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Litigation Alert >> Restrictive Covenants for New York Employees Must Be Tailored to Comply with New York Law

July 6, 2015

The New York Court of Appeals issued a decision on June 11, 2015 in Brown & Brown v. Johnson that has important implications for New York employers with regard to restrictive covenants.

The decision holds that New York courts are unlikely to enforce a restrictive covenant agreement’s choice of law provision if the selected law from another state differs significantly from New York law. Second, courts are likely to examine the circumstances under which the covenant was provided to the employee, particularly when determining whether the court should modify or “blue pencil” an overbroad covenant to make it enforceable or whether the court should simply strike the overbroad covenant and not enforce it at all. For this reason, employers can increase the likelihood of having a restrictive covenant enforced if they furnish the covenant to a new employee simultaneously with an offer of employment, rather than after a new employee has accepted the position.

BACKGROUND
BBI, a Florida-based insurance company, hired Theresa Johnson, an experienced underwriter and actuary, for a position with its New York subsidiary. On her first day on the job, Johnson was presented with a restrictive covenant agreement which had not been provided to her when she accepted her offer of employment. The restrictive covenant prevented Johnson from soliciting “any” BBI customers for two years following termination. The covenant stated that it was governed by Florida law, even though Johnson worked in the New York office. After BBI terminated Johnson several years later, she quickly secured a position at one of BBI’s competitors. BBI sued Johnson in New York when it discovered that Johnson’s responsibilities with her new employer included rendering services to some of BBI’s clients. For more background on this case and the Appellate Division decision, please refer to our previous alert here.

FLORIDA LAW VS. NEW YORK LAW
The Court of Appeals reviewed the two state laws at issue. Florida law makes it relatively easy to enforce restrictive covenants by only requiring an employer to make “a prima facie showing” of the covenants’ necessity to protect a legitimate business interest before shifting the burden to the employee to prove that the covenants are overbroad or unnecessary. Moreover, Florida law explicitly bars a court from considering the potential harm or hardship posed by the covenants on the employee. By contrast, New York law requires courts to narrowly construe covenants because of the public policy against interfering with a person’s livelihood, and requires an employer to prove that enforcement of a restrictive covenant would not impose undue hardship to the employee.

DECISION
The New York Court of Appeals agreed with the Appellate Division’s determination that Florida law was contrary to New York public policy. The court reasoned that the burden of proving that the application of an agreement’s choice of law provision would be offensive to New York public policy is high. Nonetheless, the court found that Florida’s near-exclusive focus on the interests of employers was sufficiently “obnoxious” to justify disregarding the Florida choice of law provision. Instead, the Court of Appeals analyzed the enforceability of the restrictive covenants under New York law.

Under New York, the court quickly determined the covenant was overbroad, as written, since it prohibited Johnson from working with any of BBI’s New York customers, even those clients that Johnson neither met nor rendered services to during her employment with BBI. The court recognized that it had the power to rewrite or “blue pencil” the covenant so as to enforce the part of it that was not overbroad. Significantly, however, the court refused to blue pencil the covenant. It instead remanded the case to the trial court to conduct a fact-specific analysis of the conduct of the employer in imposing the agreement on Johnson. The court held that the lower court should determine whether any blue-penciling would be appropriate, or whether the court should refuse to enforce the restrictive covenant altogether, by considering such factors as whether the employer:

  • had used its dominant bargaining power to coerce the employee into signing the agreement;
  • had discussed the agreement or explained it to the employee before he or she signed it;
  • had encouraged the employee to seek counsel before signing the agreement;
  • permitted the employee to negotiate the terms of the agreement;
  • had presented the agreement to the employee on his or her first date of employment and required the employee to sign it at that time or lose his or her job.

Against this standard, the court noted that Johnson had already left her prior employment before BBI provided her with the covenant – “which could have caused her to feel pressure to sign the agreement, rather than risk being unemployed.” This conduct, the court said, “raised questions about whether BBI had engaged in overreaching or used coercive dominant power to obtain the restrictive covenant.”

Bottom Line

The Court of Appeals decision in Brown & Brown v. Johnson is an important reminder to New York employers that they must act with care to receive the benefits of an enforceable restrictive covenant. In particular, the decision emphasized the need for employers to tailor restrictive covenant agreements with New York-based employees to New York law and to present the agreements to employees in a non-coercive fashion.

Author(s)

MICHAEL C. LASKY
Partner/Co-Chair
212.468.4849
mlasky@dglaw.com

NEAL H. KLAUSNER
Partner/Co-Chair
212.468.4992
nklausner@dglaw.com
Litigation