Blogs

Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: June 1, 2020

Non-Recruitment Provision Reasonable, and Thus Enforceable

On April 19, 2020, Justice Masley of the New York County Commercial Division issued a decision in First Am. Fin. Corp. v. Verisk Analytics, Inc., 2020 NY Slip Op. 31288(U), holding that a non-recruitment provision in an agreement to sell a business was reasonable, and thus enforceable, explaining:

Plaintiffs also argue that they are entitled to indemnification for defendants’ breach of section 6.11 (b) of the PA, which prohibits defendants from soliciting and hiring certain specified Key Employees from lnterthinx or ISO for two years after the Closing. Plaintiffs maintain that Verisk solicited and hired Shane DeZilwa, one of the named Key Employees, only seven months after the Closing. Plaintiffs assert that they are entitled to any benefits realized by Verisk after hiring DeZilwa.

To support their request for summary judgment on their claim, plaintiffs offer, among other things, a March 13, 2015 letter, in which counsel for defendants state,

We recognize that a Verisk company hired Mr. DeZilwa. It was nothing more than a simple mistake. Verisk has addressed the internal issue that led to the mistake and it should not happen again. It does not believe, however, that your client has suffered any compensable monetary damage that fulfills the requirements of Section 9.2 of the (PA]

In opposition, defendants deny soliciting DeZilwa, and assert that plaintiffs fail to show that defendants used wrongful means to hire him. Defendants also argue that plaintiffs knew that DeZilwa was designated as a Key Employee under the PA, but did nothing to stop him from rejoining Verisk after plaintiffs learned of his hiring. Thus, defendants assert that plaintiffs waived any rights complain about DeZilwa departing and rejoining Verisk. Defendants also argue that the restrictive covenant in section 6.11 (b) of the PA is unenforceable because it does not protect any legitimate interests of FAFC. Defendants further assert that plaintiffs cannot show any damages resulting from Verisk’s hiring of DeZilwa.

Although DeZilwa was not bound by any restrictive covenant as an at-will employee, under section 6.11 {b) of the PA, FAFC bargained explicitly to protect itself from the loss of Key Employees to Verisk after the purchase of lnterthinx. The submissions make clear that Verisk nevertheless hired DeZilwa less than two years after the Closing. On June 8, 2017, DeZilwa testified that in the fall of 2014, he reached out to nonparty Verisk Innovative Analytics to inquire about an opportunity after hearing from a former employee that he was leaving the company. He also testified that he heard directly from the employee and had not seen any advertisements for the position.

New York courts recognize the enforceability of restrictive covenants. Non-recruitment covenants are subject to reasonableness scrutiny because, while they are anti-competitive in nature, they are inherently more reasonable and less restrictive than noncompete covenants. A non-recruitment covenant, as opposed to a noncompete covenant, does not infringe on an employee’s ability to engage in an occupation. Furthermore, non-recruitment covenants do not affect in the same way the powerful considerations of public policy which militate against sanctioning the loss of
livelihood.

The non-recruitment clause is enforceable because it is reasonable in scope and imposes no meaningful burden on Verisk. The plain language of section 6.11 (b) of the PA is susceptible to only one interpretation: Verisk agreed not to solicit or hire certain Key Employees of lnterthinx, including Shane DeZilwa, for two years after the Closing of the PA, unless the Key Employee responds to a general solicitation. Shane DeZilwa testified that he had not seen any advertisements for the position, and there is no showing that Shane DeZilwa responded to a general solicitation before being hired by Verisk. Hiring DeZilwa, even without solicitation, clearly violates section 6.11 (b) of the PA.

Thus, plaintiffs have established entitlement to summary judgment on the issue of liability for their claim that indemnification based on defendants’ breach. Defendants assertions that FAFC waived its rights under the restrictive covenant and that the restrictive covenant is unenforceable lack merit and are insufficient to defeat summary judgment. Nevertheless, the dispute between the parties as to the Loss incurred by FAFC as a result of the breach warrants a trial on that issue.

(Internal quotations and citations omitted).

Non-compete provisions and non-recruitment provisions (discussed above) are subject to limitations, as this decision discusses. However, courts will in appropriate circumstances enforce them. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the enforcement of a non-compete or non-recruitment provision.

Click here to subscribe to this or another of Schlam Stone & Dolan’s blogs.

View posts