A recent decision from the United States District Court for the Southern District of New York, Reed Elsevier Inc. v. Transitions Holding Co., Inc., provides a useful overview of New York law on restrictive covenants. At issue was an employee non-poach agreement between two companies entered as a result of a settlement in the context of the earlier hiring of another senior executive with a non-compete. Not an unusual situation. What is somewhat unique is that the alleged “poaching” occurred in the context of the acquisition of the restricted employee’s company – – not the recruitment of the restricted employee. The Court determined not to enforce the non-hire finding that the plaintiff was unable to demonstrate that it would meet any of the four recognized “legitimate business interests” necessary to overcome the strong presumption of unenforceability of restrictive covenants under New York law.
Although the facts and circumstances presented in this case are rather unique, the Court’s review of the applicable New York case law to obtain enforcement could be quite useful to practitioners in the area. New York courts have recognized four legitimate interests that may be asserted to support a restrictive covenant: (1) protection of trade secrets, (2) protection of confidential customer information, (3) protection of the employer’s client base, and (4) protection against irreparable harm where the employee’s services are unique or extraordinary. Cenveo Corp. v. Diversapack LLC, 09 Civ. 7544(SAS), 2009 WL 3169484, at *7 (S.D.N.Y.2009) (citing BDO Seidman v. Hirshberg, 93 N.Y. 382, 388-89 (1999)).
The Reed Elsevier Court then proceeds to do the analysis under these elements (other than customer information which was not applicable). Regarding (1) protection of trade secrets, the Court noted that the confidentiality restriction in the employee’s agreement served to provide that protection and that an enhanced ability to market a product alone was insufficient to create a protected interest. Element (3), protection of the employer’s client base, required a showing that “the employee must work closely with the client or customer over a long period of time, especially where his services are a significant part of the total transaction.” In order to meet the fourth element, unique or extraordinary employee, the Court observed two sets of circumstances to constitute uniqueness. The first category applies to types of employment where the employee’s services depend on the employee’s special talents; examples include “musicians, professional athletes, actors, and the like.” Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 70 (2d Cir. 1999). The second, more recently recognized category, applies to employees who work as brokers, traders, or salespersons; the courts have found such employees’ services to be unique based on their unique relationship with the customers with whom they deal. Id. at 71; see also Maltby v. Harlow Meyer Savage, Inc., 166 Misc.2d 481, 633 N.Y.S. 926 (Sup.Ct.N.Y.Cnty.1995), aff’d 637 N.Y.S.2d 110 (1st Dep’t 1996); Natsource LLC v. Paribello, 151 F.Supp.2d 465, 469 (S.D.N.Y.2001).
Finally, the Court addressed the argument that risk of employee attrition should be considered a legitimate interest and rejected that concept finding that at least federal courts applying New York law have consistently determined that the four factors alone create the exclusive list to be considered.
While one might not agree with the Court’s application of the facts to the law, its recitation of the applicable law serves as a good guidepost for any restrictive covenant analysis under New York law.