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Posted: January 21, 2016

Court Enforces Restrictive Covenant in Employment Agreement

On January 7, 2016, Justice Kornreich of the New York County Commercial Division issued a decision in BDC Management Services, LLP v. Singer, 2016 NY Slip Op. 30039(U), enforcing a restrictive covenant in an employment agreement.

In BDC Management Services,

[t]he individual defendants, Todd and Scott, are brothers (collectively, the Singers). Todd is a dentist. Scott is an attorney. Todd owns several dental practices in New Jersey (the Practices). Prior to the involvement of plaintiffs, the Singers owned Brighter Solutions LLC (DSO), a company that provided non-clinical services to the Practices, such as marketing and human resources. In 2011, the Singers sought to sell an equity stake in their DSO so they could use the sale proceeds to expand the Practices. Plaintiff Topspin, a “control fund”, was interested in investing, but only if it could control the DSO. The parties agreed that Topspin would purchase a controlling interest in the DSO, Scott would be named CEO, and Todd, in addition to remaining the owner of the Practices (which only he, as a licensed dentist, was permitted to do under New Jersey law), would be named President and Chief Clinical Officer. The Singers would also draw salaries set forth in their employment contracts.

In connection with the sale, the Singers agreed not to “solicit[] or hir[e] the Company’s employees within two years of the termination of the Singers’ employment at the Company” or “from operating a competing DSO . . . within 75 miles of the Practices for the longer of 4 years after closing or 18 months after the termination of the Singers’ employment.” The defendants subsequently violated those restrictions. The defendants argued that the court should not grant the plaintiff’s motion for a preliminary injunction enforcing the restrictive covenants because the covenants were unenforceable. The trial court rejected this argument and granted the requested injunction, explaining:

It is . . . well settled that courts should issue injunctions to enforce reasonable restrictive covenants where doing so is necessary to ensure a wrongdoer does not undermine the consideration in an agreement for the sale of a business. The Court of Appeals explained:

Where there is a sale of a business, involving as it does the transfer of its good will as a going concern, the courts will enforce an incidental covenant by the seller not to compete with the buyer after the sale. This rule is grounded, most reasonably, on the premise that a buyer of a business should be permitted to restrict his seller’s freedom of trade so as to prevent the latter from recapturing and utilizing, by his competition, the good will of the very business which he transferred for value. This court has applied the ‘sale of a business’ rationale where an owner, partner or major stockholder of a commercial enterprise has sold his interest for an immediate consideration which was, in part, payment for the good will of the business, in terms of continuity of place and continuity of name. The sole limitation on the enforceability of such a restrictive covenant is that the restraint imposed be reasonable, that is, not more extensive, in terms of time and space, than is reasonably necessary to the buyer for the protection of his legitimate interest in the enjoyment of the asset bought.

In the ordinary employment context (concerning, for instance, improper poaching and moving to a competing firm), restrictive covenants are enforceable only when they meet established reasonableness criteria. Moreover, New York’s public policy strictly prohibits the enforcement of non-compete clauses when the employee is not a member of a learned profession or does not render services that are unique or extraordinary unless the employee is misappropriating trade secrets or confidential information. But, as Purchasing Assocs. and its progeny make clear, the rules are different when the restrictive covenant is part of the consideration for the sale of a business. When a claim to enforce a restrictive covenant is based on the sale of a business and accompanying goodwill, defendant’s violation of the covenant establishes irreparable injury. Hence, contrary to defendants’ contentions, plaintiffs’ entitlement to injunctive relief to enforce the Acquisition Agreement’s restrictive covenants is not precluded by the usual rule that injunctive relief should not be granted when a monetary judgment can sufficiently compensate plaintiff.

(Internal quotations and citations omitted) (emphasis added). The court went on to hold that the restrictions in the covenants were reasonable and, for that reason, enforced them.

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