New York Employment Law Archives

The ‘Faithless Servant’ Doctrine Under Current New York Law

Posted on August 31, 2022August 31, 2022 by Richard Friedman

The faithless servant doctrine allows employers to recover compensation paid to a former employee upon demonstrating that the employee engaged in disloyal and unfaithful conduct during his or her employment. This doctrine, grounded in agency law, offers protection and compensation for employers who discover wrongdoing by current or former employees, especially in situations where proving damages may be difficult. However, as discussed below, New York courts will not apply the doctrine to impose liability in the absence of specific allegations of misconduct.

Under New York state law, an employee is obligated “to be loyal to his employer and is ‘prohibited from acting in any manner inconsistent with his agency or trust and is at all times bound to exercise the utmost good faith and loyalty in the performance of his duties.’”¹ Moreover, an employee has an affirmative duty to act in a manner consistent with his agency and exercise good faith and loyalty.² The faithless servant doctrine provides that “[o]ne who owes a duty of fidelity to a principal and who is faithless in the performance of his services is generally disentitled to recover his compensation, whether commissions or salary.”³ As follows, a “principal [employer] is entitled to recover from his unfaithful agent any commission paid by the principal[,]”^4& or withhold compensation for services rendered by such an employee.⁵ An unfaithful employee’s forfeiture of compensation is also compulsory even when the principal employer benefitted or did not suffer provable damage as a result of the breach of fidelity.⁶ If an employee is shown to have been repeatedly disloyal throughout their tenure, “complete and permanent forfeiture of compensation, deferred or otherwise, is warranted.” ⁷ Courts have demonstrated less sympathy for employees who committed illegal acts against their employers by ruling in favor of the wronged employers’ claims for compensation.⁸

There are two different standards used by New York courts in determining whether an employee’s conduct is covered by the faithless servant doctrine: the Turner standard and the Murray standard.⁹p The more stringent standard, Turner, requires a showing of “substantial” disloyalty by the employee in order for the misbehavior to warrant forfeiture.¹⁰ Under the Turner standard, employee disloyalty must consist of more than only a single act, and the employer must not have known of or tolerated the behavior.¹¹ The second standard, first recognized by the New York Court of Appeals in Murray v. Beard,¹² requires less: “a breach of a duty of loyalty or good faith,” without regard as to the severity of the breach.¹³ Tension remains between these two standards because New York courts have not defined the circumstances in which each standard should apply.¹⁴ Regardless of the standard utilized,¹⁵ actionable misconduct under a faithless servant theory can take many forms, including fraudulent misconduct, gross negligence, embezzlement, misappropriating trade secrets, behavior detrimental to the company, or misstating a company’s financial position.

The faithless servant doctrine is a powerful tool for employers because it provides an easier method of calculating damages than breach of contract and tortious interference claims, which require that a plaintiff demonstrate the monetary value of damages suffered. In contrast, as mentioned previously, under the faithless servant doctrine, the plaintiff need only make a sufficient showing of disloyalty committed by the former employee during his or her employment.¹⁶ This has been articulated by the New York Court of Appeals, which reasoned that the function of a breach of fiduciary duty action is not only to compensate plaintiff employers for wrongs committed by their former employees, but also to prevent such unfaithfulness “by removing from agents and trustees all inducement to attempt dealing for their own benefit in matters which they have undertaken for others[.]”¹⁷

New York law permits relaxation of the law of forfeiture by allowing apportionment. This is in alignment with the position taken in the Restatement (Second) of Agency (1958), which “calls for apportioning forfeitures when an agent’s compensation is allocated to periods of time or to the completion of specified items of work.”¹⁸ Specifically, an employee may keep compensation for the tasks performed loyally, during the time period of disloyalty in other work, where: (1) the parties agreed in the contract itself that the agent would be paid on a task-by-task basis; (2) the agent performed other certain tasks with no misconduct at all; (3) the agent’s disloyalty in other tasks “neither tainted not interfered with the completion of” the tasks for which the agent was loyal.¹⁹ While supported strongly by the Restatement, this distinguishment of Murray was also rooted in the opinion that depriving unfaithful employees of all their earnings when some tasks were completely properly would be too punitive.²⁰ However, certain New York courts have held that former employees forfeited their entitlement to all compensation after their first disloyal act.²¹

For example, in Phansalkar v. Anderson Weinroth & Co., L.P., the Second Circuit held in 2003 that the faithless servant doctrine required the former employee-agent, Phansalkar, to forfeit all compensation after his first disloyal act because his agreement called for general compensation and did not itemize his compensation to specific amounts paid for completion of specific tasks.²² Phansalkar repeatedly violated his affirmative duty to act in his employer’s best interests, primarily by failing to give his employer compensation he received in cash, stocks, and other interests that should have been turned over.²³Further, the court notably concluded that a specific finding of employee’s intent to defraud an employer is not required to render their misconduct sufficient to warrant forfeiture.²⁴

In 2018, the First Department provided further support for the faithless servant doctrine by confirming an arbitration award which included disgorgement of the former employee’s past salary and commissions during the four-year period of her unfaithfulness, ordering that the former employee return a total of $2.7 million.²⁵ In that case, Matter of Mahn v. Major, Lindsey & Africa, LLC, the court held that the award was not punitive in nature and did not violate New York’s public policy.²⁶ Additionally, in City of Binghampton v. Whalen, the Court ordered the forfeiture of the salaried employee-agent’s entire compensation during the six-year period in which he stole money from the city, despite his prior “unblemished” thirty-five years of service to his employer.²⁷

However, it is important to point out that employers must provide enough evidence of when and how the former employee acted unfaithfully in order to successfully invoke the faithless servant doctrine. In Rubio v. BSDM Mgmt., the Southern District of New York held in 2021 that the asserted faithless servant claim “mirror[ed] the very elements of a cause of action for fraud” so Rule 9(b) of the Federal Rules of Civil Procedure applied.²⁸ In accordance with Rule 9(b)’s particularity requirement,²⁹ the court dismissed the employer’s faithless servant claim because it was not plead with the required specific factual allegations.³⁰ Similarly, in the 2020 case, Babbitt v. Keoppel Nissan, Inc., the court held that the defendants’ cross-claim that the plaintiff, a former finance manager, had been a faithless servant because the defendants failed to provide any detail beyond conclusory allegations such as “’[t]he Plaintiff’s disloyalty permeated her services in its most material and substantial part.” ³¹ Further, in the 2019 case of Stefanovic v. Old Heidelberg Corp., Defendants alleged in a cross-claim that Plaintiffs, former restaurant personnel, altered the gratuity amount on customers’ receipts to give themselves a higher tip and, therefore, under the faithless servant doctrine, forfeited compensation paid to them during those periods of employment³². However, because the defendants did not provide any specific instances of receipt altering by the plaintiffs, their counterclaim was dismissed.³³

In sum, the faithless servant doctrine under New York law remains a potent weapon for employers to use against former employees who engaged in certain kinds of misconduct, which serves two significant purposes: deterrence for employees’ disloyalty and the court-sanctioned rewarding of meaningful monetary remedies to wronged employers. However, employers who fail to prove when and how the former employee acted disloyally should, and are likely to, have their claims dismissed in New York.

¹ Western Elec. Co. v. Brenner, 41 N.Y.2d 291, 295 (1977) (quoting Lamdin v. Broadway Surface Adver. Corp., 5 N.E.2d 66 (1936)).
² Executive Trim Construction, Inc. v. Gross, 525 F.Supp.3d 357 (Dist. Ct. 2021) (citations omitted).
³ Feiger v. Iral Jewelry, 41 N.Y.2d. 928 (1977) (citing Restatement [Second] of Agency § 469).
⁴ Weschler v. Bowman, 284 N.Y. 284, 292, 34 N.E.2d 322 (1941) (alteration in original).
⁵ Lamdin, 5. N.E.2d at 66.
⁶ Feiger v. Iral Jewelry, 41 N.Y.2d at 929.
⁷ William Flloyd Union Free School Dist. V. Wright, 61 A.D.3d 856, 859 (2009).
⁸ 27 Am. Jur. 2d Employment Relationship § 65.
⁹ Phansalkar v. Andersen Weinroth & Co. L.P., 344 F.3d 184, 201 (2d Cir. 2003).
¹⁰ Id. (citing Turner v. Konwenhoven, 100 N.Y. 115, 119 , 2 N.E. 637(1885)).
¹¹ Phansalkar, 344 F.3d at 202 (citation omitted).
¹² Murray v. Beard, 102 N.Y. 505 (1886)
¹³ Phansalkar, 344 F.3d at 202 (citing Lamdin v. Broadway Surface Adver. Corp., 5 N.E.2d 66 (1936)).
¹⁴ Phansalkar, 344 F.3d at 202.
¹⁵ See Stefanovic v. Old Heidelberg Corp., No. 18 CV 2093-LTS-KNF, 6 (S.D.N.Y. Aug. 8, 2019) (“Interpreting these standards, courts in this circuit have held a faithless servant claim requires showing that the employee breached their duty of loyalty to their employer in a way that was substantial and material to the performance of their duties.”) (citation omitted) (providing an example of the interpretation of this tension between the two standards).
¹⁶ See Beach v. Touradji Capital Management, LP, 42 N.Y.S.3d 96, 102 (2016) (holding that former employer’s damages for breach of fiduciary duty were not limited to loss of investors).
¹⁷ City of Binghampton v. Whalen, 341 A.D.3d 145, 148 (2016) (citing Diamond v. Oreamuno, 24 N.Y.2d 494, 498 [1969] [internal quotation marks, citation and emphasis omitted]).
¹⁸ Musico v. Champion Credit Corp., 764 F.2d 102, 113 (2d Cir. 1985) (interpreting decisions regarding apportionment).
¹⁹ Phansalkar v. Andersen Weinroth & Co. L.P., 344 F.3d 184 (2d Cir. 2003) (citing Musico, 764 F.2d at 114).
²⁰ Trounstine v. Bauer, Pogue & Co, 144 F.2d 379, 383 (2d Cir. 1944) (Judge Swan affirmed apportionment of fees so that the employee-agents lost compensation only for improperly performed tasks, reasoning that “[t]o deprive the defendants of these commissions would be mere punishment because they had violated their duty as to other transactions.”).
²¹ Phansalkar, 344 F.3d at 184.
²² Id. at 188.
²³ Id.
²⁴ Id. (citing Lamdin, 272 N.Y. at 137, 5 N.E.2d 66 (where employee advances his own interests by procuring due bills instead of cash and, in doing so, does harm to his employer’s interest, misconduct is sufficient to warrant forfeiture, in the absence of the employer’s acquiescence)”
²⁵ Matter of Mahn v. Major. Lindsey, & Afr., LLC, 74 N.Y.S.3d 7, 8 (2018).
²⁶ Id. at 8.
²⁷ City of Binghampton v. Whalen, 341 A.D.3d 145, 148 (2016).
²⁸ Rubio v. BSDB Mgmt., 19-CV-11880 (VSB) (S.D.N.Y. Jan 12, 2021) (citations omitted).
²⁹ Fed. R. Civ. P. 9(b) (“in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.”).
³⁰ Rubio, 19-CV-11880 (VSB).
³¹ Babbitt v. Koeppel Nissan, Inc., 2020 WL 3183895 (E.D.N.Y. June 15, 2020).
³² Stefanovic v. Old Heidelberg Corp., No. 18 CV 2093-LTS-KNF, 6 (S.D.N.Y. Aug. 8, 2019).
³³ Id. at 8.

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

Posted on June 22, 2020May 2, 2022 by Richard Friedman

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

The court first considers whether the covenant is reasonable in scope and duration; and
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
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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 Restrictive Covenants (Other Than Non-Competes) in New York

Posted on June 4, 2019May 2, 2022 by Richard Friedman

What is a Restrictive Covenant?

Our last blog article provided an update on the state of New York law concerning non-compete provisions. Although the subject of non-competes continues to attract a lot of media attention, and will no doubt lead to a further update by us over the next year or so, we turn now to the state of New York law concerning restrictive covenants other than non-competes. A restrictive covenant is a contractual provision that many employers include in employment and severance agreements. They 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 and severance agreements, these covenants can often be found in such documents as:

Stock option agreements;
Long-term compensation plans; and
Agreements governing the sale of a company.

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 This is because the public policy of the state favors economic competition and individual liberty and seeks to shield employees from the superior bargaining position of employers.² The test New York courts use to determine whether a restrictive covenant is reasonable was articulated by the Court of Appeals in BDO Seidman v. Hirshberg. It stated that “[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.”³ Applying this test, courts analyzing a restrictive covenant take a two-step approach:⁴

The court first considers whether the covenant is reasonable in scope and duration; and
If so, it considers 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 them to be unreasonable when the restriction covers a geographic areas where the employer does not compete, or where the provision would effectively prevent the employee from continuing to work in a particular industry.⁵ 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 employer’s trade secrets, confidential customer lists, or protection from competition by a former employee whose services are unique or extraordinary.⁶ Additionally, an employer has a legitimate interest in protecting client relationships or goodwill developed by an employee at the employer’s expense.⁷

Types of Restrictive Covenants

While non-compete provisions discussed in our last blog article are the most common type of restrictive covenants, New York courts recognize other types of restrictive covenants such as:

non-solicitation provisions for clients or customers;
no-hire provisions;
and “garden leave” provisions.

1. Non-solicitation Provisions

A non-solicitation provision is a restrictive covenant which prohibits former employees, for a specific period of time after the employment relationship ceases, from soliciting the former employer’s customers or providing competing services to those customers.⁸ They often also prohibit the former employee from assisting the new employer in trying to secure business from the former employer’s customers.⁹

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 from soliciting and/or performing services for particular customers for a specified time period.¹⁰

Yet New York courts have held found that a non-solicitation provision is too broad to be enforced as written if it is not keyed to 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.¹¹

Thus, a court will find a non-solicitation clause to be overbroad if it prohibits an employee from servicing clients who came to the firm for the purpose of availing themselves of the employee’s services as a result of the employee’s own recruitment efforts.¹² But, if the patronage of the client, was acquired through the expenditure of the employer’s resources, rather than the employee’s, then maintaining that client relationship would likely be deemed a legitimate interest and in such event the provision would be enforced.¹³

2. No-hire Provisions

A non-solicitation clause that applies to the solicitation of employees has been referred to by courts as a non-recruitment or a no-hire provision. Conduct that violates a clause such as this includes identifying employees who would be recruited, direct or indirect solicitation of employees, and speaking to employees concerning how they would like to be compensated by the new employer.¹⁴

The New York Court of Appeals has not considered whether a covenant not to solicit employees is enforceable. However, both the Second Department and New York federal courts have stated that New York recognizes the enforceability of covenants not to solicit employees.¹⁵ Like other restrictive covenants, they are subject to a reasonableness analysis but are considered inherently more reasonable than a covenant not to compete.¹⁶ The United States District Court for the Southern District of New York has gone as far as saying that these sorts of provisions can be viewed as prima facie enforceable when they are reasonable in scope and limited in duration.¹⁷

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.¹⁸ 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 but direct them not to come to work or perform services, giving the employees leave to “tend to their gardens” or any other pursuit outside of the job, provided that the employees do not compete with their former employer.¹⁹ Extended notice provisions may be mutual but can also require that only the employee provide notice, with no similar obligation on the employer. Where mutual, these provisions without exception (to our knowledge) do not require such notice from employers where the employee is being terminated for cause.²⁰

¹ BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 389 (1999).

² Mathias v. Jacobs, 167 F.Supp. 2d 606, 611 (S.D.N.Y. 2001).

³ 93 N.Y. 2d at 389.

⁴ Devos, Ltd v. Record, 2015 WL 9593616 (E.D.N.Y. 2015).

⁵ Good Energy, L.P. v. Kosachuk, 49 A.D.3d 331 (1st Dep’t 2008).

⁶ BDO Seidman, 93 N.Y.2d at 389.

⁷ Gundermann & Gundermann Ins. v. Brassill, 46 A.D.3d 615 (2d Dep’t 2007).

⁸ 4B N.Y.Prac., Com. Litig. In New York State Courts § 80:8 (4th ed.).

⁹ Id.

¹⁰ Contempo Communications, Inc. v. MJM Creative Services, Inc., 182 A.D.2d 351 (1st Dep’t 1992).

¹¹ GFI Brokers, LLC v. Santana, 2008 WL 3166972 (S.D.N.Y. 2008).

¹² Zinter Handling, Inc v. Britton, 46 A.D.3d 998 (3d Dep’t 2007); Pure Power Boot Camp, Inc v. Warrior Fitness Boot Camp, LLC 813 F. Supp. 2d 489 (S.D.N.Y 2011).

¹³ Marshall & Sterling, Inc v. Southard, 148 A.D.3d 1009 (2d Dep’t 2017); see also Garber Bros, Inc. v. Evlek 122 F. Supp. 2d 375, 379 (E.D.N.Y. 2000).

¹⁴ Marsh USA Inc. v. Karasaki, 2008 Wl 4778239 (S.D.N.Y. 2008).

¹⁵ Veraldi v. American Analytical Laboratories, Inc., 271 A.D.2d 599 (2d Dep’t 2000); MasterCard International Incorporated v. Nike, Inc., 164 F.Supp 3d 592 (S.D.N.Y. 2016).

¹⁶ Renaissance Nutrition, Inc v. Jarrett, 2012 WWl 42171 *5 (W.D.N.Y. 2012); see also MasterCard International, 2016 WL 797576 (S.D.N.Y. 2016) (stating that “the reasonableness test set forth in BDO Seidman applies to non-recruitment provisions.”).

¹⁷ General Patent Corp. v. Wi-Lan Inc., 2011 WL 5845194 (S.D.N.Y. 2011).

¹⁸ 4B N.Y.Prac., Com. Litig. In New York State Courts § 80:10 (4th ed.).

¹⁹ Id.

²⁰ Id.

Enforceability of Non-Compete Provisions in NY When Involuntary Termination Is Without Cause

Posted on July 24, 2017May 2, 2022 by Richard Friedman

A question that is or should be important to employers and employees alike is whether non-compete provisions in an employment agreement can be enforced in New York when the employee is terminated involuntarily without cause. As is well known, the law regarding restrictive covenant provisions such as non-competes is a matter of state law. Although disfavored in the typical employment context under New York law on the grounds that they interfere with a person’s right to earn a living, non-compete provisions are enforced if the terms are:

no greater than required to protect an employer’s legitimate protectable interests and
reasonable in temporal and geographic scope.

See Johnson Controls, Inc. v. A.P.T. Critical Sys. Inc., 323 F.Supp. 2d 525,533 (S.D.N.Y. 2004).

Some New York courts have concluded that non-compete clauses are per se unenforceable when the employee in question was terminated involuntarily without cause. However, other courts have concluded that this is not necessarily so. A Court of Appeals decision often cited to support both of these conclusions is Post v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 48 N.Y. 2d 84, rearg. denied, 48 N.Y.2d 975 (1979). In that matter, two employees who were involuntarily terminated without cause by Merrill Lynch subsequently joined a competing firm. Having agreed to forfeiture-for-competition clauses in their agreements with Merrill Lynch, the employees were told fifteen months after their termination that, pursuant to a provision of the firm’s pension and profit sharing plan which permitted forfeiture if an employee directly or indirectly competed with the firm, their accrued pension benefits had been revoked. The Court of Appeals, New York’s highest court, held that such a forfeiture-for-competition clause was unenforceable where an employee had been discharged without cause, stating that “[an] employer should not be permitted to use offensively an anti-competition clause coupled with a forfeiture provision to economically cripple a former employee and simultaneously deny other potential employers his services.” 48 N.Y.2d at 89.

As mentioned, New York courts have interpreted Post inconsistently. Some have applied it to all non-compete agreements and others have applied its rule more narrowly, i.e., only to forfeiture-for-competition clauses in a context where the employee was terminated without cause. For example, the Second Department and at least three judges in the Southern District of New York have similarly ruled that Post stands for the proposition that non-compete clauses are categorically precluded from enforcement when an employee has been involuntarily discharged without cause. See, e.g., Grassi & Co., CPAs, P.C. v. Janover Rubinroit, LLC, 82 A.D.3d 700 (2d Dep’t 2011); Arakelian v. Omnicare, Inc., 735 F. Supp. 2d 22 (S.D.N.Y. 2010).

Other New York courts have ruled that Post does not stand for a per se rule applicable to all restrictive covenants. Most notably, in Morris v. Schroder Capital Management International, 7 N.Y.3d 616, 621 (2006), the Court of Appeals itself, citing Post, stated that “a court must determine whether forfeiture is ‘reasonable’ if the employee was terminated involuntarily without cause.” See also Hyde v. KLS Professional Advisors Group, LLC, 500 Fed.Appx. 24 (2d Cir. 2012); Brown & Brown, Inc. v. Johnson, 115 A.D.3d 162 (4th Dep’t 2014), rev’d on other grounds, 2015 WL 3616181 (2015).

In Hyde, the Second Circuit concluded that Post should be interpreted narrowly, cautioning that the Court of Appeals addressed only a forfeiture-for-competition clause in that matter, and that the district court should not “[extend] Post beyond its holding.” 500 Fed.Appx. 24 at 26.

In Brown, Justice Whalen of the Fourth Department wrote that “even assuming, arguendo, that [the employee] was terminated without cause, we conclude that such termination would not render the restrictive covenants in the [agreement] unenforceable.” 115 A.D.3d 162 at 170. Justice Whalen went on to emphasize that the court in Post dealt only with a forfeiture-for-competition clause; i.e. he concluded that Post does not create a per se rule applicable to all restrictive covenants. Id at 170.

While there is admittedly confusion in this area of the law in New York, the most recent cases support the view that non-compete provisions are not per se unenforceable in New York solely because an employee has been terminated involuntarily without cause.

Central to a correct prediction of a court’s ruling regarding the enforceability of a non-compete provision is a determination of what exactly the covenant purports to restrict and what the penalties for noncompliance are to be. Based upon the New York case law that has developed since Post, there can be no doubt that a forfeiture-for-competition clause, which stipulates that an employee will lose certain entitlements, such as pension benefits, upon involuntary termination without cause will not be upheld. However, we cannot have the same certainty when the non-compete provision does not involve the forfeiture of pension or other benefits.

Because of the uncertainty in this area of the law, capable management side employment counsel should participate in drafting or revising all non-compete provisions so that they can be crafted in such a way as to make enforceability more likely. The lawyers at Richard Friedman PLLC regularly counsel corporate clients in connection with such provisions as well as other provisions that are part of employment agreements, severance agreements, and consulting agreements and litigate concerning those provisions when appropriate.

Richard B. Friedman

Richard Friedman PLLC
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