A recent decision by New York County Commercial Division Justice, the Hon. Barry Ostrager, gave litigants a reminder of the preference that New York courts have for reasonable non-solicitation and confidentiality clauses that do not include covenants not to compete.
In King v. Marsh & McLennan Agency, LLC, 2020 NY Slip Op 50370(U) (Sup. Ct. NY Cty, Mar. 27, 2020), the plaintiff, King, sought declaratory judgment that the non-solicitation and confidentiality agreement he entered in 2014 with the defendants (“Marsh”) was unenforceable. King was hired as a surety bond agent. As a condition of his employment, pursuant to the agreement, he agreed for a period of two years from his separation from employment, whether voluntary or not, that he would not solicit clients, prospective clients or employees of Marsh. He further acknowledged the confidential nature of his work and agreed to maintain all information in the strictest of confidence during and after his separation so long as that information remained “confidential” as defined by the agreement.
Judge Ostrager began his analysis with the landmark case BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (1999). In BDO Seidman, the Court of Appeals articulated the “prevailing standard of reasonableness” applied by New York courts in determining the validity of employee agreements not to compete. BDO Seidman held that “a restrictive covenant will only be subject to specific enforcement to the extent that it is reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee”. King at *3 (citing BDO Seidman, 93 N.Y.2d at 388)(citations omitted). BDO Seidman also noted that it previously “limited the cognizable employer interest … to the protection against misappropriation of the employer’s trade secrets or of confidential customer lists, or protection from competition by a former employee whose services are unique or extraordinary.” Id., , 93 N.Y.2d at 389)(citations omitted).
King argued, among other things, that the agreement was unenforceable because of the absence of a geographic restriction. King at *4 (citing Sussman Education, Inc. v. Gorenstein, 175 A.D.3d 1188, 1189 (1st Dep’t 2019). Marsh emphasized that the agreement “does not contain a covenant not to compete; it simply prohibits the solicitation and servicing of Marsh’s client with whom King had contact or about whom King obtained confidential information, for a period of 2 years post-employment.” King at *4 (emphasis in original). Moreover, Marsh cited six New York County Commercial Division cases and three federal district court cases in which the courts reviewed identical or nearly identical clauses and found them valid. Id.
Plaintiff also argued that insurance brokers are not considered unique or extraordinary employees, which can invalidate a non-compete. The Court rejected this argument, however, and held: “[W]hile others may have the ability to provide the same technical services, the customer relationships made King’s employment ‘special, unique, or extraordinary’ under the BDO Seidman analysis. Id. at *4 (citation omitted).
In addition, the Court found that “Marsh undeniably has a legitimate interest in trying to protect its good will, customer relationships and employee relationships” and “in preventing the misappropriation of confidential information and client lists.” Id. It found questions of fact as to whether the confidential information and client lists were publicly available and found the two-year restriction on solicitation to be reasonable.
Significantly, the Court found: “the lack of a geographical limitation is not fatal when the restriction is limited to non-solicitation and confidentiality [Marsh USA Inc. v. Karasaki, 2008 U.S. Dist. LEXIS 90986, at *48 (S.D.N.Y. 2009) (collecting cases)].” Id. at *5. King also found that the “Agreement does not impose undue hardships on King as it does not contain a non-compete clause preventing King from obtaining other employment.” Id.
In the end, the Court held that “the absence of a non-compete provision in the Non-Solicitation and Confidentiality significantly impacts the legal analysis by, for example, eliminating the need for a geographic restriction. The absence of a non-compete provision also increases the likelihood that the Court will find the clause enforceable ….” Id. at *6.
The important take-away from King is that agreements containing only non-solicitation and confidentiality clauses make equitable arguments by former employees that they are prevented from obtaining other employment and arguments as to the geographic scope less persuasive.
The lesson to be learned is that sometimes less is more. An agreement that is enforceable will offer greater protection to an employer than a seemingly stricter one that is not.