Category: Employment Law

Issues Arising in Negotiating Severance Agreements by Richard B. Friedman

Issues Arising in Negotiating Severance Agreements

At the risk of stating the very obvious, a severance agreement should contain a release which protects the former employer from potential lawsuits and other legal proceedings that could otherwise be brought by the former employee and his or her heirs. Severance compensation can serve as an important transition financial resource for a former employee. Thus, it is often in both parties’ interests to reach an agreement. This article will briefly identify some of the provisions that should be considered for possible inclusion in a severance agreement by every employer and employee.

Provisions for Consideration in a Severance Agreement

Of course, the agreement should set forth the amount of severance compensation to be paid to the former employee as well as the timing of such payments. Some companies have severance policies which tie severance payment amounts to the length of an employee’s service. Many companies leave such terms for negotiation on an individual basis after an employee’s employment is terminated.

Some of the other financial terms often addressed in severance agreements, which will vary depending on the seniority of the employee, are the following:

  • health insurance;
  • unused vacation time and/or sick leave pay;
  • earned and unpaid “bonus” payments; and
  • vested and non-vested stock options.

Severance agreements of senior personnel often provide the former executive with a certain period of outplacement services to assist him or her in securing his or her next position. Severance agreements frequently provide that the company will respond to inquiries from prospective employers by solely providing the former employee’s dates of employment and the last position he or she held.

If an employee is asked to agree to what he or she considers to be overly restrictive non-compete provisions, he or she should seek additional monetary compensation. However, employers should defer payment of some severance compensation to try to ensure the former employee’s compliance with his or her obligations under the agreement.

In exchange for receiving various types of severance compensation, the former employee should always be required to release all claims, whether known or unknown, on behalf of himself or herself and all heirs against the former employer. The former employee should also be required to agree to a covenant not to sue the company or to become a member of any class seeking to sue the company or to provide any assistance to any persons suing the company.

Ideally from the employee’s perspective, the former employer should also agree to release the former employee from all known claims (at a minimum) up to the date of the release.  However, companies are often very reluctant to release claims against former employees that are not already known to the company since doing so would relegate the company if it subsequently learned of such a claim to an allegation that, mindful of his improper conduct, the former employee fraudulently induced the company into signing the severance agreement. Of course, a factual dispute could eventually ensue in a litigation as to whether a particular claim was known by the company at the time the agreement was executed.

This commentator believes that counsel for a former employee should generally seek to have the non-disparagement provision in virtually all severance agreements be mutual. In those instances where company counsel refuses to do so, the following approach can be considered. The agreement could contain a provision requiring that (i) several identified employees be notified in writing within a few business days after the execution of the agreement or the lapse of the revocation period not to disparage the former employee verbally or in writing and (ii) the former employee’s counsel be notified in writing within one or two business days thereafter that such notification was sent. However, this commentator has represented former executives who did not want any such persons to be so notified in the belief that doing so would “fan the flames” and have the opposite effect of what was intended.

We have been involved in several recent matters where, at the request of the former senior executive who we represented, several “C” suite executives were identified in the severance agreement with their consent as the only personnel authorized to provide reference information about the former executive beyond her or his dates of employment and last position. In two recent matters, we negotiated to have a reference letter signed by the CEO attached as an exhibit to the severance agreement with a provision that the company must make it available exclusively in response to any inquiries about the former executive.

Employers often include some or all of the following provisions in severance agreements:

  • A new non-compete provision or the reaffirmation or expansion of an existing such provision.
  • A provision whereby the former employee agrees to make himself or herself reasonably available to, and cooperate with, company personnel with respect to claims threatened or brought against the company or its officers, directors, and employees.
  • A provision requiring the former employee to notify the company if he or she (i) is contacted by someone who is or may be legally adverse to the company or (ii) receives a subpoena relating to the company.
  • A confidentiality provision.
  • A non-disparagement clause.
  • A provision whereby the former employee waives all rights to future employment with the company and any affiliates.
  • A provision whereby the former employee represents that he or she has returned all tangible property of the company regardless of whether it contains trade secrets or other proprietary information of the company.

In this commentator’s view, all severance agreements, indeed all agreements, should have choice of law and choice of venue provisions. A severance agreement should also provide that it is the entire agreement between the parties and supersedes any prior agreements between them.

Potential Severance-Related Issues

Benefits of Employer Severance Policies

Employers should give serious consideration to establishing standard severance policies with specified severance compensation packages for employees at different levels of seniority within the organization. Several New York cases have considered the legal ramifications of company severance policies.

In Cohen v. Nat’l Grid USA,1 the plaintiffs, management employees, brought a breach of contract action against their former employer in which they alleged that they were entitled to severance pay under their former employer’s written “change of control” policy as a result of the merger of the former employer’s parent corporation and the subsequent sale of the former employer. The court held that the severance pay provision in the former employer’s policy manual, which provided severance pay to management employees if they were terminated without cause in the event of the employer’s merger with another corporation, was not an enforceable obligation.

In Hosain-Bhuiyan v. Barr Labs., Inc.,2 a former employee sued for breach of contract and violations of the New York Labor Law alleging that he was improperly terminated for cause and was contractually entitled to certain severance payments and stock options. The defendant’s employment policy provided that employees terminated for cause were not entitled to any severance compensation. The plaintiff had been terminated after it was determined that he (i) failed to disclose to the defendant in writing his ownership interest in another business and (ii) did work for his outside business during regular business hours. After concluding that the plaintiff had been properly terminated for cause, the Court granted summary judgement in favor of the former employer.

In Norris v. Soc. Servs. Employee Union 371,3 two individuals sued their former employer, a local union, for unpaid severance under an unwritten severance policy. The employees established their entitlement to three weeks of severance pay under the policy instead of the two weeks of pay offered by the defendant. The defendant failed to have a written severance policy as required by the Labor Law and governing regulations during the period of the former employees’ employment. Due to the defendant’s lack of compliance, the defendant was forced to pay the additional week of severance pay. Although the monetary amounts at issue in this matter were modest, the case underscores the importance of employers having a written severance policy.

Confidentiality

Certain issues that may arise with confidentiality provisions are demonstrated in John Mezzalingua Assocs., LLC v. Braunschweig.4 While employed by the plaintiff, the defendant was privy to trade secrets and confidential information essential to the success of the plaintiff’s business. As a result of defendant’s position, the information she possessed posed a threat to plaintiff’s economic viability and success if the information was disclosed to third parties. The plaintiff sent the defendant a written notice letter, stating that the defendant had breached her obligations to the plaintiff as set forth in her severance agreement. The plaintiff demanded repayment of all severance payments that the defendant had received under the severance agreement. In response, the defendant argued that the non-interference clause was limited to a six-month period following the execution of the severance agreement. The former employer claimed there was no time restriction on the former employee’s obligation not to affect or disrupt its pending or future sales. The former employee’s motion for summary judgement of the plaintiff’s breach of contract claim was denied.

Importance of Severance Agreements to Employers

If there is a possibility that an employee has one or more causes of action against his or her former employer for any reason, he or she may be able to build a strong case in reliance upon his or her in-depth knowledge of the company. Of course, this is one of the main reasons why a former employer would want an assurance that the former employee cannot sue the employer. Avoiding potential lawsuits and the concomitant distraction to management and inevitable legal fees is generally of great benefit to a company and will often override the additional monetary and other compensation that former employees and their counsel will seek through negotiation. Severance agreements are also a useful way for a former employer to bolster an existing non-compete provision when it is considered desirable to do so in view of changed circumstances.

Importance of Severance Agreements to Former Employees

In addition to receiving severance compensation, which sometimes also includes the acceleration of certain stock options and company payment of COBRA insurance premiums for an agreed upon period of time, former employees can benefit from entering into a severance agreement by receiving, among other things, (i) a general release from their former employer or some variation thereof, (ii) a mutual non-disparagement provision or some variation thereof, (iii) agreed upon reference protocols which may include a reference letter to be used exclusively, and (iv) a limit on the former employee’s obligations to cooperate with her or his former employer in connection with future legal proceedings brought against the company.

Of course, every situation is different. We regularly counsel mid-level and senior executives as well as companies in connection with their respective unique circumstances.


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 Cohen v. Nat’l Grid USA, 36 N.Y.S.3d 686 (2016).
2 Hosain-Bhuiyan v. Barr Labs., Inc. Hosain-Bhuiyan v. Barr Labs., Inc., 2019 WL 3740614, at 1 (S.D.N.Y. Aug. 8, 2019), appeal dismissed, 2019 WL 8165864 (2d Cir. Dec. 27, 2019).
3 Norris v. Soc. Servs. Employee Union 371, 963 N.Y.S.2d 562 (Civ. Ct. 2013).
4 John Mezzalingua Assocs., LLC v. Braunschweig, No. 519CV00368BKSTWD, 2020 WL 210299, at *1 (N.D.N.Y. Jan. 14, 2020).

Current State of Restrictive Covenants (Other Than Non-Competes) in New York by Richard Friedman

Current State of Restrictive Covenants (other than Non-Competes) Under New York Law

What is a Restrictive Covenant?

Our last blog article provided an update on the state of New York law concerning non-compete provisions. This article focuses on the state of New York law concerning restrictive covenant provisions other than non-competes. As our readers are almost certainly all well aware, a restrictive covenant is a contractual provision that many employers include in employment and severance agreements as well as in contracts with respect to the sale of a business. Such provisions are designed to limit the activities of a former employee or a former owner of a company for a fixed period of time following the end of the employment relationship or after the sale of a company to protect the former employer’s or buyer’s supposed legitimate business interests. In addition to employment, severance, and agreements concerning the sale of a business, these covenants can often be found in stock option agreements.

Enforceability of Restrictive Covenants

As is well known, New York courts generally disfavor restrictive covenants contained in employment contracts and will only enforce them when they are found to be reasonable and necessary to protect an employer’s legitimate business interests.1  The test New York courts use to determine whether a restrictive covenant is reasonable was relied on recently by the United States District Court for the Eastern District of New York in Intertek Testing Servs., N.A., Inc. v. Pennisi.2 The court stated: “[a] restraint is reasonable only if it: (1) is no greater than is required for the protection of a legitimate interest of the employer; (2) does not impose undue hardship of the employee; and (3) is not injurious to the public.” Applying this test, New York courts analyzing a restrictive covenant take a two-step approach:3

  1. The court first considers whether the covenant is reasonable in scope and duration; and
  2. If the answer to the foregoing is yes, courts consider whether the contract, as written, is necessary to protect the employer’s legitimate interest.

Scope and Duration

To be enforceable, a restrictive covenant must not be more extensive, in terms of time and place, than necessary to protect the legitimate interests of the employer. A court may find a restriction to be unreasonable when it covers a geographic area where the employer does not compete, or where the provision would effectively prevent the employee from continuing to work in a particular industry.4 For this reason, New York courts have rarely found worldwide restrictions reasonable in any context.

Legitimate Interests

New York courts have held that legitimate interests are limited to the protection against misappropriation of the former employer’s trade secrets, confidential customer lists, or protection from competition by a former employee whose services are unique or extraordinary.5 Additionally, such courts have found that an employer has a legitimate interest in protecting client relationships or goodwill developed by an employee at the employer’s expense.6

Types of Restrictive Covenants

Although non-compete provisions are the most common type of restrictive covenants, New York courts recognize the following other types of restrictive covenants:

  • non-solicitation provisions with respect to clients or customers;
  • no-hire provisions; and
  • “garden leave” provisions.

1.  Non-solicitation Provisions

A non-solicitation provision is a restrictive covenant that prohibits former employees or the former owner of a business, for a specific period of time after the employment relationship ceased or the sale occurred, from soliciting the former employer’s or previously owned company’s customers or providing competing services to those customers.7 They often also prohibit the former employee or owner from trying, directly or indirectly, to secure business from the former employer’s or previously owned company’s customers.8

A non-solicitation provision as applied to customers is typically easier to enforce than a non-compete provision because it only restricts the former employee or owner from soliciting and/or performing services for certain categories of customers or specifically identified customers for a designated time period.9 King v. Marsh & McLennan Agency LLC10 is an example of a recent case in which a New York court enforced a non-solicitation provision for customers. In King, the Court held that the employer had an undeniable interest in enforcing a non-solicitation agreement to protect its customer relationships.

Non-solicitation provisions eliminate the need for the court to evaluate the reasonableness of a geographic restriction.11 Additionally, the absence of a non-compete provision also increases the likelihood that the court will find the non-solicitation clause in an employment agreement enforceable.12

Yet New York courts have found that a non-solicitation provision is too broad to be enforced as written if it is not necessary to protect one of the following three legitimate protectable interests:

      • the uniqueness of the employee (which is difficult to establish);
      • the protection of the employer’s trade secrets or confidential information; or
      • the competitive unfairness of allowing competition that adversely impacts the employer’s goodwill.13

Establishing that an employee is unique can be very difficult as demonstrated in a case before the New York Appellate Division First Department last year. In that case, Harris v. Patients Med., P.C.,14 a medical practice appealed a ruling that denied its motion for a preliminary injunction enjoining a former employee, a doctor, from breaching restrictive covenants in her employment agreement. The Appellate Division determined that the employer did not have a substantial likelihood of success on the merits of its claim. Specifically, the Court held the former employer had not shown that the restrictive covenants were necessary to protect its legitimate interests as it failed to establish that the doctor’s services were unique or extraordinary such that they gave the employee an unfair advantage over the employer.15 Similarly, in Vertical Sys. Analysis, Inc. v. Balzano,16 the First Department reasoned that the employee, an elevator inspector, did not provide unique or extraordinary services or have any access to trade secrets or propriety information that would require the enforcement of a non-solicitation provision.

2.  No-hire Provisions

A non-solicitation clause that applies to the solicitation of employees of a former employer or a previously owned company has been referred to by many courts as a non-recruitment or a no-hire provision. Improper conduct in this regard includes identifying employees to be recruited, direct or indirect solicitation of employees, and speaking to employees concerning how they would like to be compensated by the new employer.17

This commentator is not aware of a New York Court of Appeals case adjudicating whether a covenant not to solicit employees is enforceable.  However, both the Appellate Division Second Department and New York federal courts have stated that New York recognizes the enforceability of covenants not to solicit employees.18 Like other restrictive covenants, they are subject to a reasonableness analysis but are considered inherently more reasonable than a covenant not to compete.  The United States District Court for the Southern District of New York has gone as far as to say that these types of provisions can be viewed as prima facie enforceable when they are reasonable in scope and limited in duration.19

A relatively recent case in the Southern District of New York demonstrates how courts are willing to enforce no-hire provisions. In Oliver Wyman, Inc. v. Eielson,20  an employer brought an action against two former employees, alleging fraud and breach of contract in connection with the acquisition by the plaintiff of the former employees’ consulting business. The Court held that the non-recruitment clause in the employees’ employment contracts was no more restrictive than necessary to protect the former employer’s legitimate interest in protecting its client base.21 The Court reasoned that the no-hire clause was acceptable because of its narrow scope because it only prevented the poaching of former co-workers for actual, available employment opportunities in which the solicitor of those workers has an interest.22 Additionally, the Court held that the non-recruitment clause in the former employees’ employment contracts did not impose an undue hardship on the former employees.23

3.  “Garden Leave” Provisions

A “garden leave” provision is an extended notice provision that requires departing employees to give the company a certain period of advance notice when they intend to leave the company.24  It is a variation of a notice of termination provision and can be used as an alternative to or in addition to a traditional non-compete provision to restrict competition by departing employees.  Such a provision gives employers the option to pay the employee through the balance of the notice period and direct her or him not to come to work or perform services, giving the employees leave to “tend to their gardens” or pursue any other activity excluding other employment provided that the employee does not compete with her or his former employer.25 Extended notice provisions may be mutual but can also require that only the employee provide notice, with no similar obligation on the employer.26 Where mutual, these provisions without exception (to our knowledge) do not require such notice from employers where the employee is being terminated for cause.27

 


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 Flatiron Health, Inc. v. Carson, 2020 WL 1320867, at 19 (S.D.N.Y. Mar. 20, 2020).
2 Intertek Testing Servs., N.A., Inc. v. Pennisi, 2020 WL 1129773, at 19 (E.D.N.Y. Mar. 9, 2020).
3 Id; See also King v. Marsh & McLennan Agency, LLC, 67 Misc. 3d 1203(A) (N.Y. Sup. Ct. 2020). KCG Holdings, Inc. v. Khandekar, 2020 WL 1189302, at 17 (S.D.N.Y. Mar. 12, 2020).
4 Good Energy, L.P. v. Kosachuk, 49 A.D.3d 331 (1st Dep’t 2008).
5 Intertek Testing Servs., N.A., Inc. v. Pennisi, 2020 WL 1129773, at 21.
6 Id.
7 4B N.Y.Prac., Com. Litig. In New York State Courts § 80:8 (4th ed.).
8 Id.
9 Contempo Communications, Inc. v. MJM Creative Services, Inc., 182 A.D.2d 351 (1st Dep’t 1992). Genesee Val. Trust Co. v. Waterford Group, LLC, 130 A.D.3d 1555, 1558 (2015).
10 King v. Marsh & McLennan Agency, LLC, 67 Misc. 3d 1203(A) (N.Y. Sup. Ct. 2020).
11 Id.
12 Id.
13 Flatiron Health, Inc. v. Carson, 2020 WL 1320867, at 21 (S.D.N.Y. Mar. 20, 2020).
14 Harris v. Patients Med., P.C., 93 N.Y.S.3d 299 (N.Y. App. Div. 2019).
15 Id.
16 Vertical Sys. Analysis, Inc. v. Balzano, 621, 97 N.Y.S.3d 467 (N.Y. App. Div. 2019).
17 Marsh USA Inc. v. Karasaki, 2008 Wl 4778239 (S.D.N.Y. 2008).
18 See Intertek Testing Servs., N.A., Inc. v. Pennisi, 2020 WL 1129773, at 23 (E.D.N.Y. Mar. 9, 2020); General Patent Corp. v. Wi-Lan Inc., 2011 WL 5845194 (S.D.N.Y. 2011).
19 General Patent Corp. v. Wi-Lan Inc., Isd.
20 Oliver Wyman, Inc. v. Eielson, 282 F. Supp. 3d 684, 695 (S.D.N.Y. 2017).
21 Id.
22 Id.
23 Id.
24 4B N.Y.Prac., Com. Litig. In New York State Courts § 80:10 (4th ed.).
25 Id.
26 Id.
27 Id.

 

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

____________________

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

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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).