The Appellate Division, Fourth Department, recently provided an excellent roadmap to New York’s law of restrictive covenants. In reaching its result, the court first found that a Florida choice-of-law provision in an employment agreement was “truly obnoxious” to New York public policy and therefore unenforceable against a New York employee of a Florida-based company.
In Brown & Brown, Inc. v. Johnson, __ NYS2d __, 2014 WL 486703, at *1 (4th Dept 2014), defendant Johnson was hired by plaintiff Brown & Brown, Inc. to provide actuarial analysis. On her first day of work, Johnson was presented with an employment agreement that contained a non-solicitation covenant prohibiting Johnson from soliciting or servicing any of Brown’s New York clients for two years following the termination of Johnson’s employment. The agreement also contained a Florida choice-of-law provision. Id.
After terminating her, Brown sued Johnson for, among other things, violating the non-solicitation covenant. On Johnson’s summary judgment motion, the motion court first held that the Florida choice-of-law provision was unenforceable because the agreement bore no reasonable relationship to Florida, but then, applying New York law, denied her motion on the merits of the non-solicitation claim. Id.
On appeal, the Fourth Department agreed that the Florida choice-of-law provision was unenforceable, albeit for a different reason than cited by the motion court. New York courts will generally enforce a choice-of-law provision to “effectuate the parties’ intent.” Id. at *2 (citing Welsbach Elec. Corp. v. MasTec N. Am. Inc., 7 NY3d 624, 629 (2006)). However, the law must “bear a reasonable relationship to the parties or the transaction” and must not be “truly obnoxious” to New York’s public policy. Id. (quoting Cooney v. Osgood Mach., 81 NY2d 66, 79 (1993)). Contrary to the motion court’s conclusion, the Florida law passed the reasonable relationship test because Brown was a Florida corporation with its principal place of business in Florida. In addition, Johnson’s salary was administered in Florida and paid from a Florida bank account. Further, Johnson had traveled to Florida to attend training sessions.
But the Fourth Department reasoned that the choice-of-law provision was unenforceable because it was “truly obnoxious” to New York public policy. In New York, non-compete covenants are judicially disfavored because “powerful considerations of public policy . . . militate against sanctioning the loss of a [person’s] livelihood.” Id. at *2 (citing Reed, Roberts Assoc. v. Strauman, 40 NY2d 303, 307 (1976)). “So potent is this policy that covenants tending to restrain anyone from engaging in any lawful vocation are almost uniformly disfavored and are sustained only to the extent that they are reasonably necessary to protect the legitimate interests of the employer and not unduly harsh or burdensome to the one restrained.” Id. (citing Post v. Merrill Lynch, Pierce, Fenner & Smith, 48 NY2d 84, 86-87 (1979)).
In analyzing whether a restrictive covenant is reasonable, New York courts apply a three-pronged test and will find a restraint reasonable only if it “(1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public.” Id. at *2 (citing BDO Seidman v. Hirshberg, 93 NY2d 382, 388-89 (1999)). If the restrictive covenant violates any one of these prongs, it will be found invalid. Id.
Florida takes a different approach. When analyzing the reasonableness of a restrictive covenant, Florida courts are expressly forbidden from considering the hardship imposed upon the employee. Id. at *3 (citing Florida Statutes § 542.335(1)(g)(1) (“In 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.”). Based on this conflict between New York and Florida law, the Fourth Department concluded that Florida law is “truly obnoxious” to New York public policy and therefore New York law applied to the dispute. Id. It noted that courts in Georgia, Illinois, and Alabama have similarly found that Florida’s law on restrictive covenants conflicts with their public policy. Id.
Applying New York law to the non-solicitation covenant, the Fourth Department found that it was overbroad and unenforceable because it prohibited Johnson from soliciting clients with whom she had never acquired a relationship through her employment with Brown. Id. at *4. Citing BDO Seidman, Brown tried to get some relief by arguing that the court should partially enforce the covenant to prohibit Johnson from soliciting those clients with whom she actually developed a relationship during her employment. Id. at *5. In that case, the Court of Appeals had held that partial enforcement of a restrictive covenant may be appropriate “if the employer demonstrates an absence of overreaching, coercive use of dominant bargaining power, or other anti-competitive misconduct, but has in good faith sought to protect a legitimate business interest, consistent with reasonable standards of fair dealing.” Id. (citing BDO Seidman, 93 NY2d at 394).
In analyzing whether partial enforcement is warranted, New York courts are to consider the following factors: “the imposition of the covenant in connection with hiring or continued employment–as opposed to, for example, imposition in connection with a promotion to a position of responsibility and trust–the existence of coercion or a general plan of the employer to forestall competition, and the employer’s knowledge that the covenant was overly broad.” Id. (citing Scott, Stackrow & Co., C.P.A.’s, P.C., 9 AD3d 805, 807 (2004)). Applying that test, the Fourth Department ultimately concluded that partial enforcement was not warranted because it was undisputed that Johnson was only presented with the Agreement on her first day of work after she had left her prior employment. There was also no evidence that in exchange for signing the Agreement, Johnson received any benefit from Brown other than her continued employment. Id.