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.”