Purchasing Associates, Inc. v. Weitz, 13 N.Y.2d 267 (1963)
Restrictive covenants in employment agreements are disfavored and will only be enforced to protect trade secrets, confidential customer lists, or when the employee’s services are unique or extraordinary.
Summary
Purchasing Associates sued Morton Weitz to enforce a non-compete agreement. Weitz, formerly in a partnership that sold its assets to Purchasing Associates (plaintiff), subsequently became an employee and signed a non-compete. After resigning, Weitz formed a competing company. The trial court enforced the covenant, but the Court of Appeals reversed, holding that the agreement was an employment contract, not the sale of a business, and Weitz’s services were not unique or extraordinary. Therefore, the restrictive covenant was unenforceable.
Facts
Morton Weitz was a data processing employee. He formed a partnership, Purchasing Associates, to purchase supplies for businesses. Purchasing Associates then entered a contract to “sell” its assets to Associated Sales Analysts, Inc.’s subsidiary, Purchasing Associates, Inc. (plaintiff). Weitz entered an employment contract with the plaintiff, including a covenant not to compete within a 300-mile radius of New York City for two years after termination. Weitz resigned and formed Datamor Associates, Inc., a competitor.
Procedural History
Purchasing Associates, Inc. sued Weitz to enforce the non-compete. The trial court granted the injunction, finding Weitz’s services “special, unique and of extraordinary character” and the covenant connected to the sale of a business. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.
Issue(s)
Whether the restrictive covenant signed by Weitz is enforceable as either (1) a covenant ancillary to the sale of a business, or (2) a covenant made in connection with a contract of employment.
Holding
No, because the transaction was, in substance, an employment agreement and the defendant’s services were not unique or extraordinary; thus, the restrictive covenant is not enforceable under the stricter standard applied to employment agreements.
Court’s Reasoning
The court distinguished between covenants not to compete in the sale of a business and those in employment contracts. In the sale of a business, such covenants are enforceable to protect the buyer’s good will. In employment contracts, they are disfavored and enforced only to protect trade secrets, customer lists, or when the employee’s services are “special, unique or extraordinary.” The court stated, “a covenant by which an employee simply agrees, as a condition of his employment, not to compete with his employer after they have severed relations is not only subject to the overriding limitation of ‘reasonableness’ but is enforced only to the extent necessary to prevent the employee’s use or disclosure of his former employer’s trade secrets, processes or formula or his solicitation of, or disclosure of any information concerning, the other’s customers.”
Despite the agreement’s label as a “contract of sale,” the court found the transaction was essentially an employment agreement. Weitz transferred no tangible assets or customer relationships, therefore, no “good will” was actually transferred. The court determined Weitz’s services were not “unique” or “extraordinary,” noting that more must be shown than that the employee excels at his work. The court emphasized that such services must be of a character to make replacement impossible or cause the employer irreparable injury. The court concluded that absent trade secrets, customer solicitation, or unique services, the covenant was unenforceable. The court noted, “More must, of course, be shown to establish such a quality than that the employee excels at his work or that his performance is of high value to his employer. It must also appear that his services are of such character as to make his replacement impossible or that the loss of such services would cause the employer irreparable injury.”