United States: I Can't Call Who? Employee Nonsolicitation Of Clients Covenants Under New York Law

Last Updated: January 8 2016
Article by Evan Belosa

Most Read Contributor in United States, September 2017

I. Introduction

The situation happens with regularity: an employee's employment ends, for any of a variety of reasons. The employee's first thought is to get another job, call the clients of his former employer, many of whom have closely worked with him, and get back in the swing of business. Perhaps some of those clients have even called him already, offering sympathy, or asking his future plans. But in the stack of departure papers given to the employee, there is a reminder to abide by a nonsolicitation covenant contained in a governing employment document, often executed years prior. The employee and the employer, not surprisingly, often have contrary views on the applicability and enforceability of such a covenant; those contrary views can often lead to conflict and eventually, litigation.

Battles over nonsolicitation covenants are not personal vanity or blind pique. Personal contacts, both with clients and fellow service providers, comprise an increasingly valuable component of an employee's overall worth. As the Ameri­can macroeconomic model has skewed toward high-value services rather than blue-collar labor, the value of an employee's contacts with clientele has dramati­cally risen. That value is often noted by employers, who seek to retain, as best as possible, the value of the employee's contacts long after he or she departs. With employee mobility as high as ever, the validity, enforcement, and interpretation of nonsolicitation covenants has accordingly increased in importance.

Despite the importance of solicitation, the focus of restrictive covenant litigation and scholarly and industry commentary remains on noncompetition, rather than nonsolicitation covenants. Employers have traditionally included — and employees have traditionally focused on and fought — noncompetition covenants, and so the lion's share of restrictive covenant litigation has turned on the interpretation of non­competition covenants. While an entire doctrinal field has developed in response, the interpretation of nonsolicitation covenants has languished behind; nonsolicitation covenants have not been considered nearly as significant a focus of doctrinal law or practical interpretation. Yet, given both the new economic paradigm, and the disinclination of courts to deprive workers of their economic mobility, we can expect a new surge of focus on the protection of the employer's interests through the use of nonsolicitation, rather than noncompetition covenants. Accordingly, employees who sign agreements containing nonsolicitation covenants, and the employers who use them, should pay close attention to the prospective application of the words on the page.

By the careful study of New York common law, this ar­ticle answers some practical questions commonly asked by both employers and employees and in so doing, provides a framework by which drafters of nonsolicitation covenants can focus adroitly on the impact of the drafted words so as to best protect the interest of their respective clients. For purposes of this article, we are focused entirely on nonsolicitation covenants in employment agreements or other governing employment documents, rather than on covenants which may apply in to the sale of a business or between entities, such as in a non-disclosure agreement.

II. What Is a Nonsolicitation Covenant?

Before we can discuss the parameters, we need to know what we are discussing in the first place. A nonsolicitation covenant, broadly, prohibits employees from soliciting or interfering with the relationship between the employer and the employers' workers and customers after the termina­tion of employment. By way of example, a basic provision may state something along the lines of, "I agree that during my employment, and for one year thereafter, I shall not, without the written permission of the Company, directly or indirectly solicit or attempt to solicit, divert, or take away any employee, consultant, client, or customer of the Company." Some nonsolicitation covenants skew more broadly, also covering prospective clients. Others also at­tempt to restrict the acceptance of business from specific clients, regardless of who initiated contact. Nevertheless, regardless of the specific verbiage, all belong to the same basic subset of restrictive covenant that prohibits seeking the business of clientele or individuals which the employer believes are the property of the employing entity. For the purposes of this article, we are concerning ourselves solely with the more economically critical version of nonsolici­taiton clause – those that refer to clientele.

III. The Test for Validity — Reed Roberts and BDO Seidman

Like their cousins restricting competition, nonsolicitation covenants are governed by the general jurisprudence of overall restrictive covenants. There are, however, subtle differences. While non-solicitation covenants are subject to the same analysis, they are traditionally enforced more often, the rationale being that precluding the employee from soliciting or working on any account which the em­ployee had worked on previously, and particularly when that employee had no previous contact with that account, is far less onerous and anticompetitive than a more restric­tive preclusion against working at all.1

The governing jurisprudence, refined over time, posits that restrictive covenants are subject to careful judicial scrutiny and are governed by what the Court of Appeals described as an "overriding requirement of reasonable­ness."2 In the landmark case of BDO Seidman v. Hirsch­berg, decided in 1999, the New York Court of Appeals expounded upon the reasonableness standard as follows:

The modern, prevailing common-law standard of reasonableness for employee agreements not to compete applies a 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.3

In applying this standard, "[c]ourts must weigh the need to protect the employer's legitimate business interests with the employee's concern regarding the possible loss of liveli­hood, a result strongly disfavored by public policy in New York."4 Although some nonsolicitation litigation focuses on the length of time of the covenant, or the geographic restrictions, the majority of the arguments between liti­gants, and hence what the Court must decipher, is whether the interest the employer seeks to protect is "legitimate" as required in the first prong of the test. A legitimate interest will, absent excessive duration or unique circumstances, usually lead to enforcement. While "legitimate business interests" seems at first blush like a wide category, in reality, legitimate business interests are limited under governing common law. In fact, "an employer may assert only four types of `legitimate interests':5 (1) protection of trade secrets; (2) protection of confidential customer information; (3) protection of an employer's client base; and (4) protection against irreparable harm where an employee's services are unique or extraordinary." This four part test is the lodestar of restrictive covenant analysis for the purposes of assessing the validity of nonsolicitation covenants. If there is no legitimate business interest, there can be no enforcement. The outlines of conflict become clear through the haze: the battle is joined as employers endeavor to show that the words of the applicable cov­enant are necessary to protect a legitimate interest, itself imperiled by the specific factual circumstances of the case at issue; the employee, naturally often seeks to attack the covenant as overbroad or unnecessary for any legitimate interest. Within this clash the courts have developed the jurisprudence analyzed in this article.

The four part test was originally, under Reed Roberts Assocs., Inc. v. Strauman, a three part test. In Reed Roberts, the court recognized the "legitimate interest an employer has in safeguarding that which has made his business suc­cessful and to protect himself against deliberate surrepti­tious commercial piracy."6 Accordingly, the Court stated that restrictive covenants were enforceable to prevent the disclosure of trade secrets or customer confidential information, or where the employee's services are unique and extraordinary.7 Nowhere was the protection of the client base said to be a valid interest. Twenty-three years later, and perhaps in a nod to the diversifying knowledge economy roaring at the time, the Court of Appeals in BDO Seidman considered the reasonableness of an agree­ment requiring the departed employee to compensate the former employer for servicing certain clientele. The operative document was a Manager's Agreement in which the employee acknowledged that he would compensate BDO Seidman for any former clients he serviced while at his new employer. BDO urged that the court recognize its interest in protecting its entire customer base, claim­ing that it was entitled to the fees stated in the Manager's Agreement. While rejecting the expansive interest urged on it by the plaintiff employer – explored in detail in Section IX of this Article -- -the Court nonetheless added a fourth legitimate interest, holding that the employer "has a legitimate interest in preventing former employees from exploiting or appropriating the goodwill of a client or customer, which had been created and maintained at the employer's expense, to the employer's competitive detriment."8 The interest, importantly, is independent and distinct from the others: in BDO, the employee was neither unique nor, as the court noted, was there any "evidence that the employee obtained a competitive advantage by using confidential information."9

While the overall reasonableness test, therefore, was devised in the application of noncompetition covenants, it has found a home in analyzing nonsolicitation covenants as well. Of the four legitimate interests, it is the newest one – protection of an employer's client base, as added by the BDO court—which New York courts consistently utilize to uphold justified restraints on solicitation. The courts have held in general, that "whether viewed con­ceptually as a type of special service, an offshoot from an employer's interest in safeguarding customer information, or as a distinct cognizable interest, it is now clear that under New York law an employer also has a legitimate interest in protecting client relationships developed by an employee at the employer's expense."10 The rationale used by courts is that in certain circumstances, the potential adverse effect of the employee's exploitation of his or her relationships with clients on the employer's ability to retain the clients are sufficient to support the enforcement of a duly bargained for restriction. As the employer has made introductions and connections to clients, so the employer may legitimately contract to protect the rights to retain those relationships as property of the institution, not the departing individual. At a minimum, courts will consider the desire to retain the client's "goodwill" as a legitimate business interest.11

Yet even as the Court will find such legitimate interests, there are many situations where the facts of a specific dispute do not give rise to a protectable interest. It is to these differences that we turn.

IV. Does the Covenant Protect Specific Relationships?

The Courts will not simply find a legitimate interest in protecting all client relationships, which would stretch the test beyond that which was intended by the BDO court. 12 Given the restrictions of trade and hampering of the employee's free pursuit of his or her trade, the courts will looks to the quality and type of the relationships the employer is seeking to protect. Is the employer claiming a strong interest in even the most limited clientele?

While protection of customer relationships is a legiti­mate interest, for the relationship to be protectable the employee must have long-standing client relationships and her services must be "a significant part of the total transac­tion."13 As the BDO court stated, protection of the client base rises to a legitimate interest when "the employee must work closely with the client or customer over a long period of time, especially when his services are a significant part of the total transaction."14  Subsequent caselaw has supported this analysis. For example, the Northern District of New York in DS Parents Inc. v. Teich declined to find a protect­able interest in a nonsolicitation covenant prohibiting the departed employee from "soliciting [Plaintff] customers or clients", where most of the customers were "one-time purchasers", finding the customer relationships developed to be "of limited value."15 Stating that the relationships are "special and unique," as the plaintiff did in Teich, was insufficient: the plaintiff needed to "specify what made those relationships unique or valuable" and "personal."16 The interest, to be a valid one deserving of protection, has been described as requiring a "close business relation­ship...where the employee rendered specific substantive circumstances of a confidential nature,"17 which suggests that the implication of confidential information can be a trigger point to finding a protectable interest. This line of analysis is critical to assessing whether the customer relationship prong applies at all. Courts, in interpreting the direction of the BDO court, suggest that the signifi­cance of the business, the role of the individual sought to be restrained, and the repetitiveness of the customer is a factor in finding a protectable interest.18

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Footnotes

1 As the Court stated in First Empire Securities, Inc. v. Miele, 2007 WL 28942345 at *5 (Sup. Ct. Suf­folk Cty. Aug. 10, 2007), "However, concern for the Respondent's right to earn a living does not immunize him from capitalizing on his acquain­tance with his former employer's customers or the favor he found for them, when a valid restrictive covenant concerning the non-solicitation of customers exists." (citations omitted). See also Renaissance Nutrition v. Jarrett, 2012 WL 42171 (W.D.N.Y. Jan. 9, 2012), holding that a nonsolicita­tion covenant is enforceable as more reasonable than a noncompetition covenant because "Defen­dants are free, under this provision of the contract, to undertake any occupation they choose." ).

2 Reed Roberts Assocs., Inc. v. Strauman, 40 N.Y.2d 303, 307, 386 N.Y.S.2d 677, 353 N.E.2d 590 (1976).

3 BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 690 N.Y.S.2d 854, 712 N.E.2d 1220, 1223 (1999).

4 Estee Lauder Cos. Inc. v. Batra, 430 F.Supp.2d 158, 177 (S.D.N.Y.2006) (citation omitted)

5 BDO, 712 N.E.2d at 1224-25; Silipos v. Bickel, No. 05-cv-4356 (RCC), 2006 WL 2265055, at *3 (S.D.N.Y. 2006)

6 Reed Roberts Assocs., Inc. v. Strauman, 40 N.Y.2d 303 at 308.

7 Id.

8 BDO Seidman v. Hirshberg, 93 N.Y.2d 382 at 392.

9 Id. at 390, 391.

10 Johnson Controls, Inc. v. A.P.T. Critical Systems, Inc., 323 F. Supp. 2d 525, 534 (S.D.N.Y. 2004).

11 See Kelly v. Evolution Markets Inc., 626 F. Supp. 2d 364, 372 (S.D.N.Y. 2009) ("EvoMarkets' desire to protect its goodwill that it fostered with custom­ers constitutes a legitimate business interest"); DS Courier Services Inc. v. Seebarran, 40 A.D.3d 271, 272, 834 N.Y.S.2d 191, 192 (1st Dep't 2007) ("the covenant legitimately protects the goodwill that plaintiff had developed with certain of its customers").

12 Indeed, some courts have simply ignored the ad­dition of the client relationship prong altogether. See, e.g. Game Fitness Corp. v. Monzillo, 2010 N.Y. Slip Op 30348(U) (Sup. Ct. Suffolk County, Jan 26, 2010), which cited only the three part Reed Roberts test in refusing to enforce a nonsolicita­tion covenant.

13 BDO Seidman, 712 N.E.2d at 1224.

14 Id. 93 N.Y. at 391-92.

15 2014 WL 546358 at *10 (N.D.N.Y. Feb. 14, 2014)

16 Id.

17 Pure Power Boot Camp v. Warrior Fitness Boot Camp, 813 F.Supp.2d 489, 510 (S.D.N.Y. 2011); and Concord Limousine Inc. v. Orezzoli, 7 Misc. 3d 1026(A), 801 N.Y.S.2d 232 (Sup. Ct. Kings County May 20, 2005) ("the enforcement of such covenants on the basis of a close business relationship between the employee and the employer's customers is generally limited to instances where the defendant rendered specific substantive services of a confidential nature to the employer's customers").

18 See, e.g. Greystone Staffing, Inc. v. Goehringer, No. 13906-06, 2006 WL 3802202, at *3 (N.Y. Sup. Ct. Nov. 27, 2006) (finding protectable interest where employee's "significant" relationships had allowed employer to "compete for and obtain the patronage and repeat business of its customers."); Reed Elsevier, Inc. v Transunion Holding Company, Inc., 2014 WL 97317 at *10 (S.D.N.Y., January 09, 2014) (finding no legitimate interest where the responsibilities of the employee were "primarily managerial and supervisory, rather than client-focused"); and Silipos, Inc. v. Bickell, 2006 WL 2265055 (S.D.N.Y. Aug. 8, 2006)(employee's sales activities, where he had "extensive, regular communications" with clients over a fourteen year period, were "significant enough to establish [Plaintiff's] legitimate interest").

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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