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On March 8, 2022, Excel Sports Management, LLC commenced an action in the Supreme Court of New York, Commercial Division, alleging that its former Vice President of Basketball Partnerships, Eric Eways, resigned his employment in favor of employment with Klutch Sports Group, LLC, in violation of a restrictive covenant in his employment agreement. The non-compete, governed by New York law, prohibited Eways from working for Klutch and other specifically-named competitors for eight months post-separation.
Excel simultaneously moved for a preliminary injunction against Eways and Klutch. Excel alleged that Eways was a unique employee tasked with sourcing off-court marketing opportunities and endorsement deals for its athlete clients. Excel argued that a preliminary injunction was necessary to prevent Eways from diverting the corporate brands with whom Excel had developed relationships in favor of deals with Klutch's clients.
The motion judge denied the injunction, holding that any protectable interests regarding Excel's brand partners could be protected by more narrow non-solicitation and confidentiality provisions. The court further stated that it was not convinced that Excel would suffer irreparable harm because the diversion of any such business relationships could be compensated through monetary damages. In this regard, the court appeared to find compelling Klutch's arguments that there was no evidence of client poaching and that the brand partners at issue are non-exclusive and not clients of Excel.
Excel appealed from the decision and simultaneously moved for a preliminary appellate injunction, seeking again to enjoin Eways from working at Klutch in accordance with his non-compete agreement. On May 26, 2022, the Appellate Division, First Judicial Department, granted the injunction prohibiting Eways from working for Klutch pending the hearing and determination of the appeal, or through October 15, 2022 (8 months from the date of Eways's resignation from Excel) whichever occurs first, effectively reversing the lower court's ruling.1 The appellate court's ruling is currently subject to a pending motion for reconsideration.
Key takeaways
Despite the recent trend of legislative efforts in New York and elsewhere seeking to curtail the enforcement of employment-based non-competes, the Appellate Division, First Department, has signaled that New York continues to be a hospitable forum for employers seeking to enforce such covenants. However, given the absence of a written opinion accompanying the appellate court's injunction order, the specific basis for the appellate court's order is uncertain. Nevertheless, in granting the injunction, the appellate court must necessarily have found that Excel satisfied both a likelihood of success on the merits of its breach of contract claim and that irreparable harm would result to Excel in the absence of the injunction, despite the alleged lack of evidence of direct solicitation. It is likely that the appellate court was persuaded by Excel's argument that Eways had significant exposure to Excel's confidential information concerning its brand partners and marketing strategies. It is also noteworthy that Klutch was specifically identified as a competitor in Eways's non-compete.
The standard under New York law continues to be that a restrictive covenant in an employment agreement is only enforceable if necessary to protect an employer's legitimate business interests, 2 and "(1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardships on the employee, and (3) is not injurious to the public."3 However the lower court's ruling, although reversed, presents a cautionary tale that individual judges continue to have significant discretion in the application of this legal standard, and determining whether a likelihood of success on the merits and irreparable harm have been established, with varying and unpredictable outcomes, including narrowing the breadth of non-compete provisions. We will continue to monitor this case and report on any important developments.
Footnotes
1 https://assets.law360news.com/1497000/1497541/order.pdf
2 Kanan, Corbin, Schupak & Aronow, Inc. v. FD Int'l, Ltd., 8 Misc. 3d 412, 415 (Sup. Ct. N.Y. Cnty. 2005);
See also Arthur J. Gallagher & Co. v. Marchese, 96 A.D.3d 791, 792 (2d Dept. 2012).
3 BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 389 (1999).
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