Too “Obnoxious” to Enforce: New York Court Refuses to Apply Florida Law in Considering Restrictive Covenants

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Recently, a New York appellate court concluded that an employer could not rely upon a Florida choice-of-law provision in an employment agreement to enforce restrictive covenants against a former employee, even though the employer was a Florida parent corporation with its principal place of business in Florida. The Supreme Court of New York’s Appellate Division, Fourth Judicial Department ruled that the Florida choice-of-law provision was unenforceable because it was “truly obnoxious” to New York public policy. See Brown & Brown, Inc. v. Johnson, 980 N.Y.S.2d 631 (4th Dep’t 2014).

In this case, the employment agreement contained three restrictive covenants: (i) a non-solicitation covenant, which prohibited the defendant-employee from soliciting or servicing any client of the employer for two years after termination; (ii) a confidentiality covenant, which prohibited the employee from disclosing the employer’s confidential information or using it for her own purposes; and (iii) a non-inducement covenant, which prohibited the employee from inducing current employees from leaving for two years after termination. The employment agreement also stated that it would be governed by, construed, and enforced according to Florida law.

Florida law, which addresses “all contractual restrictions such as noncompetition/nonsolicitation agreements, confidentiality agreements, exclusive dealing agreements, and all other contractual restraints of trade,” among other things, expressly forbids courts from considering the hardship imposed upon an employee in evaluating the reasonableness of a restrictive covenant. Florida Statute § 542.335(1)(g)(1) provides that “[i]n determining the enforceability of a restrictive covenant, a court… [s]hall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought.” (emphasis added). The statute further requires courts to construe restrictive covenants in favor of the party seeking to protect its legitimate business interests, stating that courts “shall not employ any rule of contract construction that requires the court to construe a restrictive covenant narrowly, against the restraint, or against the drafter of the contract.”  § 542.335(1)(h).

By contrast, under New York law, determining whether a restrictive covenant is reasonable involves the application of a three-prong test:

  1. Is it greater than required for the protection of the employer’s legitimate interest?
  2. Does it impose undue hardship on the employee?
  3. Is it injurious to the public?

And a violation of any of these three prongs renders the restrictive covenant invalid. As per New York law, a restrictive covenant that imposes an undue hardship on an employee is unacceptable.

The court determined that if Florida law were applicable, the restrictive covenants would be upheld in favor of the employer without any consideration of the potential impact such covenants would have on the terminated employee. The court found that this result would be “obnoxious” and wholly contrary to New York public policy. Indeed, the New York court was not alone in this interpretation, as courts in Alabama, Georgia, and Illinois have similarly held that the Florida statute in question conflicts with the public policy of their respective states.

Having resolved the choice-of-law question in favor of the application of New York law, the court turned to the employer’s non-solicitation covenant. The court ruled that the covenant was overly broad, as it barred the employee from soliciting any business from anyone who is a customer of the employer’s New York offices, without any regard to whether the employee had any prior relationship with the customers. During oral argument, the employer suggested that, at a minimum, the court should partially enforce the covenant, as expressly permitted in the employment agreement. The employer stated that this would only prevent the former employee from working with clients with whom she had a previous relationship for a period of time. However, the court decided that simply because the employment “[a]greement contemplated partial enforcement does not require partial enforcement of the non-solicitation covenant. The decision whether to do so is left to the discretion of the court.”

As a result, employers located, or with employees working, in New York should think twice about including a Florida choice-of-law provision in agreements with employees.

Topics:  Choice-of-Law, Parent Corporation, Restrictive Covenants

Published In: Civil Procedure Updates, General Business Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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