Presented By: Howard M. Rubin, Esq.

Transcription

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2 Presented By: Howard M. Rubin, Esq. Practice Areas: Real Estate Brokerage Issues, Commercial Litigation and Business Transactions ext

3 TYPES OF RESTRICTIONS AVAILABLE Common restrictive covenants include: 1. Non-compete clause 2. Client non-solicitation clause 3. Client non-acceptance clause 4. Employee non-solicitation clause 5. Garden leave clause 6. Confidentiality clause

4 1. Non-Compete Clause A non-compete clause prevents an employee from competing with their employer during the course of their employment and for a reasonable period of time thereafter. In New York and other common law states, non-compete clauses (and other restrictive covenants) are enforceable if they are reasonably necessary to protect legitimate interests of the employer, are reasonable in scope and duration, do not impose undue hardship on the employee, and are not injurious to the public. BDO Seidman v. Hirshberg, 93 N.Y.2d 382, (1999); Reed Roberts Assocs., Inc. v. Strauman, 40 N.Y.2d 303, 307 (1976).

5 2. Client non-solicitation clause. A client non-solicitation clause prevents an employee from soliciting clients of their employer during the course of their employment and for a reasonable period of time thereafter. Under New York law, employers have a legitimate interest in preventing former employees from exploiting the goodwill of a client, which had been created and maintained at the employer s expense. BDO Seidman, 93 N.Y.2d at 392. A client non-solicitation clause should normally be limited to clients with which the employee had business dealings. BDO Seidman, 93 N.Y.2d at ; Mallory Factor, Inc. v. Schwartz, 146 A.D.2d 465, (1st Dep t 1989).

6 3. Client Non-Acceptance Provision Some employment agreements include provisions which seek to prevent an employee from servicing or accepting business from a client of their former employer. Courts tend to analyze these non-acceptance provisions as noncompetes, which must be reasonable and for the purpose of protecting legitimate business interests. See Leon M. Reimer & Co., P.C. v. Cipolla, 929 F. Supp. 154, 157 (S.D.N.Y. 1996); Marsh USA Inc. v. Karasaki, No. 08 Civ (JGK), 2008 WL , *18 (S.D.N.Y. 2008).

7 4. Employee non-solicitation clause. An employee non-solicitation clause prevents an employee from soliciting co-workers during the course of their employment and for a reasonable period of time thereafter. New York generally recognizes the enforceability of employee nonsolicitation clauses. Global Telesystems, Inc. v. KPNQwest, N.V., 151 F. Supp. 2d 478, 482 (S.D.N.Y. 2001); Renaissance Nutrition Inc. v. Jarrett, 08-CV-800S, 2012 WL 42171, *1 (W.D.N.Y. Jan. 9, 2012).

8 5. Garden Leave Provisions A garden leave provision requires that notice be given prior to an employee s termination of the employment relationship. Garden leave provisions provide that employment continues through the notice period (with attendant fiduciary duties). Garden leave provisions generally permit the employer to alter the employee s duties or to direct the employee to stay away from the place of business for the duration of the notice period. The employee continues to be paid by the employer and to receive other employment benefits during the notice period.

9 5. Garden Leave Provisions (continued) In enforcing garden leave provisions, New York courts have tended to treat the notice period as a non-compete period and have recognized that an employee may not be compelled to serve an employer against their will. See e.g., Deutsche Bank Sec. Inc. v. Zelnick, Index No. 10/ (N.Y. Sup. Ct., Apr. 2010); Natsource LLC v. Paribello, 151 F. Supp. 2d 465 (S.D.N.Y. 2001). The enforceability of garden leave provisions is still open to debate. Credit Suisse failed to enforce a 30 day notice period to prevent an employee from joining a competitor. Credit Suisse Securities (USA) LLC v. Ebling, 06 Civ , 2006 WL (S.D.N.Y. Nov. 27, 2006). Other jurisdictions have questioned enforceability. See e.g., Bear, Stearns & Co. Inc. v. Sharon, 550 F. Supp. 2d 174 (D. Mass. 2008).

10 6. Confidentiality Provision Protects against the use or disclosure of employer s confidential information. Though the common law imposes a duty on an employee to maintain the confidences of its employer, confidentiality provisions are common in employment agreements. They serve the useful purpose of defining what the employer considers to be proprietary and what the employee should understand cannot be disclosed to outsiders.

11 Consideration Where a restrictive covenant is executed as part of an original employment agreement at the time employment is accepted, the offer of employment is considered adequate consideration for the covenant. See John G. Bryant Co., Inc. v. Sling Testing and Repair, Inc., 471 Pa. 1 (1977). Continued employment alone will likely constitute sufficient consideration when an existing employee enters into an agreement containing restrictive covenants in New York. See e.g., Zellner v. Conrad, 589 N.Y.S.2d 903 (1992);

12 Consideration Forms of Consideration: Promotion Increase in Annual Compensation Signing Bonus Continued or New Access to Confidential/Trade Secret Information Additional Job Training Continued or New Access to Customer Relationships Fixed Term of Employment

13 Manner of Termination If an employee voluntarily quits or is terminated for good cause, courts are more likely to find a restriction clause agreement enforceable. Some courts in New York had moved toward a bright line rule that if an employee is terminated without cause, restrictive covenants will be deemed unenforceable, relying on a line of cases that had originated with Post v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 48 N.Y.2d 84, 89(1979). This bright line approach was called into question by the Second Circuit in Hyde v. KLS Prof l Advisors Group, 500 Fed. Appx. 24 (2d Cir. 2012). The Second Circuit stated that Post v. Merrill Lynch had been extended beyond its holding by the lower court and that Post v. Merrill Lynch did not create a per se rule that restrictive covenants are unenforceable against an employee who has been terminated without cause.

14 Hiring Employees With Post-Employment Restrictions What steps should an employer take to avoid a dispute when hiring an employee who is subject to restrictive covenants at their prior place of employment?

15 Hiring Employees With Post-Employment Restrictions 1. Determine whether applicant is subject to agreement or policy that restricts conduct after leaving the employer and request copies. 2. If an applicant is subject to a contractual restraint or corporate policy restraining post-employment conduct, a review and assessment of the enforceability and/or applicability of the restraint should be made. 3. Determine whether notice of termination is required, whether it has been given and what the applicant s obligations are during notice period. 4. Do not request and do not accept confidential or proprietary information belonging to an applicant s employer. Advise applicants that should not remove or any confidential or proprietary of their employer and that the company does not want and will not receive such material. 5. In most instances applicants with contractual restraint issues should be encouraged to consult their own counsel with regard to any risks associated with changing employment.

16 Liquidated Damages Permits a calculations of damages without the need for proof of the value of the actual damages. Cannot be a penalty, but must have some relation to a calculation of projected damage. BDO Seidman v. Hirshberg.

17 ADVANTAGES OF AVAILABLE FORUMS State Supreme Court Arbitration American Arbitration Association REBNY

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