25 N.Y.3d 364 (2015)
A New York court will not enforce a choice-of-law provision in an employment agreement if applying the chosen law would violate New York’s public policy concerning restrictive covenants, particularly those regarding employee non-solicitation.
Summary
The case involved a dispute over an employment agreement containing a Florida choice-of-law provision and a non-solicitation clause. After being terminated, the employee began working for a competitor and servicing some of the former employer’s customers. The New York Court of Appeals held that applying Florida law, which is more favorable to employers in enforcing restrictive covenants, would violate New York’s public policy. The Court reversed the lower court’s dismissal of the breach of contract claim, finding that factual issues remained regarding the enforceability of the non-solicitation provision under New York law, particularly in the context of whether the employee was subject to overreaching during the contract formation.
Facts
Theresa Johnson was recruited by Brown & Brown of New York, Inc. (BBNY), a New York subsidiary of Brown & Brown, Inc. (BBI), to leave her previous employment. On her first day of work, Johnson signed an employment agreement containing a Florida choice-of-law provision and a non-solicitation clause. The non-solicitation clause prohibited Johnson from soliciting or servicing BBI and BBNY’s customers for two years after her termination. After Johnson was terminated and began working for a competitor, BBI and BBNY sued, alleging breach of contract. The trial court found the choice-of-law provision unenforceable, but the Appellate Division dismissed the breach of contract claim related to the non-solicitation provision. The case was appealed to the Court of Appeals.
Procedural History
The trial court partially granted the defendants’ motion for summary judgment, finding the choice-of-law provision unenforceable. The Appellate Division modified the trial court’s order, dismissing the breach of contract claim based on the non-solicitation provision. The Court of Appeals granted the plaintiffs’ motion for leave to appeal.
Issue(s)
1. Whether the Florida choice-of-law provision in the employment agreement is enforceable under New York law, particularly concerning the non-solicitation provision.
2. Whether the non-solicitation provision is enforceable under New York law, and if so, whether partial enforcement is appropriate.
Holding
1. No, because applying Florida law would violate New York public policy regarding restrictive covenants.
2. The Court found factual issues preventing a determination of the non-solicitation provision’s enforceability, and therefore the question of partial enforcement was not answered.
Court’s Reasoning
The Court of Appeals applied the public policy exception to the enforcement of contractual choice-of-law provisions. The Court emphasized that New York courts will not enforce agreements where the chosen law violates a fundamental principle of justice or public policy. The Court compared Florida law, which favors the employer in enforcing restrictive covenants, to New York law, which balances the interests of the employer, employee, and public. The Court found significant differences, including Florida’s shift of the burden of proof to the employee after the employer makes a prima facie showing of a legitimate business interest, its prohibition of considering the harm or hardship to the former employee, and its requirement to construe restrictive covenants in favor of protecting the employer’s interests. In contrast, New York requires employers to prove all three prongs of the test for reasonableness, considers the hardship to the employee, and strictly construes such covenants.
The court quoted, “A restraint is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public.” The Court reasoned that the differences in the law of the two states meant that the application of Florida law would be offensive to New York public policy. As for partial enforcement, the Court found that fact issues remained on overreaching and the circumstances under which the non-solicitation clause was signed, and thus sent the case back to the lower court.
Practical Implications
This case underscores the importance of considering the applicable state’s public policy when drafting and enforcing employment agreements. The decision confirms that New York courts will protect employees from overbroad restrictive covenants and those that unduly restrict the employee’s ability to earn a living. Attorneys must carefully draft restrictive covenants to comply with New York’s strict standards and avoid provisions that could be deemed unenforceable. The case also demonstrates a strong judicial disfavor of these covenants. Businesses with employees in multiple states need to consider the choice-of-law implications of their agreements, and this case serves as a guide for when a New York court will refuse to enforce a choice-of-law clause.