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Current Developments in the Commercial Divisions of the
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Posted: January 16, 2016

Court Refuses to Enforce Non-Compete Agreement

On January 5, 2016, Justice Demarest of the Kings County Commercial Division issued a decision in Aqualife Inc. v. Leibzon, 2016 NY Slip Op. 50002(U), refusing to enforce non-compete agreements.

In Aqualife, the plaintiff sought “damages for breach of contract, tortious interference with contract, and unjust enrichment, and to impose a constructive trust” relating to the violation of restrictive covenants agreed to by former employees of the plaintiff. In deciding the defendants’ motion for summary judgment, the court focused on the enforceability of the covenants, which provided:

To the extent permitted by the laws of the State of New York, I shall not, during my employment (or other relationship with [plaintiff] as agreed) and for a period of two (2) years immediately following my termination, directly or indirectly, for myself or on behalf of any other person, partnership, corporation, or association, either as an employee, contractor, service provider, counselor or otherwise: (i) participate or engage in production, distribution, sale and/or advertisement of products similar to products produced and distributed by [plaintiff]; i.e. water purification and filtration systems and equipment; (ii) solicit or treat any customers who have received services from [plaintiff] or purchased products from [plaintiff] prior to or during the term of this agreement; (iii) act in any way that could be harmful to the goodwill or business of [plaintiff].

The court began its analysis by looking at the standard for the enforceability of restrictive covenants in employment agreements:

Restrictive covenants not to compete are justified by the employer’s need to protect itself from unfair competition by former employees. However, generally, negative covenants restricting competition are enforceable only to the extent that they satisfy the overriding requirement of reasonableness.

The modern, prevailing common-law standard of reasonableness for employee agreements not to compete applies a three-pronged test. Under this three-pronged test, a restraint is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public.

. . . In this context a restrictive covenant will only be subject to specific enforcement to the extent that it is reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee. This rule is strictly applied to limit enforcement of broad restraints on competition.

(Internal quotations and citations omitted) (emphasis added). Applying those standards to the covenants at issue, the court found them to be unenforceable.

First, it found them to be unreasonable because they “contain[ed] no geographical limit whatsoever.”

Second, it found them unreasonable because “restrictive covenants are disfavored by the courts and are enforceable only to the extent necessary to protect the employer from unfair competition which stems from the employee’s use or disclosure of trade secrets or confidential customer lists. Here, plaintiff has failed to establish that the individual defendants possessed a trade secret or confidential information.” (Internal quotations and citations omitted).

Third, it rejected the argument that the covenants were enforceable to prevent the use of customer lists because “where the employer’s past or prospective customers’ names are readily ascertainable from sources outside its business, trade secret protection will not attach and their solicitation by the employee will not be enjoined.”

Fourth, the court held that “the restrictive covenants are overly broad since they extend to all customers who received services from plaintiff or purchased products from plaintiff prior to or during the term of the individual defendants’ [agreements], even those defendants had never met, did not know about, and for whom they had done no work.”

The court rejected the plaintiff’s argument “that even if the restrictive covenants are overbroad, they should nevertheless be enforced [because] the language ‘to the extent permitted by the laws of the State of New York’ expressed its intention that the restrictive covenants be enforced to the maximum extent permitted by law, and that the court should, therefore, interpret the restrictive covenants consistent with this intent and partially enforce them.” The court explained:

The determination of whether an overly broad restrictive covenant should be enforced to the extent necessary to protect an employer’s legitimate interest involves a case specific analysis, focusing on the conduct of the employer in imposing the terms of the agreement. Partial enforcement may be justified if the employer demonstrates, in addition to showing that it has, in good faith, sought to protect a legitimate business interest, consistent with reasonable standards of fair dealing, an absence of overreaching, coercive use of dominant bargaining power, or other anti-competitive misconduct. Factors weighing against partial enforcement are the imposition of the covenant in connection with hiring or continued employment – – as opposed to, for example, imposition in connection with a promotion to a position of responsibility and trust – – the existence of coercion or a general plan of the employer to forestall competition, and the employer’s knowledge that the covenant was overly broad.

Here, it is undisputed that plaintiff, who was in a superior bargaining position, required the individual defendants to sign the IBO Agreements and the Salesperson Agreements containing the restrictive covenants as a condition of their initial employment as salespersons. Thus, after considering the relevant factors, the court finds that plaintiff has failed to demonstrate that partial enforcement of the restrictive covenants is warranted.

(Internal quotations and citations omitted).

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