Category: Employment Law Counseling

Current State of Non-Competes Under New York Law by Richard Friedman

Current State of Non-Competes Under New York Law

What is a Non-Compete?

As all of our readers undoubtedly know, a non-compete provision is a type of restrictive covenant that many employers include in employment and severance agreements. The purpose of a non-compete provision is to restrict a former employee’s ability to work for a competitor after the cessation of his or her employment.

When are Non-Competes Enforceable?

New York courts tend to disfavor non-compete provisions.1 However, as is also well known, non-compete provisions have been enforced where they have found to:

  1. Impose no greater restrictions than required to protect an employer’s legitimate protectable interests;
  2. Not impose undue hardship on the employee or be harmful to the general public; and
  3. Be reasonably limited temporally and geographically.2

Employer’s Legitimate Protectable Interests

In New York, employer’s legitimate protectable interests include:3

  1. Protection of trade secrets;
  2. Protection of customer relationships;
  3. Confidential customer; and
  4. “Unique” services.

The latter category has rarely been invoked by employers since it is very difficult to prove that an employee rendered unique services that cannot easily be replaced.

Scope of Restrictions

If a New York court determines that a non-compete is necessary to protect a legitimate interest, it will then examine the following three factors:

  1. Geographic scope of the restriction. New York courts generally conduct a fact-based analysis to determine if a geographic restriction in a non-compete provision is reasonable. New York courts may be willing to enforce a broad geographic restriction so long as the duration of the restrictions is short. For example, in Interga Optics, Inc v. Nash, a Northern District of New York Judge, applying New York law, stated that “[e]ven if the geographic scope were found to be somewhat broad (due to the evidence that the vast majority of Plaintiff’s current clients appear to be limited to North and South America), the restriction is tempered by the brief duration of it.”4 In a February 2020 decision in Markets Grp., Inc. v. Oliveira, a Southern District of New York Judge, also applying New York law, held a non-compete provision unenforceable because it did not contain a geographical limit.”5
  2. Duration of the restriction. When reviewing the temporal period of non-competes, New York courts have held repeatedly that restrictions of six months or less are generally reasonable. However, like the geographic limitation, this analysis is conducted on a case-by-case basis and courts have also found certain longer non-compete provisions reasonable in light of other circumstances. For instance, an Eastern District of New York Judge held in March 2020 that a five year non-compete clause was reasonable in the context of the sale of a business.6
  3. The scope of the business activity impacted. New York courts will not enforce a non-compete provision where the scope of the business activity impact is deemed to be too broad or it is not shown to be necessary to protect trade secrets or other confidential information such as customer lists. For example, the New York Appellate Division Fourth Department held that a non-compete provision precluding a former employee of a staffing agency (a physician assistant) from providing medical services to any hospital at which he had provided services through his prior employer was overly broad and therefore not enforceable.7

Other Factors and Situations Considered by NY Courts

Sale of a Business. When there has been a sale of a business, non-compete provisions are more likely to be considered reasonable because they are designed to (i) protect the new owner from having its business usurped by the former owner, and (ii) enable the former owner to extract a higher price in the sale to reward him or her for the goodwill which he or she may have spent years creating.8

Terminated Without Cause. An issue arises when an employee with a non-compete is terminated without cause. The Second Department and at least three judges in the Southern District of New York have ruled that non-compete clauses are categorically precluded from enforcement when an employee has been involuntarily discharged without cause.9 However, the New York Court of Appeals has not issued a per se rule applicable to non-compete provisions in such circumstances. Indeed, in Morris v. Schroder Capital Management International,10 the Court of Appeals stated that “a court must determine whether forfeiture is ‘reasonable’ if the employee was terminated involuntarily without cause.”

In two very recent cases, judges in the United States District Court for the Southern District of New York considered whether non-compete provisions should be enforced where an employee was terminated without cause. In both cases the judges enforced restrictive covenants because they were not persuaded that the former employees had actually been terminated without cause.

In Beirne Wealth Consulting Servs., LLC v. Englebert,11 the relationship between the employees and employer had deteriorated beyond repair. After they were terminated, the defendants argued that the restrictive covenants in their employment agreements were not binding because they were terminated without cause. However, the Court disagreed that the former employees had been terminated without cause and enforced the non-compete provisions.

In a similar case, Kelley-Hilton v. Sterling Infosystems Inc,12 the plaintiff, a former employee, claimed she was wrongfully terminated by the defendant. The plaintiff moved for a preliminary injunction preventing her former employer from enforcing any contractual provisions that would prohibit her from competing with it, soliciting its customers, or hiring its employees. The plaintiff’s motion for a preliminary injunction was denied because the plaintiff failed to show she would be likely to prove she was terminated without cause.

Future of Non-Competes

A proposed New York statute would invalidate no-poach provisions which are sometimes found in contracts between employers. The bill would “prohibit agreements between employers that directly restrict the current or future employment of any employee and allows for a cause of action against employers who engage in such agreements.”13 The purpose of a no-poach provision is to restrict employers from soliciting or hiring another employer’s employees or former employees. But the proposed legislation would outlaw only no-poach agreements between employers and not apply to non-compete provisions in contracts between employers and current or former employees.14

In 2017, the New York Attorney General’s Office proposed BILL A07864A in the New York State Assembly which would substantially limit the enforceability of non-compete provisions. However, the failure of the legislature to adopt that or any similar proposal leads this commentator to believe that such legislation is unlikely to become law in New York in the foreseeable future.

Nonetheless, in view of the historically high unemployment rates caused by the COVID-19 pandemic and the attendant economic hardships being experienced by millions of New Yorkers, this commentator also believes that many New York courts are likely to become much less willing to enforce non-compete provisions other than (i) where the former employee is being paid during the period covered by the non-compete and (ii) in connection with the sale of a business.


Richard B. Friedman
Richard Friedman PLLC

200 Park Avenue Suite 1700
New York, NY 10166
TEL: 212-600-9539
rfriedman@richardfriedmanlaw.com
www.richardfriedmanlaw.com
www.richardfriedmanlaw.com/blog
Connect with me on Linkedin

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1 Long Island Minimally Invasive Surgery, P.C. v. St. John’s Episcopal Hosp., 83 N.Y.S.3d 514, 516 (N.Y. App. Div. 2018) (medical practice brought action against surgeon and his subsequent employer, seeking damages and injunctive relief for an alleged breach of a restrictive covenant in the employment contract). 

2 Harris v. Patients Med. P.C., 93 N.Y.S.3d 299, 301 (N.Y. App. Div. 2019)(medical group appealed the denial of a motion for preliminary injunction enjoining former employee, a doctor, from breaching restrictive covenants in her employment agreement; the court ruled plaintiff did not have substantial likelihood of success on merits of its claim); see also Intertek Testing Servs., N.A., Inc. v. Pennisi, 2020 WL 1129773 (E.D.N.Y. Mar. 9, 2020).

3 Cortland Line Holdings LLC v. Lieverst, 2018 WL 8278554, at 6 (N.D.N.Y. Apr. 6, 2018). Intertek Testing Servs., N.A., Inc. v. Pennisi, 2020 WL 1129773 (E.D.N.Y. Mar. 9, 2020).

4 Integra Optics, Inc. v. Nash, 2018 WL 2244460, at 7 (N.D.N.Y. Apr. 10, 2018) (court enforced an employer’s preliminary injunction against a former employer as the non-compete agreement was deemed reasonable; specifically, the restriction on geographic scope was considered necessary to protect the employer’s government interest).

5 Markets Grp., Inc. v. Oliveira, 2020 WL 815732 (S.D.N.Y. Feb. 19, 2020) (court affirmed a summary judgement motion in favor of the defendant, a former employee, because the court found the defendant did not violate the non-compete provision of his employment agreement).

6 Intertek Testing Servs., N.A., Inc. v. Pennisi, 2020 WL 1129773, at 19 (E.D.N.Y. Mar. 9, 2020) (building and construction service provider brought action against employee of entity acquired by provider, former employees of provider, and competitor seeking injunctive relief non-compete provision of the contract, the provider was successful).

7 Delphi Hospitalist Servs., LLC v. Patrick, 80 N.Y.S.3d 616, 617–18 (N.Y. App. Div. 2018) (medical staffing agency brought action against physician assistant, seeking to enforce restrictive covenant in assistant’s employment agreement after assistant terminated his contract with agency; the defendant prevailed).

8 UAH-Mayfair Mgmt. Grp. LLC v. Clark, 110 N.Y.S.3d 849, 850 (N.Y. App. Div. 2019)(court granted former employer a preliminary injunction enforcing the non-compete provision of the employment agreement and awarded the plaintiff costs); see also 4D N.Y.Prac., Com. Litig. in New York State Courts § 105:21 (4th ed.).

9 See, e.g., Kelly-Hilton v. Sterling Infosystems Inc., 426 F. Supp. 3d 49 (S.D.N.Y. 2019); Beirne Wealth Consulting Servs., LLC v. Englebert, 2020 WL 506639, at 1 (S.D.N.Y. Jan. 30, 2020).

10 7 N.Y. 3d 616, 621 (2006).

11 Beirne Wealth Consulting Servs., LLC v. Englebert, No. 19 CIV. 7936 (ER), 2020 WL 506639 (S.D.N.Y. Jan. 30, 2020)

12 Kelley-Hilton v Sterling Infosystems Inc., 426 F.Supp 3d 49 (S.D.N.Y. 2019).

13 NY State Senate Bill S3937C, NY State Senate (2020), https://www.nysenate.gov/node/7677776; see also NY State Assembly Bill A05776, NY State Assembly (2020), https://nyassembly.gov/leg/?bn=A05776&term=&Summary=Y&Actions=Y&Votes=Y&Memo=Y&Text=Y&leg_video=1.

14 Ronald W. Zdrojeski et al., The evolving landscape of non-compete agreements-change is underway in New York State-could non-compete clauses become unenforceable? Lexology (2019), https://www.lexology.com/library/detail.aspx?g=222535b1-92aa-47b0-a521-27692a2bd2c4.

 

LLC. Limited liability company. Business abbreviation.

The Importance of Dissolution Provisions for New York LLCs

The limited liability company (LLC) has become one of the most commonly used business entities in New York because of the many benefits it provides to its members and managers. LLCs allow members to satisfy their business needs while still providing them with the same limited liability protection that limited partnerships provide. Although the flexibility of an LLC can be very beneficial, it is this commentator’s view that members of a New York LLC should not rely on New York’s Limited Liability Company Law (LLCL) to govern the activities of an LLC. If persons choose to form an LLC, it is essential that they have a clearly written operating agreement that provides explicit terms for, among other things, the LLC’s dissolution. A number of New York cases illustrate issues that arise when an operating agreement is vague on how to dissolve the LLC. Indeed, as discussed below, an LLC can be difficult to dissolve if the operating agreement is not explicit in this regard.

Under LLCL §702 a court may dissolve an LLC “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” In Matter of 1545 Ocean Avenue., LLC1, the Appellate Division for the Second Department articulated two factors courts in that department must consider when deciding if an LLC can be dissolved. The petitioner for the dissolution must show: (1) the management of the company is unable or unwilling to reasonably permit or promote the stated purpose of the company to be realized or achieved; and (2) continuing the company is financially unfeasible. In that case, the court found a dissolution was not justified.

Other New York cases demonstrate the obstacles LLCs can face when they do not have clear dissolution provisions in operating agreements. In Yu v. Guard Hill Estates, LLC2 the trial court did not allow a dissolution to occur when the only justification for dissolution was discord between family members. The court stated as follows: “While [the petitioner] complains that his family members have engaged in certain activities to further their personal ‘vendetta’ against him, his unflattering characterization of his family’s actions is not sufficient to support a cause of action that his family has abandoned the purpose of the LLC.” Another example when a New York court found that an LLC could not be dissolved is the case Kassab v Kasab3, where the Queens County Commercial Division denied dissolution because the “exile” of a member participating in the partnership did not satisfy either prong established in 1545 Ocean Avenue.4

However, there have been some New York cases where dissolution was allowed pursuant to LLCL §702. In Matter of 47th Rd. LLC5, the court stated that the existence of personal vendettas between two brothers who were “partners,” which threatened to result in physical violence and ruin the business, could result in a judicial dissolution. A similar result occurred in Matter of D’Errico6, after the majority members of an LLC named Epic locked out all of the minority members from the premises of the business and prevented the minority members from accessing all business accounts. The majority members even formed a new LLC called BeyondEpic. As a result of BeyondEpic having been formed, the court stated as follows: “BeyondEpic … reduced Epic to an entity that operates solely at BeyondEpic’s sufferance.” Accordingly, the court found that judicial dissolution of Epic under LLCL §702 was warranted.

As New York courts continue to establish precedents for LLCL §702, the significance of an unambiguous dissolution provision in LLC operating agreements is essential. While partners in a business at its inception are often not thinking about its demise, it is important to try to anticipate issues which should lead to a dissolution of the LLC. The cases discussed in this article exemplify how operating agreements that do not clearly delineate the grounds for dissolution can cause serious issues for persons involved in those LLCs. Simply relying on the default dissolution statute, LLCL §702, is a risk no members of a New York LLC should take.


Richard B. Friedman
Richard Friedman PLLC

200 Park Avenue Suite 1700
New York, NY 10166
TEL: 212-600-9539
rfriedman@richardfriedmanlaw.com
www.richardfriedmanlaw.com
www.richardfriedmanlaw.com/blog
Connect with me on Linkedin

 

1 Matter of 1545 Ocean Ave., LLC, 72 A.D.3d 121 (2010).

2 Yu v. Guard Hill Estates, LLC 2018 N.Y. Slip Op 32466(ii) (Sup.Ct. Sept. 28, 2018).

3 Kassab v. Kasab, 65 N.Y.S.3d 492 (N.Y. Sup. 2017).

4 Supra note 1.

5 In Matter of 47th Rd. LLC 54 N.Y.S. 3d 610 (N.Y. Sup. Ct. 2017).

6 Matter of D’Errico No. 610084 (Sup.Ct. Nassau County Aug. 21, 2018).