New York Law Review

Tag: restraint of trade

  • Barclay’s Ice Cream Co. v. Local No. 757, 41 N.Y.2d 270 (1977): State Court Authority Over Union Actions Restraining Interstate Trade

    Barclay’s Ice Cream Co. v. Local No. 757, 41 N.Y.2d 270 (1977)

    A state court is not preempted by federal labor law from enjoining a union’s coercive activity that aims to establish an embargo on the flow of out-of-state goods into the state when the union’s actions lack a legitimate labor objective and unlawfully restrain trade.

    Summary

    Barclay’s, a New Jersey corporation, distributed ice cream manufactured in Pennsylvania and Ohio in New York. Local 757, representing ice cream manufacturing employees in New York City, unsuccessfully attempted to persuade Barclay’s to buy ice cream exclusively from designated New York manufacturers. Subsequently, Local 757 initiated a consumer boycott by picketing retail stores selling Barclay’s ice cream and distributing literature urging consumers to avoid Barclay’s products, falsely claiming substandard labor conditions. The Appellate Division restrained the union’s actions, and the Court of Appeals addressed whether this was permissible under the doctrine of federal preemption. The court held that the state court had the power to issue the injunction because the union’s actions constituted an unlawful restraint on trade lacking a legitimate labor objective and thus fell outside the scope of exclusive federal jurisdiction.

    Facts

    Barclay’s Ice Cream Co., a New Jersey corporation, distributes ice cream manufactured in Pennsylvania and Ohio to customers in New York and New Jersey.
    Local 757 represents employees engaged in ice cream manufacture in the New York City area.
    Local 757 unsuccessfully tried to persuade Barclay’s to purchase all its ice cream from certain designated manufacturers within New York.
    Local 757 initiated a consumer boycott, picketing retail stores selling Barclay’s ice cream and distributing literature urging consumers not to buy Barclay’s products, which were described as having been manufactured outside New York “under sub-standard labor conditions.” This description was found by the Appellate Division to be without basis in the record.
    The sole objective of Local 757’s action was “to protect our members’ jobs”—i.e., by compelling Barclay’s to purchase locally produced ice cream rather than that manufactured in Pennsylvania and Ohio.

    Procedural History

    Barclay’s moved for a preliminary injunction, which was initially denied by the Special Term.
    The Appellate Division reversed the Special Term’s order and restrained the defendants from picketing and distributing written material.
    The case was removed to the United States District Court for the Southern District of New York but was remanded to state court.
    The Court of Appeals granted leave to appeal from the Appellate Division’s nonfinal order, certifying the question of whether the order was properly made.

    Issue(s)

    Whether the National Labor Relations Act preempts a state court from enjoining a union’s activities that restrain trade and lack a legitimate labor objective.

    Holding

    No, because the union’s consumer boycott to force Barclay’s to abandon out-of-state suppliers constitutes an unlawful restraint of trade and falls outside the scope of the National Labor Relations Board’s exclusive jurisdiction.

    Court’s Reasoning

    The court reasoned that the critical question is whether the activity of the local is “arguably” subject to the provisions of the Labor Management Relations Act. It is not enough that Local 757 itself asserts that its conduct comes within the National Labor Relations Board ambit. The court stated, “If the activity is ‘a merely peripheral concern of the Labor Management Relations Act’ the jurisdiction of the State to regulate the activity in furtherance of local feeling and responsibility remains undiminished.” The court concluded that the consumer boycott planned by Local 757 falls outside the scope of the exclusive jurisdiction of the National Labor Relations Board because no legitimate objective of labor union activity is involved. The sole objective and consequence of the intended consumer boycott is to force Barclay’s to abandon its out-of-State suppliers and turn exclusively to local sources. This imposition is an unlawful purpose contrary to the public policy of the state, which the courts have the power to enjoin. The court emphasized, “We reject the proposition that under the doctrine of pre-emption our State courts must defer in this case to the exclusive competence of the National Labor Relations Board and thus are powerless to protect against the unlawful coercive activity designed by this union to erect an embargo on the flow of out-of-State goods into New York.”

  • 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.

  • 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.”