New York Law Review

Tag: non-compete agreement

  • Morris v. Schroder Capital Management, 9 N.Y.3d 616 (2007): Applying Constructive Discharge to Employee Choice Doctrine

    9 N.Y.3d 616 (2007)

    The constructive discharge test, traditionally used in employment discrimination cases, is the appropriate legal standard to determine whether an employee’s resignation was voluntary for purposes of applying the employee choice doctrine in enforcing non-compete agreements.

    Summary

    Paul Morris sued Schroder Capital Management International (SIMNA) for breach of contract after SIMNA denied him deferred compensation benefits, citing his violation of a non-compete clause. Morris argued he was constructively discharged due to a significant reduction in his job responsibilities. The Second Circuit certified the question of whether the constructive discharge test should apply to determine if Morris’s departure was voluntary under the employee choice doctrine. The New York Court of Appeals held that the constructive discharge test is the appropriate standard, protecting employees from employers who create intolerable work conditions to enforce otherwise unreasonable non-compete agreements.

    Facts

    Morris was hired by SIMNA as a senior vice-president. His compensation included deferred bonuses that vested three years after issuance, subject to forfeiture if he resigned and joined a competitor. After receiving deferred compensation awards for 1997-1999, Morris resigned to start a hedge fund. SIMNA claimed Morris forfeited his deferred compensation by competing with them. Morris argued that SIMNA constructively discharged him by reducing his managed assets from $7.5 billion to $1.5 billion, essentially forcing his resignation.

    Procedural History

    The U.S. District Court for the Southern District of New York dismissed Morris’s complaint, holding that he failed to state a claim for constructive discharge and that the non-compete was valid under the employee choice doctrine. The Second Circuit Court of Appeals certified the question to the New York Court of Appeals regarding the appropriate test for determining involuntary termination in the context of the employee choice doctrine. The New York Court of Appeals accepted certification.

    Issue(s)

    1. Whether the factual determination of “involuntary termination” (i.e., whether an employee quit or was fired) under the New York common law employee choice doctrine is governed by the “constructive discharge” test from federal employment discrimination law?
    2. If not, what test should courts apply?

    Holding

    1. Yes, because the constructive discharge test appropriately determines whether an employee’s resignation was truly voluntary when considering the application of the employee choice doctrine.
    2. Question not answered, as it is rendered academic by the answer to the first question.

    Court’s Reasoning

    The Court of Appeals reasoned that non-compete clauses are generally disfavored but can be enforced under the employee choice doctrine where an employee is given the choice of receiving post-employment benefits in exchange for complying with a restrictive covenant. However, this doctrine requires the employer’s “continued willingness to employ” the employee. The court stated, “Where the employer terminates the employment relationship without cause, ‘his action necessarily destroys the mutuality of obligation on which the covenant rests as well as the employer’s ability to impose a forfeiture.’”

    The court then considered the constructive discharge test, defining it as occurring “when the employer, rather than acting directly, deliberately makes an employee’s working conditions so intolerable that the employee is forced into an involuntary resignation.” The court emphasized that “the trier of fact must be satisfied that the . . . working conditions [were] so difficult or unpleasant that a reasonable person in the employee’s shoes would have felt compelled to resign.” The court concluded that the constructive discharge test is appropriate in the employee choice context because if an employer intentionally creates intolerable conditions, the employee’s choice is essentially taken away. Permitting the employer to enforce a non-compete while denying benefits under those conditions would be inequitable. Therefore, the court held that the constructive discharge test should be used to determine whether the employee’s resignation was voluntary.

  • Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Management, L.P., 7 N.Y.3d 96 (2006): Waiver and Estoppel in Non-Compete Agreements

    7 N.Y.3d 96 (2006)

    A party’s prior conduct can waive their right to enforce a contract provision, but the scope of that waiver is a question of fact for the jury, particularly when the relationship between the parties shifts from cooperation to competition. Moreover, estoppel requires justifiable reliance and cannot be determined as a matter of law if questions of fact exist regarding the reasonableness of reliance.

    Summary

    Fundamental Portfolio Advisors (FPA) sued Tocqueville Asset Management for breaching a non-compete agreement. The agreement prevented Tocqueville from soliciting FPA’s mutual funds without written consent. FPA initially encouraged Tocqueville to engage with the funds to facilitate a transfer of advisory responsibilities. However, the deal fell apart, and FPA alleged Tocqueville breached the non-compete clause. The Court of Appeals held that while FPA initially waived the non-compete agreement by fostering Tocqueville’s relationship with the funds, a factual dispute existed as to whether that waiver continued after the relationship turned adversarial. The court also found that estoppel was not established as a matter of law. The case was remanded for trial.

    Facts

    Lance Brofman founded the Fundamental Funds in the early 1980s. In 1996, Brofman and Vincent Malanga met with Robert Kleinschmidt and Christopher Culp of Tocqueville to discuss transferring FPA’s investment advisory assets. On September 24, 1996, Kleinschmidt and Culp signed a non-disclosure and non-compete agreement, prohibiting them from soliciting or engaging in business with the Fundamental Funds without FPA’s written consent. In early 1997, FPA and Tocqueville tentatively agreed to transfer investment advisory duties to Tocqueville for approximately $6 million. Culp began working in FPA’s offices and making presentations to the Funds’ boards. The boards then solicited formal proposals from several firms, including Tocqueville, and eventually voted to replace FPA with Tocqueville. Negotiations then stalled, and the SEC brought charges against Brofman.

    Procedural History

    FPA sued Tocqueville for breach of the non-compete agreement. The Supreme Court granted Tocqueville’s motion for summary judgment, finding FPA had waived the written consent requirement and was estopped from enforcing the clause. The Appellate Division affirmed. A dissenting Justice argued waiver and estoppel were inappropriate. The Court of Appeals modified by denying Tocqueville’s summary judgment motion and otherwise affirmed.

    Issue(s)

    1. Whether FPA waived its right to enforce the non-compete agreement by actively encouraging the Funds’ boards to hire Tocqueville.

    2. Whether FPA should be estopped from invoking the non-compete agreement.

    3. Whether FPA proved damages as a matter of law to overcome a motion for summary judgment.

    Holding

    1. No, because a question of fact exists as to whether FPA’s waiver continued after the relationship between FPA and Tocqueville changed from cooperation to competition.

    2. No, because the issue of whether equitable estoppel is warranted cannot be resolved as a matter of law based on the language of the non-compete agreement and the course of the parties’ dealings.

    3. No, because conflicting evidence in the record raises questions of fact on the issue of damages.

    Court’s Reasoning

    The Court of Appeals reasoned that while contractual rights may be waived if they are knowingly, voluntarily, and intentionally abandoned, waiver should not be lightly presumed. The Court agreed with the lower courts that FPA had initially waived enforcement of the non-compete agreement. However, a factual issue existed regarding the scope of this waiver. Once the relationship turned adversarial, a jury must determine whether FPA’s actions were sufficient to put Tocqueville on notice that it should cease dealings with the Funds. The non-compete agreement anticipated that FPA would permit Tocqueville to have discussions with the Funds, and such consent would not operate as a permanent waiver. As for estoppel, the court stated that, “estoppel is imposed by law in the interest of fairness to prevent the enforcement of rights which would work fraud or injustice upon the person against whom enforcement is sought.” "By executing the agreement, Tocqueville understood that if a deal was not consummated it would be prohibited from engaging in business with the Funds. But similar to the issues surrounding application of the waiver doctrine, FPA’s conduct creates a question of fact as to whether Tocqueville could justifiably rely on FPA’s actions to reasonably conclude that the agreement would not be enforced and, if so, whether that belief induced Tocqueville to continue pursuing a contract with the Funds." Finally, the court found that based on the conflicting evidence regarding the amount of recovery that FPA may be entitled to if it sustains its burden of proving that the noncompete agreement was breached, this issue must be resolved by the trier of fact if it is determined that Tocqueville is liable for a breach of the noncompete agreement.

  • Wolff v. Wolff, 67 N.Y.2d 638 (1986): Enforceability of Non-Compete Agreements

    Wolff v. Wolff, 67 N.Y.2d 638 (1986)

    A covenant not to compete will not be enforced if it is unreasonable in time, space, or scope, or if it operates in a harsh or oppressive manner.

    Summary

    This case addresses the enforceability of a non-compete agreement in the context of a dispute between siblings involved in a family business. The court found that while the plaintiff breached his fiduciary duties by diverting corporate opportunities, the lower court’s injunction against him competing with the business was overly broad. The Court of Appeals modified the order, holding that the injunction was unreasonable because it was unbounded by time or geography and deprived the plaintiff of the opportunity to earn a livelihood. The court emphasized that injunctions should be remedial, not punitive.

    Facts

    Plaintiff and his siblings were involved in a food and game vending machine business, Hot Coffee Vending Service, Inc. The plaintiff was accused of wrongdoing and misappropriation, while he, in turn, accused his siblings of similar misconduct. The trial court rejected the plaintiff’s claims but found that he had breached his fiduciary duties by starting a competing business, Top Score Fun ‘N Food, while still an officer at Hot Coffee. He secured business opportunities for Top Score, including facilities at Hunter College and Madison Square Garden Bowling Center, thereby diverting these opportunities from Hot Coffee.

    Procedural History

    The trial court ruled against the plaintiff and imposed an injunction against him (and any corporation where he was a shareholder) from competing with Hot Coffee, specifically regarding business at the Madison Square Garden Bowling Center. The Appellate Division affirmed this decision. The plaintiff then appealed to the New York Court of Appeals.

    Issue(s)

    Whether the injunction against the plaintiff, prohibiting him from competing with Hot Coffee Vending Service, Inc. without any limitation in time or geographic scope, was an abuse of discretion.

    Holding

    Yes, because the injunction was overly broad, unreasonable in time and scope, and effectively deprived the plaintiff of an opportunity to earn a livelihood, making it an abuse of discretion.

    Court’s Reasoning

    The Court of Appeals reasoned that the purpose of an injunction is remedial, not punitive. The court found the lower court’s injunction to be overly broad and therefore an abuse of discretion. The court cited May’s Furs & Ready-to-Wear v Bauer, 282 NY 331, 343 to highlight that injunctions should be remedial. The court also cited American Broadcasting Cos. v Wolf, 52 NY2d 394, 403-404 stating that “Even an otherwise valid covenant not to compete will not be enforced if it would be unreasonable in time, space or scope, or would operate in a harsh or oppressive manner.” The court found the injunction unreasonable as it was unbounded by time or geography, effectively preventing the plaintiff from earning a living. However, the court upheld the decision that misappropriated property should be returned to the corporation and that the plaintiff should account for diversions of assets until the settlement date, as these actions constituted breaches of fiduciary duty while he was an officer. The court reasoned that an officer who diverts corporate assets and opportunities may be held accountable for the profits gained from that wrongdoing, citing Blaustein v Pan Am. Petroleum & Transp. Co., 293 NY 281, 300; New York Trust Co. v American Realty Co., 244 NY 209, 216; Restatement [Second] of Agency § 403.

  • Post v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 48 N.Y.2d 84 (1979): Enforceability of Forfeiture-for-Competition Clauses After Involuntary Termination

    Post v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 48 N.Y.2d 84 (1979)

    A forfeiture-for-competition clause in an employee pension plan is unenforceable as a matter of law where the employee’s termination was involuntary and without cause.

    Summary

    Post and Maney, former account executives at Merrill Lynch, were terminated and subsequently began working for a competitor, Bache & Company. Merrill Lynch then sought to forfeit their pension benefits based on a clause in the pension plan that allowed forfeiture if an employee competed with the firm. The New York Court of Appeals held that such a forfeiture is unreasonable and unenforceable when the termination is involuntary and without cause. The court emphasized the public policy against forfeiture of employee benefits and the importance of mutuality of obligation in employment contracts, especially in light of the growing importance of ERISA.

    Facts

    Post and Maney were employed as account executives by Merrill Lynch, choosing a salary and participation in pension/profit-sharing plans over a straight commission. Both were terminated on August 30, 1974, and began working for Bache & Company, a competitor, on September 4, 1974. Fifteen months after their termination, Merrill Lynch informed them that their pension benefits were forfeited due to the plan’s provision against competition. The plaintiffs claimed they were discharged without cause, a claim Merrill Lynch did not dispute for the purposes of the summary judgment motion.

    Procedural History

    Post and Maney sued Merrill Lynch for conversion and breach of contract, seeking recovery of pension amounts and punitive damages. The lower court granted Merrill Lynch’s motion for summary judgment, dismissing the complaint based on the precedent set in Kristt v. Whelan. The New York Court of Appeals reversed the lower court’s decision, denying the motion for summary judgment and reinstating the complaint.

    Issue(s)

    Whether a forfeiture-for-competition clause in an employee pension plan is enforceable when the employee’s termination was involuntary and without cause.

    Holding

    No, because where an employee is involuntarily discharged without cause and subsequently competes with their former employer, a forfeiture of earned pension benefits based on that competition is unreasonable as a matter of law and cannot be upheld.

    Court’s Reasoning

    The court distinguished this case from prior cases like Kristt v. Whelan, where the employee voluntarily left and competed with the former employer. The court emphasized the strong public policy against forfeiture of an employee’s livelihood, stating, “powerful considerations of public policy * * * militate against sanctioning the loss of a man’s livelihood.” The court also considered the policy implications of the Employee Retirement Income Security Act of 1974 (ERISA), highlighting the growing importance of safeguarding employee benefits. The court reasoned that the mutuality of obligation is destroyed when an employer terminates the employment relationship without cause. Allowing forfeiture in such cases would be unconscionable, permitting the employer to “economically cripple a former employee and simultaneously deny other potential employers his services.” The court noted that the specific pension plan provision was not explicitly drawn to address involuntary terminations. The court stated, “An employer should not be permitted to use offensively an anticompetition clause coupled with a forfeiture provision”. The court concluded that the question of whether the plaintiffs’ termination was voluntary could not be resolved on a motion for summary judgment, necessitating a trial on that issue.

  • Psychoanalytic Center, Inc. v. Burns, 46 N.Y.2d 1002 (1979): Enforceability of Arbitration Award Based on Prior Fee Allocation

    Psychoanalytic Center, Inc. v. Burns, 46 N.Y.2d 1002 (1979)

    An arbitration award calculating damages based on a prior fee allocation between a psychotherapist and a treatment center does not constitute illegal fee-splitting and is enforceable, provided it arises from a breach of contract and not a voluntary, prospective fee-splitting arrangement.

    Summary

    This case addresses the enforceability of an arbitration award in a dispute between a psychoanalytic center and a psychotherapist who formerly worked there. The arbitrator determined that the psychotherapist breached an agreement not to treat the center’s clients after his departure and awarded damages based on the fees he received from those clients, mirroring the parties’ prior fee allocation. The New York Court of Appeals held that this award did not constitute illegal fee-splitting and was enforceable because it was a damage calculation arising from a breach of contract, not a prearranged agreement to split fees prospectively.

    Facts

    The Psychoanalytic Center, Inc. and Robert Burns, a psychotherapist, had an agreement under which Burns worked at the center. The agreement contained a clause that, upon termination of his association with the center, Burns would not treat any of the center’s clients. Burns discontinued his association with the center and subsequently treated clients of the center, allegedly in violation of the agreement.

    Procedural History

    The dispute was submitted to arbitration. The arbitrator found that Burns had breached the agreement. The arbitrator then made an award of damages to the Psychoanalytic Center. The damages were calculated based on the fees Burns received for treating the center’s clients, using the same allocation formula that was in place when Burns was associated with the center. The Supreme Court confirmed the arbitration award. The Appellate Division reversed, finding the award constituted illegal fee-splitting. The Psychoanalytic Center appealed to the New York Court of Appeals.

    Issue(s)

    Whether an arbitration award that calculates damages for breach of contract based on a prior fee allocation between a psychotherapist and a treatment center constitutes illegal fee-splitting that violates public policy and regulations prohibiting such practices.

    Holding

    No, because the arbitration award was a computation of damages resulting from a breach of contract and not a voluntary, prospective agreement to divide professional income in a manner that could compromise professional responsibility.

    Court’s Reasoning

    The Court of Appeals reasoned that the regulation prohibiting fee-splitting (specifically, regulation 72.2 (subd [a], pars [4], [5]) of the Commissioner of Education) aims to prevent voluntary, prospective arrangements for dividing professional income that might threaten a professional’s responsibility to clients. The court emphasized that the arbitration award in this case was not such an arrangement. Instead, it was a calculation of damages resulting from Burns’s breach of contract. The court stated, “What are prohibited by the regulation are certain voluntary prospective arrangements for the division of professional income in circumstances where such a practice might threaten or impair the discharge of professional responsibility to clients. There is nothing of that here.” The court distinguished between an agreement to split fees in advance and a calculation of damages after a breach, even if that calculation mirrors the parties’ prior fee arrangement. The court noted that the computation of damages “is not invalidated because it was predicated on the parties’ own prior division of client revenue or the circumstance of the precise arithmetic parallel thereto.” The court found no violation of public policy and reinstated the Supreme Court’s judgment confirming the arbitration award.

  • Columbia Ribbon & Carbon Mfg. Co., Inc. v. Trecker, 421 N.E.2d 497 (N.Y. 1981): Enforceability of Overbroad Restrictive Covenants

    Columbia Ribbon & Carbon Mfg. Co., Inc. v. Trecker, 421 N.E.2d 497 (N.Y. 1981)

    A restrictive covenant in an employment agreement that is unreasonably broad and not tailored to protect legitimate business interests such as trade secrets or confidential customer lists is unenforceable.

    Summary

    Columbia Ribbon sought to enforce a restrictive covenant against its former salesman, Trecker, to prevent him from working for a competitor. The covenant prohibited Trecker from selling similar goods within his former territory for two years. The court held the covenant unenforceable because it was too broad, lacking limitations related to uniqueness, trade secrets, confidentiality, or unfair competition. Columbia failed to demonstrate that Trecker possessed or used any confidential information, or that his services were unique. The court refused to rewrite the covenant to make it enforceable.

    Facts

    Trecker worked as a salesman for Columbia Ribbon, a company supplying consumables to the word and data processing industry. He signed an employment agreement with a restrictive covenant preventing him from disclosing customer information or competing with Columbia for two years after termination. After being demoted, Trecker left Columbia and joined a competitor, A-l-A Corporation. Columbia then sued to enforce the restrictive covenant, seeking to enjoin Trecker from competing anywhere in the United States and from soliciting former customers.

    Procedural History

    The trial court (Special Term) dismissed Columbia’s complaint on cross-motions for summary judgment. The Appellate Division affirmed the dismissal. Columbia appealed to the New York Court of Appeals.

    Issue(s)

    Whether a restrictive covenant in an employment agreement is enforceable when it is not reasonably limited temporally and geographically and is not necessary to protect the employer from unfair competition stemming from the employee’s use or disclosure of trade secrets or confidential customer lists.

    Holding

    No, because the restrictive covenant was too broad and not tailored to protect legitimate business interests such as trade secrets or confidential customer lists, and the employer failed to demonstrate the employee’s services were unique or that any confidential information was disclosed.

    Court’s Reasoning

    The court emphasized that restrictive covenants are disfavored because they can deprive individuals of their livelihood. Such covenants are only enforceable if reasonably limited in time and geography, and necessary to protect the employer from unfair competition arising from the employee’s use of trade secrets or confidential customer lists. The court noted that customer lists readily ascertainable from outside sources do not warrant trade secret protection. Referencing Purchasing Assoc. v Weitz, the court stated that injunctive relief may be available if the employee’s services are truly special, unique or extraordinary, even without trade secrets. Here, the restrictive covenant was deemed overly broad because it was not tied to uniqueness, trade secrets, confidentiality, or competitive unfairness; it simply restrained competition. Columbia did not provide sufficient evidence to show that Trecker disclosed any secret information, performed unique services, or caused any actual damage to the company. The court declined to rewrite the covenant, stating that Columbia’s evidence was insufficient to defeat summary judgment. As such, the court affirmed the lower court’s dismissal of the complaint. The court noted, “[T]here are ‘powerful considerations of public policy which militate against sanctioning the loss of a man’s livelihood’”.

  • Reed, Roberts Assoc., Inc. v. Strauman, 40 N.Y.2d 303 (1976): Enforceability of Employee Non-Compete Agreements

    Reed, Roberts Assoc., Inc. v. Strauman, 40 N.Y.2d 303 (1976)

    Employee non-compete agreements are enforceable only to the extent they are reasonable in time and area, necessary to protect the employer’s legitimate interests (such as trade secrets or unique services), not harmful to the general public, and not unreasonably burdensome to the employee.

    Summary

    Reed, Roberts Associates sought to enforce a non-compete agreement against its former senior vice-president, John Strauman, who formed a competing company. The court held that the agreement was unenforceable. While non-compete agreements are generally disfavored, they may be enforced to protect trade secrets, confidential customer information, or where the employee’s services are unique. The court found that Strauman’s services were not unique, no trade secrets were involved, and customer information was readily available. Therefore, the court refused to enjoin Strauman from competing or soliciting Reed, Roberts’ customers.

    Facts

    John Strauman was hired by Reed, Roberts Associates, an unemployment tax consulting firm, in 1962 and signed a non-compete agreement. Over 11 years, Strauman rose to senior vice-president, contributing to the company’s forms and computer system. He later resigned to form Curator Associates, a direct competitor. Reed, Roberts alleged Strauman was soliciting its customers. Strauman’s company sustained losses during its first year of operation.

    Procedural History

    Reed, Roberts sued Strauman and Curator Associates seeking to enforce the non-compete agreement. The trial court partially granted relief, enjoining Strauman from soliciting Reed, Roberts’ customers permanently but refused to prohibit him from engaging in a competitive enterprise. The Appellate Division affirmed. The New York Court of Appeals then modified the Appellate Division’s order by reversing the permanent injunction against the defendants.

    Issue(s)

    Whether a restrictive covenant in an employment contract is specifically enforceable when the employee’s services are not unique or extraordinary, no trade secrets are involved, and customer information is readily available through public sources.

    Holding

    No, because the restrictive covenant was broader than necessary to protect Reed, Roberts’ legitimate business interests, Strauman’s services were not unique or extraordinary, there were no trade secrets involved, and the customer information was readily available from public sources.

    Court’s Reasoning

    The court emphasized the general disfavor of restrictive covenants due to public policy considerations against restricting an individual’s livelihood. The court stated that “no restrictions should fetter an employee’s right to apply to his own best advantage the skills and knowledge acquired by the overall experience of his previous employment.” While employers have a legitimate interest in protecting trade secrets and confidential customer information, the court found that Reed, Roberts failed to demonstrate such protectable interests in this case.

    The court distinguished between non-compete agreements arising from the sale of a business, where a less stringent reasonableness standard applies, and those arising from employment contracts, where a stricter standard is required. For employment contracts, the covenant must be reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the public, and not unreasonably burdensome to the employee.

    The court relied on Leo Silfen, Inc. v. Cream, holding that an injunction is not warranted where the employee engaged in no wrongful conduct and customer information is readily discoverable through public sources. Since Strauman did not pilfer or memorize customer lists, and Reed, Roberts admitted that potential customers could be identified through publications like Dun & Bradstreet’s Million Dollar Directory, the court found the customer information was not confidential.

    Regarding Strauman’s knowledge of Reed, Roberts’ business operations, the court stated that absent wrongdoing, an employee should not be prohibited from using their knowledge and talents acquired during their employment. “Where the knowledge does not qualify for protection as a trade secret and there has been no conspiracy or breach of trust resulting in commercial piracy we see no reason to inhibit the employee’s ability to realize his potential both professionally and financially by availing himself of opportunity.”

  • Karpinski v. Ingrasci, 28 N.Y.2d 45 (1971): Enforceability of Overbroad Employee Non-Compete Agreements

    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.

  • Purchasing Associates, Inc. v. Weitz, 13 N.Y.2d 267 (1963): Enforceability of Employee Non-Compete Agreements

    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.”

  • Clark Paper & Mfg. Co. v. Stenacher, 236 N.Y. 312 (1923): Enforceability of Employee Non-Compete Agreements

    Clark Paper & Mfg. Co. v. Stenacher, 236 N.Y. 312 (1923)

    An employee’s covenant not to compete will only be enforced if the employee’s services are special, unique, or extraordinary, or if they possess valuable trade secrets that could harm the employer’s business if disclosed.

    Summary

    Clark Paper sought to enforce a non-compete agreement against Stenacher, a former salesman, preventing him from working for a competitor for eight years. The court refused to enforce the agreement, finding that the employment contract lacked a definite term and that Stenacher’s services were not unique or special, nor did he possess any trade secrets. The court emphasized that simply preventing an employee from using general skills acquired during employment is an unreasonable restraint of trade.

    Facts

    Clark Paper & Mfg. Co. hired Stenacher as a salesman of wrapping paper. Stenacher signed an agreement stating that he would not work for a competitor in New York for eight years after leaving Clark Paper. The agreement also restricted him from revealing customer lists or the company’s business methods. Critically, the contract stated Stenacher’s employment term would be “mutually agreed upon between them,” but no such agreement on a specific term was ever reached. Stenacher left Clark Paper after approximately two and a half years to work for a competitor, the George Irish Paper Company. Clark Paper then sued to enforce the non-compete clause.

    Procedural History

    The trial court granted an injunction preventing Stenacher from working for Clark Paper’s competitor. The appellate division affirmed. The New York Court of Appeals reversed the lower courts’ decisions and dismissed the complaint.

    Issue(s)

    Whether a non-compete agreement is enforceable against a former employee when the employment contract lacks a definite term of employment and the employee’s services were not special, unique, or involved trade secrets.

    Holding

    No, because the underlying employment contract lacked a definite term, and the employee’s services were not unique or special, nor did he possess any trade secrets that could harm the employer’s business.

    Court’s Reasoning

    The Court of Appeals reasoned that the employment contract was incomplete because it failed to specify a definite term of employment. The agreement stated the employment period would be mutually agreed upon, but no such agreement was ever reached. This made the non-compete clause, which was tied to the expiration of the contract, unenforceable. Moreover, the court found that Stenacher’s services as a wrapping paper salesman were not special or unique. The court stated that “[t]here was nothing peculiar in the nature of the work undertaken for the plaintiff by the defendant.” The customers were easily identifiable through directories, and there were no secret customer lists. Critically, the court emphasized that the company’s true motivation was to prevent Stenacher from using the general skills he acquired during his employment elsewhere, which is an unreasonable restraint of trade. The court quoted Herbert Morris, Ltd., v. Saxelby, stating that an employer is “undoubtedly entitled to have his interest in his trade secrets protected…[b]ut freedom from all competition per se…he is not entitled to be protected against.” The court concluded that injunctions enforcing non-compete agreements are reserved for “exceptional cases where, by reason of the peculiar or extraordinary character of the services a violation of an agreement will cause injury to the employer for which an action at law will afford no adequate remedy.”