sufficiently strong showing that ‘enforcement would be unreasonable or unjust, or that the clause was invalid for such reasons as fraud or overreaching.’ ” Phillips v. Audio Active Ltd., 494 F.3d 378, 383, 384 (2d Cir.2007) (quoting M/S Bremen v. Zapata Off–Shore Co., 407 U.S. 1, 15, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972)).”

“But what if you don’t have a forum selection clause in your agreement?” you ask.

Under those circumstances, you will need to have more than a passing connection with New York before you will be allowed to sue there. Stated differently, although the courts will usually accord a fair amount of deference to a plaintiff ’s choice of forum, the courts’ deference is not unlimited.


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Therefore, where the plaintiff fails to show that the parties or the claim at issue has a substantial nexus to New York, the claim is liable to dismissed. In legalese, this is referred to as “forum non conveniens,” which means pretty much what it sounds like.

In that unlikely event, New York’s courts have set forth that the following criteria will be considered on a motion to dismiss for forum non conveniens (which, not coincidentally, are the same factors you

should consider in determining where to bring your lawsuit):

1) The burden on the New York courts;

2) The potential hardship to the defendant;

3) The unavailability of an alternative forum;

4) The residence of the parties; and,

5) The location of the events giving rise to the transaction at issue.

Ghose v. CNA Reins. Co., 43 A.D.3d 656, 660 (1st Dep’t 2007).

While this test - at least insofar as New York is concerned - is not a very strict one, the following practicality should not be overlooked:

Why should a New York judge effectively volunteer to be burdened with a case that really belongs somewhere else?

(The same logic applies for why New York’s courts will often honor an arbitration clause in a contract – even if the applicability of that clause is questionable.)


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WHEN A NON-COMPETE AGREEMENT IS ENFORCEABLE

UNDER NEW YORK LAW

A truthful New York lawyer should admit that it is hard to predict whether a New York court will enforce a senior-level, key employee’s non-compete agreement. That said, New York State’s highest court has set forth four (4) criteria that will determine whether the non-compete (a/k/a “restrictive covenant”) is reasonable, and therefore, enforceable:

(1) The restriction does not go beyond that which is needed to protect a “legitimate interest of the employer”;

(2) The restriction is not overly broad, and therefore manifestly unfair, to the employee;

(3) The restriction is not “injurious to the public”; and,

(4) The non-compete clause has to be limited - reasonably - both in terms of length of time as well as in geographic scope.

Admittedly, this list isn’t exactly a model of clarity - particularly if you’re an employee looking to find out whether your (soon to be) former employer’s non-compete clause can be enforced against you.

Luckily, the Court of Appeals has gone further, and enumerated some of the factors it will consider in deciding whether to enforce a non-compete agreement:

“[N]o restrictions should fetter an employee’s right to apply to his own best advantage the skills and knowledge


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acquired by the overall experience of his previous employment. This includes those techniques which are but ‘skillful variations of general processes known to the particular trade.’

On the other hand ...

“[T]he courts must also recognize the legitimate interest an employer has in safeguarding that which has made his business successful and to protect himself against deliberate surreptitious commercial piracy.”

Doesn’t that leave us right back where we started?

No; not exactly.

Rather, the courts are telling us that they will look to enforce a non-compete so long as it is needed to keep a former employee from breaching his fiduciary duty and wrongfully disclosing the employer’s confidential, proprietary information that it expended time, money and effort to develop. On the other hand, the courts will look to invalidate agreements that overreach and unfairly deprive individuals the opportunity to advance their careers through the knowledge and skills they legitimately acquired.

WHAT HAPPENS WHEN YOUR EMPLOYMENT CONTRACT

EXPIRES IN NEW YORK

One question that commonly arises is what happens when an employment agreement containing a non-compete clause expires, and the employee continues working for the employer without a formal written agreement?


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At first blush, it would seem that the non-compete should not bind the employee, as that clause ended in tandem with the expiration of the underlying employment agreement.

But that is not necessarily the case; at least not in New York.

Under New York law, “[W]hen an agreement expires by its terms, if, without more, the parties continue to perform as theretofore, an implication arises that they have mutually assented to a new contract containing the same provisions as the old.” Martin v. Campanaro, 156 F2d 127 (2nd Cir. 1946) cert denied 329 US 759 (1946). See also, North Am. Hyperbaric Ctr. v. City of New York, 198 AD2d 148 (1st Dept 1993).

Acknowledging the “real world,” New York’s courts have granted some leeway to elevate substance over form, recognizing that where people forget to formally renew an agreement and continue to act as if nothing changed, the law may deem, or presume, that the parties agreed to renew the contract.

A word of caution is in order here, however:

When it comes to de facto, or presumed, contract renewals, “[T]he presumption is one of fact and may be rebutted.” Borne Chemical Co., Inc. v. Dictrow, 85 A.D.2d 646, 648 (2nd Dept 1981).

WHEN NEW YORK COURTS MAY ACTUALLY EXTEND YOUR

NON-COMPETE AGREEMENT

Yes, it’s true. There are some circumstances under which New York’s courts have extended the term of a non-compete agreement beyond the time set forth in the parties’ underlying, original agreement.


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But, as you could (or should) surmise, those circumstances are extremely limited, and the reasons are obvious:

First, given the heavy volume of cases already glutting the courts’ dockets, they do not want to get involved with parties’ contracts on a granular level; and,

Second, the courts are loath to re-write parties’ contracts – especially where it will afford one party broader relief than it had bargained for. Chimart Associates v. Paul, 66 N.Y.2d 570, 573–74, 498 N.Y.S.2d 344, 489 N.E.2d 231 (1986)(collecting authorities); George Backer Mgmt. Corp. v. Acme Quilting Co., Inc., 46 N.Y.2d 211, 219, 413 N.Y.S.2d 135, 385 N.E.2d 1062 (1978)(“Freedom to contract would not long survive courts’ ready remaking of contracts that parties have agreed upon”).

Consequently, the courts have only extended the parties’ non-compete beyond its original term in extenuating circumstances.

For example, in New York Real Estate Inst., Inc. v. Edelman, 42 A.D. 3d 321, 839 N.Y.S.2d 488 (1st Dept. 2007), the court noted that the “defendant hid his ownership interest in the competing ... [business] for the entire two-year duration of the non-compete agreement,” and there was undeniable proof that he was competing unfairly.

Needless to say, adducing the kind of proof marshaled in Edelman is exceedingly rare. Therefore, it is generally safe to assume that a New York court will not extend the term of a non-compete agreement beyond its original term.


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WHY NEW YORK’S COURTS WON’T ENFORCE NON-COMPETES UNLESS

IT IS AGAINST “KEY” EMPLOYEES

New York’s courts consider several factors in deciding whether to enforce a non-compete clause. Close examination of these criteria yields that, as a general rule, these clauses will only apply to “key employees,” however:

“An employee’s mere ‘knowledge of the intricacies of [a former employer’s] business operation’ is not a protectable interest sufficient to justify enjoining the employee ‘from utilizing his knowledge and talents in this area.’ Reed, Roberts Assocs., Inc. v. Strauman, 40 N.Y.2d 303 (1976); see Tradition Chile Agentes de Valores LTDS v. ICAP Sec. USA LLC, No. 09 Civ. 10343, 2010 WL 185656 at *3 (S.D.N.Y. Jan. 12, 2010) (“A party seeking an injunction must provide evidentiary support of ongoing damage to its operations, reputation or goodwill”).”

In the same vein, one Federal Court in New York stated that “[M]ere speculation that the loss of a valuable employee will result in [irreparable harm] is insufficient to warrant an injunction.”

To that end, another Federal New York court required the employer to show that the employee’s replacement is essentially “impossible” before enjoining the employee from working for a competitor. International Creative Management, Inc. v. Abate, No. 07 Civ. 1979, 2007 WL 950092 at *6 (S.D.N.Y. Mar. 28, 2007).


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HOW A NON-COMPETE CAN REMAIN ENFORCEABLE IN

NEW YORK - EVEN IF YOU’RE FIRED

New York’s courts have stated openly that they will look actively to invalidate non-compete clauses because they don’t want to create “an unreasonable restraint upon an employee’s liberty to earning a living.”

As a corollary to that principle, employers who fire an employee without “good cause” cannot then hold that employee to the non-compete clause. (This rule is discussed more fully below).

But there is an important exception to this rule:

The Employee Choice doctrine.

“What’s that?” you ask.

The Employee Choice doctrine provides that an employer can enforce a non-compete against an employee – even post-termination – if the employee accepts post-employment severance or benefits in exchange for honoring the non-compete.

Under those circumstances, the non-compete remains enforceable because the employee is making “an informed choice between forfeiting his benefit or retaining the benefit by avoiding competitive employment (Kristt, 4 A.D.2d at 199, 164 N.Y.S.2d 239).”

New York State’s highest court further elucidated this Doctrine as follows:

“The [Employee Choice] doctrine rests on the premise that if the employee is given the choice of preserving his


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rights under his contract by refraining from competition or risking forfeiture of such rights by exercising his right to compete, there is no unreasonablerestraint upon an employee’s liberty to earn a living (see Kristt v. Whelan, 4 A.D.2d 195, 199, 164 N.Y.S.2d 239 [1st Dept.1957], affd. without op. 5 N.Y.2d 807, 181 N.Y.S.2d 205, 155 N.E.2d 116 [1958]; see also Post, 48 N.Y.2d at 88-89, 421 N.Y.S.2d 847, 397 N.E.2d 358).

“It assumes that an employee who leaves his employer makes an informed choice between forfeiting his benefit or retaining the benefit by avoiding competitive employment (Kristt, 4 A.D.2d at 199, 164 N.Y.S.2d 239).”

One final point:

Once the employee signs off on this new agreement, the non-compete may be enforced - even if the agreement is terribly unreasonable.

HOW SOME NON-SOLICITATION AGREEMENTS GO TOO FAR

At the risk of stating the obvious, while some non-solicitation agreements will be upheld by New York’s courts, others won’t.

“So where is line drawn?” you ask.

True, these are typically fact-specific inquiries, but New York’s appellate courts have articulated some general guidelines:

An employer may use a non-solicitation agreement to protect its investment in creating and maintaining its goodwill and customer base.


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HOWEVER, an employer many not use a non-solicitation agreement to prevent a former employee from dealing with the employer’s entire client base, including clients that the defendant never serviced, nor acquired any relationship with while employed by the company. See, e.g., Stackrow & Co. v. Skavina, 9 AD3d 805, 806 (3d Dept. 2004); Good Energy, L.P. v. Kosachuk, 49 AD3d 331, 332 (1st Dept. 2008).

That would be considered “going too far,” and would not be enforceable.

JUST BECAUSE A NON-COMPETE IS OVERLY BROAD DOESN’T MEAN

THE EMPLOYEE IS IN THE CLEAR

“Why?” you ask.

Because a court remains empowered to re-write, or “blue-line,” the agreement.

In fact, in its November 2, 2012 decision in Crossroads, ABL, LLC v. Canaras Capital, a New York County trial judge clearly suggested that had the defendant asked, he would have been inclined to re-write the parties’ non-compete agreement (which was obviously overbroad), stating:

“Since there is no practical temporal limitation contained in the provision, this covenant would prohibit [plaintiff] from competing with [defendants] indefinitely, so long as its membership interest remained above 15 percent. Furthermore, there is no geographic limitation provided. There has been no request to modify, or “blue-pencil” this provision, and I decline to do so sua sponte.”

The moral of the story is clear:


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It is - and remains - extraordinarily difficult to predict with any degree of certainty whether a particular non-compete agreement will be upheld in a court of law (at least in New York).

HOW A FIDUCIARY CAN PERMISSIBLY SOLICIT HIS OLD

CLIENTS UNDER NEW YORK LAW

Under New York law, the seller of a business “impliedly covenants,” or promises, not to solicit his old customers away from the business to a competitor. In legal terms, this is called the “Mohawk Doctrine.” And this doctrine is in place even where the parties don’t enter into a formal non-compete agreement.

So, the question arises, in the absence of a non-solicitation or non-compete agreement, where is the line drawn between what constitutes permissible solicitation of a former employer’s client, and improper solicitation - or poaching - of a former employer’s client under New York law? Stated differently, how far does a seller’s “implied covenant” not to compete or solicit his old customers away from the business extend?

Unsure of the answer to this question, a Federal appeals court punted it over to New York State’s Court of Appeals, who in turn recognized that there is no bright-line test, and that each case will inherently be fact-specific. However, the Court of Appeals also stated that the determination will turn on whether this seller and former employee actively solicited the former clients and/or employees, or was merely passive, answering questions that originated from the clients. While active solicitation would be prohibited under the Mohawk Doctrine, passive activity in response to client inquiries would be permitted.


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To better illustrate these principles at work, following are some examples from New York’s courts:

WHEN A FIDUCIARY BREACHES A NY NON-COMPETE AGREEMENT – AND LIES ABOUT IT

Reading the appellate court’s rendition of the facts in GoSmile, Inc. v. Levine, a case where the plaintiff claimed breach of contract, breach of non-competition agreement and fraudulent inducement/concealment, it is clear that the court empathized with the plaintiff, and wanted to allow the plaintiffs their day in court.

The sordid details are as follows:

Defendant Levine, together with his wife, founded GoSmile, Inc., a company that developed and sold tooth-whitening and oral hygiene products. The Levines were the company’s sole stockholders, directors and employees. After enjoying a measure of success, the Levines sold a majority interest in the company to investors (the plaintiffs).

At the time of the sale in 2003, the Levines executed confidentiality and non-competition agreements granting the company exclusive ownership rights of all intellectual property associated with the company, and prohibited the Levines from using this information to compete with the company. In exchange for a cash payment, the Levines became at-will employees, directors and minority owners of the company.

After the purchase was completed, the parties became embroiled in arguments over the company’s financial difficulties. As a result, the company terminated the Levines, and the Levines sued the company for wrongful termination. That lawsuit was resolved via a settlement agreement with plaintiff and several other parties


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“which contained a broad mutual release of all claims of all kinds, whether known or unknown, that the parties ever had or now had.”

As part of the settlement agreement, plaintiff insisted upon – and Levine warranted – that he had never breached the 2003 confidentiality and non-compete agreement. The settlement agreement also obligated the company to pay the Levines a lump sum of over $3 million, and an additional payout of $1 million over the following 4 years in exchange for the remainder of the Levines’ stock in the company.

Later, the company learned that Levine had, in fact, breached his fiduciary duties to the company by using this confidential information to compete unfairly with the plaintiff.

The appellate court credited plaintiff ’s claim that Levine deliberately lied about (in legalese, misrepresented) breaching his fiduciary duty and non-compete agreement with the company in order to fraudulently induce GoSmile into paying him the $3 million settlement.

In order to reach this result, however, the Court had to sidestep procedural landmines, including the following:

(1) Ordinarily, you can’t convert a breach of contract claim into a tort, such as fraud (which is an intentional tort); and,

(2) As a general rule, you can’t pursue a breach of contract or fraudulent misrepresentation or concealment claim if you waive those claims as part of a disclaimer or settlement agreement.


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Nevertheless, the appellate court went out of its way to offer a creative, two-pronged analysis for why GoSmile’s claims did not offend either rule, stating:

(1) “In the instant matter, plaintiff ’s allegation that defendant knowingly misrepresented that he did not breach the confidentiality and non-compete provisions of the 2003 agreement is not merely an insincere promise of future performance. It was instead, a misrepresentation of then present facts that was collateral to the contract, and thus plaintiff sufficiently alleged a cause of action sounding in fraud”; and,

(2)“The general release did not act as a bar to plaintiff ’s fraud and breach of contract claims because plaintiff specifically sought defendant’s express warranty that he didn’t breach his non-compete agreement, and the general release stated clearly that it did not extend to claims which “[plaintiff] does not know or suspect to exist in his favor at the time of executing the release.”

After reading the court’s rendition of the facts of this case, no one should be surprised at the outcome.

WHAT AN EMPLOYER CAN DO WHEN ITS (FORMER)

EMPLOYEE VIOLATES HIS NON-COMPETE AGREEMENT

I. The Employer Can Seek an Injunction Barring the Employee from Working at His New Job

The filing of a request with the court for a temporary restraining order, or “TRO,” is the first step for a company alleging that its


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former officer or other key employee breached his fiduciary duty and violated his non-compete clause.

“Why is this filing so significant?” you ask.

Because if granted, the TRO will effectively put this former employee “on ice,” barring him from either working for a competitor, or exploiting some knowledge or client relationship that he or she gained while working for the company – at least until the Court issues a further order allowing him to resume working at his new job.

I am confident we can all agree that this is very significant indeed.

Recognizing that a plaintiff-company is seeking the extreme relief of putting the defendant out of a job, New York’s courts have – understandably – required the plaintiff to satisfy a heightened threshold of proof (which is discussed below) before it will grant the injunction.

The importance of the Court’s response to the company’s request for injunctive relief is not limited to the motion itself; if the Court grants the TRO, the Court is signaling its view that the company is likely to ultimately prevail at the conclusion of the case. Consequently, by granting access to its “crystal ball,” the Court is affording both parties the opportunity to ascertain whether it is indeed worthwhile to pursue a case about which the court may have already made up its mind.

a) The Most Important Component to Securing a TRO

In order to obtain a restraining order, the plaintiff-company must demonstrate, among other things, that they are about to suffer imminent, irreparable harm unless the injunction is granted.


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The next question, therefore, is obvious:

How can an employer show that unless an injunction is granted, the company will suffer “irreparable harm”?

New York’s courts have answered this question as follows:

“The Second Circuit has recognized that damage to one’s business reputation and loss of customer goodwill can constitute irreparable harm. Xelus, Inc. v. Servigistics, Inc., 371 F.Supp.2d 387, 390 (W.D.N.Y. 2005) (citing Register.Com, Inc. v. Verio, Inc., 356 F.3d 393, 404 (2d Cir. 2004)); see also Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 69-70 (2d Cir.1999) (it is “very difficult to calculate monetary damages that would successfully redress the loss of a relationship with a client that would produce an indeterminate amount of business in years to come”).

II. The Employer Can Seek to Recoup the Money it Paid the Employee

Contrary to popular belief, employers do have potential recourse against former employees who collect a salary while not living up to their end of the deal:

The employer can sue them and get (at least some of) their money back.

Yes, you read that correctly.

The New York rule is that when an employee breaches the employment contract by refusing to perform, the employer is entitled to recover the difference between the contract wage and what the employer was required to pay to replace the employee. Triangle Waist Co. v. Todd, 223 N.Y. 27, 119 N.E. 85; Valentine Dolls, Inc. v. McMillan, 25 Misc.2d 551, 202 N.Y.S.2d 620.


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Naturally, this also means that if the employer promptly replaces that disloyal, or non-performing, employee with someone else at a lower salary, it is unlikely the employer can recover any damages. See, e.g., Marcus v. Liner, 85 Misc. 368, 147 N.Y.S. 458 (employer not entitled to recover damages where employee designer is replaced within two weeks by another designer at a lower salary).

III. The Employer Can Sue to Recover Lost Profits

New York’s courts have held that an employer can recover his lost profits that directly result from the employee’s breach of the non-compete agreement, stating “ “[T]he proper measure of damages [for breach of a restrictive covenant not to compete] is the net profit of which plaintiff was deprived by reason of defendant[s’] improper competition with plaintiff ” (Pencom Sys. v. Shapiro, 193 A.D.2d 561, 598 N.Y.S.2d 212; see also Gomez v. Bicknell, 302 A.D.2d 107, 756 N.Y.S.2d 209; Support Sys. Assocs. v. Tavolacci, 135 A.D.2d 704, 522 N.Y.S.2d 604); See also, E.W. Bruno Co. v. Friedberg, 28 A.D.2d 91, 281 N.Y.S.2d 504, aff ’d, 23 N.Y.2d 798, 297 N.Y.S.2d 302, 244 N.E.2d 872; see Weinrauch v. Kashkin, 64 A.D.2d 897, 407 N.Y.S.2d 885; McRoberts Protective Agency, Inc. v. Lansdell Protective Agency, Inc., 61 A.D.2d 652, 403 N.Y.S.2d 511 (i.e., profit plaintiff would have made, not the profits defendant did make).

To that end, and importantly, the employer will only be able to recover his lost net profits - not his gross profits - that directly result from the employee’s actions, as New York’s courts have stated unequivocally that “[T]he proper measure of damages [for breach of a restrictive covenant not to compete] is the net profit of which plaintiff was deprived by reason of defendant[s’] improper competition with plaintiff ” (Pencom Sys. v. Shapiro, 193 A.D.2d 561, 598 N.Y.S.2d 212; see also Gomez v. Bicknell, 302


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A.D.2d 107, 756 N.Y.S.2d 209; Support Sys. Assocs. v. Tavolacci, 135 A.D.2d 704, 522 N.Y.S.2d 604).

But here’s an interesting caveat to that rule:

If the employee engaged in these improper acts while he was still employed by the plaintiff/former employer (thereby breaching his fiduciary duties to the employer), the employer will be entitled to recover all of the profits that the employee gained during that time, because “[D]isgorgement of defendant’s profits would be the proper measure of damage if defendant had used the trade secrets for his own benefit while still in plaintiff ’s employ.”

IV. The Employer Can Sue to Recover Liquidated Damages

While most non-compete agreements that I’ve seen do not have such a provision, there are some employers who have gone to the trouble of inserting a clause in the contract stating that in the event that the employee breaches the non-compete (or, in legalese, “restrictive covenant”), he may be liable for a multiple of the billable work generated by the client that over the past year - which has now been lost to the company/employer.

So, here’s the question:

Is such a provision an enforceable liquidated damages clause, or is it an unenforceable penalty insofar as New York law is concerned?

Unfortunately, there really isn’t a clear-cut answer, or bright-line test, because each such clause turns on its own unique facts. That said, New York States highest court has weighed in on the factors that the courts must look to in order to determine whether the particular liquidated damages clause is enforceable or not, stating:


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“Liquidated damages provisions, under our precedents, are valid if the ‘damages flowing from a breach are difficult to ascertain [and under] a provision fixing the damages in advance * * * the amount is a reasonable measure of the anticipated probable harm” (City of Rye v Public Serv. Mut. Ins. Co., 34 N.Y.2d 470, 473). On the other hand, if “the amount fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced” (Truck Rent-A-Ctr. v Puritan Farms 2nd, 41 N.Y.2d 420, 425).”

TWO THINGS THAT AN EMPLOYER CAN’T RECOVER

FROM A DISLOYAL EMPLOYEE

I. In the Non-Compete Context, Unjust Enrichment Claims Are (Usually) Doomed

When an employee leaves to go work for a competitor in violation of a non-compete agreement, one of the common claims leveled against the competitor (a/k/a the new employer) is that they have unfairly benefitted from the time, blood, sweat, tears and money the former employer invested in this employee. In legalese, this is referred to as “unjust enrichment.” (For additional information on this topic, please see my article “How to Prove an Unjust Enrichment Claim Under New York Law”).

Unjust enrichment claims are not without limitations, however, and in the context of non-competes, often fail.Here’s why:

As noted in “How NY Courts Limit Unjust Enrichment Claims,” one required element of this claim is that the relationship between the plaintiff and the defendant isn’t “too attenuated.” This has


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important implications in the context of the violation of a non-compete agreements as well.

Applied to this context, since “[T]he mere fact that the plaintiff ’s activities bestowed a benefit on the defendant is insufficient to establish a cause of action for unjust enrichment,” Clark v. Daby, 300 A.D.2d 732 (3d Dep’t 2002).

In order to sharpen this concept, following are a few cases where New York’s courts applied this principle:

In Barbagallo v. Marcum LLP, 820 F. Supp. 2d 429, 447-48 (E.D.N.Y. 2011), a Federal court held that by hiring plaintiff ’s former employee that was bound by a non-compete, the defendant company improperly benefitted from the plaintiff, securing benefits to which it was not entitled.

However, the Court also noted that since the connection between the plaintiff and the defendant was only indirect – i.e., the benefits were not the result of services the plaintiff had performed for the defendant, the connection between plaintiff and defendant was too attenuated to support an unjust enrichment claim.

Likewise, in Wayne Thomas Salon, Inc. v. Moser, 2010 N.Y. Misc. LEXIS 5015, *12 (Sup. Ct. N.Y. Co. Oct. 12, 2010), a New York court dismissed a former employer’s unjust enrichment claim against its former employee as well that former employee’s new employer even though the defendants reaped benefits, including income from plaintiff ’s clients, after hiring plaintiff ’s former employee.

Once again, the court’s reasoning was straightforward: The plaintiff did not itself confer any benefit upon defendants which would entitle it to recovery. See also, Zeno Group, Inc. v. Charlotte Wray, 2008 N.Y. Misc.


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LEXIS 10229, *30 (Sup. Ct. N.Y. Co. Sept. 26, 2008) (“The complaint states that defendants have been unjustly enriched in receiving the benefits of employment and client relationships, ‘including that of a special and extraordinary employee who had access to the highly confidential and proprietary information of [plaintiff]…. [T]his argument is ineffective. Defendants presumably paid [employee] for her services, and did work in exchange for payment from clients. Nothing was ‘bestowed’ upon them.”).

II. You Can’t Recover Damages That You Can’t Prove

I was recently contacted by the proprietor of a small business, a cleaning service, and she wanted to sue one of her former employees for breaching her non-compete agreement, and starting a competing agency on company time. Therefore, she wanted to secure an injunction barring this former employee from unfairly competing against the business. Fair enough.

This proprietor also wanted her former employee to pay damages, and fork over every penny she made on the new business.

There was just one “small” problem, however:

This proprietor had no way of proving what damages, if any, she sustained as a result of this former employee’s actions because she couldn’t point to a single client that had been poached by this former employee.

When I pointed out that as the plaintiff, it was her burden - not the former employee’s burden - to demonstrate damages, she became agitated; and when I told her that no, you can’t bar the competing agency’s employees (people who never worked for her, and who never signed an agreement with her) from working in that field, she became downright furious.


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This woman refused to understand that you can’t ask a New York court to impose a non-compete agreement on people that you can’t even identify; she refused to understand that there are limits on what you can recover for the breach of a non-compete agreement under New York law. (Needless to say, this woman and I parted ways).

3 WAYS AN EMPLOYEE CAN FIGHT BACK AGAINST HIS EMPLOYER’S

LAWSUIT OVER HIS NON-COMPETE

I. Putting the Employer to its Proofs

In the last year alone, I have encountered the following question several times:

Is it enough for a plaintiff to claim, in general terms, that a former employee (or someone else) stole (or, in legal terms, “misappropriated”) their trade secrets (and in the process, breached a fiduciary duty and/or violated a non-compete clause), or do they have to do something more?

As I’m sure you guessed, a generic claim of this sort will not suffice under New York law.

To the contrary, a New York County trial court recently articulated the rule, as well as its underlying rationale, as follows:

“[T]he law requires that a trade secret plaintiff identify trade secrets with reasonable particularity early in the case. See, Xerox Corp. v. IBM Corp., 64 F.R.D. 367, 371 (S.D.N.Y. 1974) (“[t]he burden is upon the plaintiff to specify [the alleged trade secrets], not upon the defendant to guess at what they are…Clearly until this is done, neither the court nor the parties can know, with any degree of certainty, whether discovery is relevant


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or not; and it is doubtful whether [defendant] can undertake a meaningful discovery program….”). Only by distinguishing between the general knowledge in their field and their trade secrets, will the court be capable of setting the parameters of discovery and will defendants be able to prepare their defense.”

In other words, a plaintiff cannot be heard to claim on the one hand, that the defendant stole his confidential information, yet on the other hand refuse to identify what it is that the defendant stole.

Alternatively, “I could tell you, but I’d have to kill you” doesn’t work in New York’s courts.

II. Demonstrating that the Employer Has “Unclean Hands”

No, this isn’t an ad for good hygiene.

While we’ve written fairly extensively on the subject of seeking an injunction from the Court (see e.g., “Why Restraining Orders Are So Important in a New York Non-Compete Case

and “The 3 Critical Steps to Defend Against a TRO in a New York Non-Compete Case”), barring a former employee from poaching his former employer’s clients or fellow employees, there is an important factor that must be taken into consideration before embarking down the path of seeking the injunction:

Whether the party seeking the injunction (alternatively referred to as a restraining order) has “clean hands.”

Naturally, this leads to two questions:


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(1) What does that mean? and,

(2) Why is that important?

First, “clean hands” means that the party who is seeking the injunction, which is a form of fairness-based (in legalese, “equitable”) relief, cannot come to court and seek such relief if he has done anything manifestly improper.

The reason why this is important in this context is because clean hands are a prerequisite for obtaining injunctive relief - regardless of any alleged or even actual wrong attributable to defendants.

Or, as one of New York’s courts put it, “[H]e who comes to equity must come with clean hands” and unclean hands may bar injunctive relief concerning enforcement of a shareholders’ agreement.” Amarant v. D’Antonio, 197 A.D.2d 432, 434 (1st Dept. 1993).

III. Proving that He Didn’t Quit; He Was Fired (a/k/a “The MosT Powerful way To DefeaT a NoN-coMPeTe agreeMeNT iN New york”)

Although there are many ways to “poke holes” in a non-compete agreement, more often than not, those attacks may not prove decisive - at least not under New York law.

And the reason for this is relatively straightforward (as set forth above): the courts often reserve the right to “blue-line” the agreement, which means that the court can re-write the offending provisions of the agreement to be more in line with accepted standards, such as by reducing the length of a non-compete from 5 years to 18 months, or by


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limiting the territorial restriction of a non-compete to a 100 mile radius.

But there is another way of challenging a non-compete agreement that can potentially strike a fatal blow to a plaintiff ’s attempt to enforce it: where the plaintiff fired the defendant “without cause.”

A Federal Court in New York recently explained the rationale behind this rule as follows:

“New York courts ‘will not enforce a non-competition provision in an employment agreement where the former employee was involuntarily terminated.’ SIFCO Indus., Inc. v. Advanced Plating Techs., Inc., 867 F.Supp. 155, 158 (S.D.N.Y.1994); see Post v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 48 N.Y.2d 84, 421 N.Y.S.2d 847, 397 N.E.2d 358, 361 (1979).

“An essential aspect [of enforceable restraints on employee mobility] is the employer’s continued willingness to employ the party covenanting not to compete.’ SIFCO, 867 F.Supp. at 158 (quoting Post, 421 N.Y.S.2d 847, 397 N.E.2d at 360).

“Enforcing a noncompetition provision when the employee has been discharged without cause ‘would be ‘unconscionable’ because it would destroy the mutuality of obligation on which a covenant not to compete is based.” Morris v. Schroder Capital Mgmt. Int’l, 445 F.3d 525, 529–30 (2d Cir. 2006) (quoting Lucente v. IBM Corp., 310 F.3d 243, 254–55 (2d Cir. 2002)).

I would be remiss if I didn’t mention this next bit, however.

At the end of 2012, the Second Circuit, which is the Federal appeals court for New York, noted that in the case before them


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of Hyde v. KLS Professional Advisors Group, LLC, they didn’t need to decide this issue, but wanted to weigh in on whether an employee can still be held to a non-compete even if she was fired without cause.

In legalese, this is referred to as “dicta,” which means it is not binding on anyone, but it certainly gives you a court’s view of an issue, and in many instances, other courts will look to it as persuasive authority.

Here’s what the court said:

“In the interest of judicial economy, however, we note our reservation about the district court’s preliminary interpretation of New York law. Relying on Post v. Merrill Lynch, Pierce, Fenner & Smith, 48 N.Y.2d 84, 421 N.Y.S.2d 847, 397 N.E.2d 358 (1979), the district court concluded that restrictive covenants are per se unenforceable in New York against an employee who has been terminated without cause. But in Post, the New York Court of Appeals held only that when an employee was terminated without cause, the employer could not condition the employee’s receipt of previously earned pension funds on compliance with a restrictive covenant. Id. at 89, 421 N.Y.S.2d at 849, 397 N.E.2d 358. We caution the district court against extending Post beyond its holding, when a traditional overbreadth analysis might be more appropriate. See BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 392–93, 690 N.Y.S.2d 854, 858–59, 712 N.E.2d 1220 (1999).”

In other words, the Second Circuit believed that the trial court’s reading of Post as inherently invalidating non-competes for employees that were fired without cause was incorrect.

While I think that the Second Circuit’s position goes down the wrong policy path – and many downstate courts in New York


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have followed the SIFCO Industries court’s analysis, and held invalid a non-compete where the employee was terminated without cause - an upstate appeals court has cited with approval the Hyde decision, and I want to make sure you approach this issue with your eyes wide open, aware of the possibility that a New York court could go either way on this issue.

In any event, as this next piece indicates, this doctrine is not applicable in all jurisdictions.

Company Wins Over $1.3 Million from Former Managers Who Violated Their Non-Competes

Following a week-long trial that concluded on August 6, 2012, a Colorado jury found that two former managers of a company had not only breached their fiduciary duties to their employer (the plaintiff), but had also violated their non-compete agreements by acquiring a competing business and poaching both former co-workers and customers away from the plaintiff, their former employer.

This case, United Subcontractors, Inc. v. Cotten and Gott, had an interesting twist that might have led to a different result under New York law, however. One of the defendants, who had been working as a manager for plaintiff, was actually fired before he went to work for a competitor, and began soliciting some of his former co-workers and clients from when he worked at United.

“Why should that matter?” you ask.

Because under New York law, if you’ve been fired, and it’s not “for cause,” the general rule is that your non-compete agreement is no longer enforceable. On the other hand, in this case the plaintiff apparently produced a large amount of evidence that the defendants were up to no good while still in their employ,


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as one of them ordered “hundreds of thousands of dollars in insulation products” from an unapproved supplier at a price higher than the company would have paid. but repeatedly violated and disregarded United’s policies.

Given the timing of everything else involved, it is entirely possible that a jury would have still considered all of this pre-meditated by the defendants in an effort to make the transition to the new company more difficult to track and attack, leading to the same result.

Reduction in Pay May Vitiate Non-Compete, Says NY Court

In an important corollary to the general rule we set forth earlier, that an employee who is fired without cause cannot be held to his non-compete agreement, in October, 2012, a New York Federal Court held that reducing an employee’s pay may, in some cases, vitiate the employee’s non-compete agreement under NY law.

In IDG USA, LLC v. Schupp, et al., a salesman for IDG left to work for a competitor in the Buffalo area, in apparent violation of a non-compete agreement he had signed that barred him from working for a competitor within 50 miles and for a period of one year post-employment. Schupp was required to sign this agreement - or so it appears from the record - in order to obtain a promotion to account executive and receive a $3,000 raise.

Subsequently, Schupp’s salary was cut as part of a company-wide salary reduction plan that was placed into effect in an effort to avoid mass layoffs that would have been necessitated by the economic downturn. After Schupp left to work for a competitor - within the 50 mile radius and within a year following his resignation - IDG sued, contending he had violated his non-compete agreement. Schupp countered that the only reason he


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signed the non-compete agreement (NCA) in the first instance was because he couldn’t have gotten the promotion or raise without it, and since IDG later reduced his salary, that action rendered the non-compete unenforceable.

In finding that Schupp’s claim could theoretically have merit, the Court stated as follows:

“While there is no indication Schupp would have been terminated had he failed to sign the NCA, these statements, considered in the light most favorable to Schupp, suggest that, had he refused to sign, he may have been denied the raise and promotion. Because Schupp has raised a triable question of fact as to whether his promotion and raise were conditioned on his signing the NCA, such that they could be considered part of the consideration for signing, IDG’s motion for summary judgment as to its first and second causes of action is denied.”

Why a Former Employee Should Fight a TRO in New York - Even Before It’s Signed

The threat posed to a newly former employee (and by extension, his new employer) by a signed TRO is potentially devastating: it can force him out of a job before it even begins, and deprive him of a desperately needed paycheck until a further order of the court.

In nearly all circumstances, however, the company will be obliged to provide the employee with notice that it will be filing the application with the court for the temporary restraining order, in order to afford the employee a chance to oppose their application - even before it is signed.


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This opportunity to be heard on the company’s application should not be taken lightly - and here’s why:

Since the company is seeking extraordinary relief, in that they are seeking a court order barring someone from going to work, the court will not sign off on such an order lightly. To the contrary, the court is obliged to scrutinize closely their application before granting it.

Therefore, it is often a good idea to retain an attorney that is knowledgeable about this area of the law (i.e., non-compete agreements) to analyze the former employee’s particular contract to ascertain whether there are any glaring holes in the agreement that might persuade the court to decline to sign off on the company’s application in the first instance.

The value in spending the money up front to appear and oppose the TRO application is three-fold:

(1) If the court denies the company’s application, you may well be able to continue working in your present capacity pending the outcome of the case;

(2) At worst, your attorney can push the court to leave the order in place for a shorter time period pending a further hearing; and,

(3) If the trial court declines to sign the TRO, the plaintiff will often be left without any practical recourse, as it is rather expensive to try to recast the application before an appellate court, and it is unlikely the appellate court will reach a different result once the trial court declined to sign off on the TRO.


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WHAT ARE YOUR OPTIONS IF THE COURT RULES AGAINST YOU AT

THE BEGINNING OF A NON-COMPETE CASE?

In the context of non-compete cases - just as in any other type of litigation - courts can get it wrong. Indeed, this just happened to one of my clients in a Suffolk County action where the court held that my client was bound to the non-compete agreement he had with his employer, and therefore barred from working for a competitor - even though they had fired him for a completely unrelated reason. (As noted above in “How a Non-Compete Can Remain Enforceable in NY – Even if You’re Fired,” the general rule in New York is that employees cannot be held to their non-compete agreements with their former employers if they’ve been fired.)

Generally, at that point, the former employee will be faced with two primary options:

(1) Seek to Reverse, Vacate or Modify the TRO. Judges, like anybody else, don’t like being told they were wrong. That problem aside, the challenges with this option are several:

• First, if the Court granted the company’s application for a TRO, barring you, the former employee, from seeking (or continuing) gainful employment with one of the company’s competitors, you will likely need a stay of the trial court’s order just to continue collecting a paycheck.

• Second, securing a stay, especially when a court has already – albeit preliminarily -- ruled against you is much harder done than said.

• Third, and aside from the great expense that is usually entailed with vacating or modifying an earlier court order, it


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is important to bear in mind that such applications, whether before a trial or appellate court, often aren’t decided for weeks or months, by which time the issues that were raised on the motion or appeal may be largely, if not completely, rendered moot, leading directly to option #2, which is ...

(2) Explore Settlement. In many instances, the former employee has relatively nominal funds available for settlement purposes (after all, s/he just lost their job). Therefore, the former employer should consider what they hope to accomplish by continuing to press a protracted litigation with a highly uncertain return.

That said, settlement may not be a viable option – at least at this stage of the litigation – where there is a significant amount of money, or the moving of clients away from the former employer is at stake.

Consider the following story, which illustrates rather nicely the foregoing options at work:

Back in 2011, it was reported that a local downtown Brooklyn paper sued one of its former reporters, and secured a temporary restraining order barring him from working for a competing periodical. The TRO was based upon a six-month non-compete agreement the reporter had previously signed.

From the story, it appears that the reporter settled out with the plaintiff, paying the paper over $2,000 in order to get out of the non-compete.

Granted, I was not privy to much of the pertinent facts of this case, but I was puzzled by one thing:

What conceivable “trade secret” did this reporter possess such that his non-compete agreement shouldbe enforced?


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Regardless, and relevant to this discussion, the reason that the defendant settled with the plaintiff should be fairly obvious:

For the nominal sum of $2,000, the defendant was free to work wherever and whenever he wanted.

WHY FORMER EMPLOYERS MAY SUE OVER NON-COMPETES - EVEN

UNENFORCEABLE ONES

In a case that was filed in Federal Court in Massachusetts, Boston Beer Corporation - the manufacturer of the popular Samuel Adams beer - sued another brewery roughly 5% its size, California-based Anchor Brewers - claiming that the smaller brewery should be barred from hiring its $60,000 per year sales manager because otherwise, Boston Beer would stand to suffer “irreparable harm.”

Given that this sales manager was moving cross-country for a new job, was a fairly low-level employee, and only worked for Boston Beer for one year, it should come as no surprise that New York’s courts would be highly unlikely to uphold or enforce this non-compete agreement (provided, that is, that this employee wasn’t using any information gleaned from his time at Boston Beer to now unfairly compete with Boston Beer).

Under the circumstances, why bring the lawsuit?

As noted earlier, it appears that different jurisdictions give greater (or lesser) deference to non-compete agreements, and. Massachusetts generally favors upholding non-compete agreements moreso than California, or New York, for example.


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Suing the smaller brewery in Massachusetts has the added benefit to Boston Beer of compelling its much smaller competitor to litigate the case in a far more inconvenient venue.


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CONCLUSION

In sum, since the high stakes and level of complexity involved in assessing the viability of a breach of non-compete agreement, you owe it to yourself to at least consult with an attorney before you undertake any actions that could have significant ramifications on your future employment prospects.

In this realm, minor adjustments in either direction could make the difference between actions that prove rewarding or devastating.

Even if you’ve lost your job, that doesn’t necessarily mean that you can’t hire a competent lawyer to handle your case.

There are increasing numbers of lawyers, like me, who are willing to accept these cases in ways that call for other than a straight hourly fee. Some of those

arrangements might include either prosecuting the case on a flat fee, or imposing a cap on the legal fees in the case, thereby giving you, the client, a firm limit on the expenses they will have to incur in seeking to recover their damages.

As set forth above, I do not expect that this book will answer all of your questions regarding a non-compete case under New York law.

But, I hope you’ll agree, this book is a pretty good starting point.

If you have any further questions about your particular legal issue(s), please feel free to pick up the phone and give me a call at 516-791-5700. If you prefer, you can even send me an e-mail at [email protected], and we can set up a mutually convenient time to discuss your legal questions.

Jonathan Cooper


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The Definitive Insider’s Guide to Non-Compete Agreements in New York

INCLUDING:

• WHEN A NON-COMPETE AGREEMENT IS ENFORCEABLE UNDER NY LAW

• HOW A FIDUCIARY CAN PERMISSIBLY SOLICIT HIS OLD CLIENTS

• WHAT AN EMPLOYER CAN DO WHEN AN EMPLOYEE – OR FORMER EMPLOYEE – VIOLATES HIS NON-COMPETE

AND,

• THE MOST POWERFUL WAY TO DEFEAT A NON-COMPETE


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W O R D A S S O C I A T I O N P U B L I S H E R Swww.wordassociation.com1.800.827.7903

Jonathan Cooper is, first and foremost, a husband and father to seven (yes, that’s right - 7) adorable children with whom he lives in Queens, New York. Less importantly, he has litigated numerous cases arising out of non-compete agreements before New York's courts. He has even had the privilege of arguing a case before New York State's highest court - the Court of Appeals.

Jonathan has published hundreds of articles on the topics related to not only non-compete agreements, but breach of contract and business torts as well. He has been quoted in the Wall Street Journal, and some of his other books have been featured by CNBC. The real public service though, has been Jonathan’s websites, blogs and educational videos, which provide a lot of free, useful information and links on a variety of topics, such as breach of contract, business fraud, defamation, and the different types of tortious interference claims under New York law.

Visit Jonathan’s sites and blogs at:

www.JMCooperLaw.com

www.NYBusinessLitigationLawyer.com

www.NYSmallBusinessAttorney.com

$16.95

to compete or not to compete - the definitive insider's guide to non-compete agreements in new...

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