Karpinski v. Ingrasci, 28 N.Y.2d 45 (1971)

A court may modify and enforce a non-compete agreement to the extent that it is reasonable, even if the agreement is initially drafted too broadly.

Summary

Dr. Karpinski, an oral surgeon, sought to enforce a non-compete agreement against his former employee, Dr. Ingrasci, who opened a competing practice nearby after his employment ended. The agreement prohibited Ingrasci from practicing “dentistry and/or Oral Surgery” within five counties. The court found the agreement overbroad because it restricted Ingrasci from practicing general dentistry, which did not compete with Karpinski’s oral surgery practice. However, the court held that it could sever the unreasonable portion of the covenant and enforce the restriction against practicing oral surgery within the specified area, as the geographical and time restrictions were reasonable. The court also addressed the issue of liquidated damages, holding that while an injunction was appropriate, the full liquidated damages were not, and remitted the case for a determination of actual damages during the breach.

Facts

Dr. Karpinski, an oral surgeon in Auburn, NY, expanded his practice by cultivating referrals from dentists in five nearby counties. In 1962, he opened a second office in Ithaca and hired Dr. Ingrasci as an employee. As part of the employment agreement, Ingrasci signed a contract that included a covenant not to compete, preventing him from practicing “dentistry and/or Oral Surgery” in those five counties, even after the agreement’s termination. The agreement also stipulated a $40,000 promissory note payable if Ingrasci violated the covenant.

Procedural History

After the employment contract expired and discussions of a partnership failed, Ingrasci opened his own oral surgery practice in Ithaca. Karpinski sued to enforce the restrictive covenant and collect on the promissory note. The Supreme Court ruled in favor of Karpinski, granting an injunction and damages. The Appellate Division reversed, finding the covenant too broad and unenforceable.

Issue(s)

1. Whether a covenant by a professional man not to compete with his employer is enforceable.
2. If the covenant is enforceable, whether a court can modify an overbroad non-compete agreement to make it reasonable.
3. Whether the inclusion of a liquidated damages provision in a non-compete agreement bars injunctive relief.

Holding

1. Yes, because covenants by professionals are generally given effect if reasonable in scope.
2. Yes, because a court has the power to sever the impermissible from the valid and uphold the covenant to the extent that it is reasonable.
3. No, because the inclusion of a liquidated damages provision does not automatically bar the grant of an injunction if the performance of the covenant was intended, and not merely the payment of damages in case of a breach.

Court’s Reasoning

The court reasoned that employee non-compete agreements are subject to an “overriding limitation of ‘reasonableness.’” Such covenants are generally enforced for physicians if reasonable in scope. The court found the geographic scope (five rural counties) reasonable because it coincided with the area where Karpinski drew patients, and the restriction was unlimited in time, but found the restriction against practicing “dentistry” too broad since Karpinski only practiced oral surgery. The court reasoned that, “[t]he restriction, as formulated, is…too broad; it is not reasonable for a man to be excluded from a profession for which he has been trained when he does not compete with his former employer by practicing it.”

The court then addressed its power to “sever” the impermissible part of the covenant. It cited precedent and scholarly commentary supporting the court’s ability to modify and enforce a non-compete agreement to the extent it is reasonable. The court stated, “[I]t is just and equitable to protect appellant [employer] by injunction to the extent necessary to accomplish the basic purpose of the contract insofar as such contract is reasonable.” Therefore, the injunction should only prevent Ingrasci from practicing oral surgery.

Regarding liquidated damages, the court noted that the inclusion of such a provision does not automatically bar injunctive relief. The court quoted Diamond Match Co. v. Roeber, “It is a question of intention, to be deduced from the whole instrument and the circumstances; and if it appear that the performance of the covenant was intended, and not merely the payment of damages in case of a breach, the covenant will be enforced.” The court held that it would be unfair to grant both an injunction and the full liquidated damages, as the injunction would prevent future breaches. Instead, the court remitted the case to determine the actual damages suffered during the period of the breach, citing Wirth & Hamid Fair Booking v. Wirth as precedent.