Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: May 25, 2017

Restrictive Covenant Reasonable on Facts Alleged

On May 16, 2017, Justice Singh of the New York County Commercial Division issued a decision in Douglas Elliman LLC v. Steinberg, 2017 NY Slip Op. 31047(U), refusing to dismiss a restrictive covenant as unreasonable, explaining:

In New York, 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. A violation of any prong renders the covenant invalid. Moreover, the courts have limited an employer interests under the first prong of the common-law rule to the protection against misappropriation of the employer’s trade secrets or of confidential customer lists, or protection from competition by a former employee whose services are unique or extraordinary.

Here, the non-solicit clause is reasonable. Taking the allegations in the complaint – as the court must on a motion to dismiss – to be true, Douglas Elliman has a legitimate interest in
protecting its customer relationships and the goodwill created and maintained at its own expense. Additionally, Douglas Elliman’s agents are privy to valuable and substantial proprietary information, including new developments in the initial planning stages and confidential business strategies for those new developments created by Douglas Elliman.

. . .

The non-solicit is narrowly tailored – Steinberg and Senequier are allowed to work for Compass, to solicit any client or potential client, and even to hire any Douglas Elliman’s broker or agent that approaches them independently. The restriction is limited to the solicitation of Douglas Elliman’s brokers and agents for 18 months· from the time the Commission Agreement was signed. This period is a reasonable time for a non-solicit covenant.

The provision even allows individual(s) to first initiate communications with either or both of Steinberg and/or Senequier. Although there is no geographic restriction, defendant’s claim that the non-solicit is a “worldwide restrictive covenant” is an exaggeration. A review of Douglas Elliman’s public website indicates that it has offices in one country (the United States) and six states. Moreover, in New York, the courts have expressly recognized and applied the judicial power to sever and grant partial enforcement for an overbroad employee restrictive covenant. Even if the restrictive covenant is found to be unenforceable, an exception to the general rule that non-compete provisions are disfavored may apply here. Under the employee choice doctrine where an employee voluntarily resigns and the “employer conditions receipt of post-employment benefits upon compliance with a restrictive covenant the restriction will be enforced without regard to reasonableness. Here, after Steinberg and Senequier resigned, Douglas Elliman agreed to make substantial payments to them conditioned upon a post-termination non-solicit provision. Steinberg and Senequier had a choice not to accept the payment and solicit Douglas Elliman’s agents. Their decision to accept payments may result in the nonsolicitation agreement being enforceable.

(Internal quotations and citations omitted).

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