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Current Developments in the Commercial Divisions of the
New York State Courts
Posted: July 30, 2015

Restrictive Covenant Made in Connection With Sale of Business Enforced by Stricter Standard

On July 10, 2015, the Fourth Department issued a decision in Genesee Valley Trust Co. v. Waterford Group, LLC, 2015 NY Slip Op. 06071, holding that a restrictive covenant limiting the employment of a business’s seller is enforced more strictly, explaining:

Because [the defendant] sold his GVT shares to CNC, and CNC acquired GVT’s goodwill in the transaction, the enforceability of section 7.1 against [the defendant] should be evaluated pursuant to the standard applicable to the sale of a business rather than the stricter standard of reasonableness applicable to employment contracts. A covenant restricting the right of a seller of a business to compete with the buyer is enforceable if its duration and scope are reasonably necessary to protect the buyer’s legitimate interest in the purchased asset, and we conclude that the scope and one-year duration of section 7.1 are reasonably necessary, as applied to [the defendant], to protect CNC’s legitimate interest in GVT’s goodwill, except relative to clients, if any, that [the defendant] independently recruited to GVT after it was sold to CNC. Absent anticompetitive misconduct by the employer not present here, a restrictive covenant that is overbroad in some respect is partially enforceable to the extent necessary to protect the employer’s legitimate interest and, with that limited exception, section 7.1 is prima facie enforceable against [the defendant].

(Internal quotations and citations omitted) (emphasis added).

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