New York Non-Compete: The Legitimate Interests Test
Decided almost a half century ago, Reed, Roberts Assoc. v Strauman, 40 N.Y.2d 303 (N.Y. 1976), remains a pillar of New York case law when determining if a non-compete is enforceable. With this decision, New York State’s highest court established a framework for determining whether a non-compete (or any other restrictive covenant) is “reasonable” and, therefore, enforceable.
In this case, the employer, Reed, Roberts Associates, Inc. (“Reed Roberts” and, sometimes, “the company”), provided advice and guidance to employers with respect to their obligations under New York State unemployment laws. The company’s expertise also extended to advising their clients in the areas of worker’s compensation, disability benefits, and pension plans. By 1976, Reed Roberts boasted over 6,000 customers, 21 offices nationwide, and gross sales of almost $4 million.
In 1962, Reed Roberts hired John Strauman. As part of his employment contract, Mr. Strauman agreed to two restrictive covenants: a non-solicitation covenant and a non-compete covenant. The non-solicitation covenant provided that Mr. Strauman would never solicit any of Reed Roberts’ clients. The non-compete provided that Mr. Strauman would not, for a period of three years from the date of his termination of employment, engage in or have an interest in any business of the same type as Reed Roberts, provided such business was located within the City of New York or the counties of Nassau, Suffolk and Westchester.
During his 11-year tenure with Reed Roberts, Mr. Strauman became a valuable employee and received three promotions, eventually rising to the position of senior vice-president in charge of operations. A key employee, Mr. Strauman was both responsible for formulating company policy and instrumental in devising most of the forms utilized by the company in rendering its services and in setting up its computer system. “Importantly, however, he was not responsible for sales or obtaining new customers.” Reed, Roberts Assoc. v Strauman, 40 N.Y.2d 303 (N.Y. 1976) p. 306.
In 1973, Mr. Strauman left Reed Roberts and started his own company, Curator Associates, in direct competition with his former employer. Curator Associates was located in the same municipality as Reed Roberts, a geographical area specifically covered by the non-compete covenant that Mr. Strauman had signed in 1962.
Reed Roberts brought a lawsuit against John Strauman and Curator Associates alleging that Strauman had been soliciting their customers and requesting that the court enforce the non-compete and non-solicitation covenants. Specifically, Reed Roberts requested relief via a court-issued injunction prohibiting Mr. Strauman and Curator Associates from (a) engaging in the business of unemployment tax control within the New York City metropolitan area for a period of three years, and (b) soliciting any of Reed Roberts’ customers permanently.
Rules for Evaluating Restrictive Covenants
Under New York State law, generally, restrictive covenants such as non-compete and non-solicitation provisions are enforceable only to the extent that they are reasonable. Whether or not a provision is determined to be “reasonable” differs based on context. In Reed, Roberts Assoc. v Strauman, the New York Court of Appeals outlined a framework for determining whether a restrictive covenant is “reasonable” (and therefore enforceable) under New York law.
Reasonableness Framework for Restrictive Covenants
In the employment context, restrictive covenants (such as non-competes) will only be considered reasonable and therefore enforceable to the extent that such provisions are:
- reasonable in time and geographic area;
- necessary to protect the employer’s legitimate interests;
- not harmful to the general public; and
- not unreasonably burdensome to the employee.
In addition to considering the above framework for determining reasonableness, New York courts are more inclined to find that a restrictive covenant is reasonable if the facts show that there has been a conspiracy or breach of trust by the employee that results in commercial piracy.
When is a Non-Compete Necessary to Protect an Employer’s “Legitimate Interests”?
Focusing on the second prong of the reasonableness framework described above, the New York Court of Appeals set forth the following two-part test for determining whether a restrictive covenant (such as a non-compete) is necessary to protect an employer’s legitimate interest.
A restrictive covenant is necessary to protect an employer’s legitimate interests and enforceable on such grounds only:
- to the extent necessary to prevent the disclosure or use of an employer’s trade secrets or confidential customer information; or
- where an employee’s services are unique or extraordinary.
When is a Non-Compete Not “Unreasonably Burdensome” to the Employee?
Focusing on the fourth prong of the reasonableness framework, the New York Court of Appeals shed some light on when a non-compete might be considered unreasonably burdensome to the employee. According to the court, a restrictive covenant is unreasonably burdensome to an employee when it restrains the employee’s right to apply, to their best advantage, the skills and knowledge (including those techniques which are skillful variations of general processes known to the particular trade) acquired by the overall experience of any previous employment.Id.at p. 307.
The Reed court also noted an exception for members of “the learned professions.” The Court explained that a restrictive covenant might not be unreasonably burdensome to such an employee, provided that the restrictive covenant is reasonable and such employee’s services are unique or extraordinary.
On the first issue, the trial court ruled against Reed Roberts, refusing to grant an injunction that would enforce the non-compete and prohibit Mr. Strauman and Curator Associates from engaging in its business. The trial court explained that an injunction was not appropriate because (a) there were no trade secrets involved and (b) Mr. Strauman’s services were not so unique or extraordinary (even though he was considered a “key employee”), and therefore the non-compete agreement was not reasonable and was therefore not enforceable.
On the second issue, the trial court ruled in favor of Reed Roberts, granting an injunction to permanently prohibit Mr. Strauman and Curator Associates from soliciting Reed Roberts’ clients. The trial court reasoned that it would be unjust and unfair for Mr. Strauman to utilize his knowledge of Reed Roberts’ internal operations to solicit its clients.
Upon appeal, the New York State Appellate Division affirmed the trial court’s decision on both issues. The decision was then appealed to the New York State Court of Appeals, the state’s highest court.
New York State Court of Appeals Opinion
Issue #1: Is the Non-Compete Enforceable?
On the first issue of whether the non-compete was enforceable, the New York State Court of Appeals affirmed the trial court’s ruling: the non-compete was not enforceable since its enforcement was not necessary to protect Reed Roberts’ legitimate interests.
Focusing on whether the non-compete was reasonable to protect Reed Roberts’ legitimate interests, the Court of Appeals forged, then applied, its two-part test for determining whether a restrictive covenant (such as a non-compete) is necessary to protect an employer’s legitimate interest. The court explained that a restrictive covenant will be enforceable on such grounds only (1) to the extent necessary to prevent the disclosure or use of trade secrets or confidential customer information, or (2) where an employee’s services are unique or extraordinary.
Applying the two-part test, the court held that the non-compete was not necessary to protect Reed Roberts’ legitimate interests; Mr. Strauman had not been in possession of trade secrets or confidential information, nor had he provided services that reached the level of “unique” nor “extraordinary” required under the test.
Issue #2: Is the Non-Solicitation Provision Enforceable?
On the second issue of whether the non-solicitation provision was enforceable, the Court of Appeals ruled against Reed Roberts, reversing the trial court’s granting of an injunction to permanently prohibit Mr. Strauman and Curator Associates from soliciting Reed Roberts’ clients.
The Court of Appeals dismissed the trial court’s reasoning that it would be unjust and unfair for Mr. Strauman to utilize his knowledge of Reed Roberts’ internal operations to solicit its clients. Instead, the court analyzed (a) whether enforcing the non-solicitation provision was necessary to protect Reed Roberts’ legitimate interests, and (b) whether Mr. Strauman’s alleged use of Reed Roberts’ customer list amounted to commercial piracy.
Invoking the same legitimate interests test that they had applied to the non-compete issue, the court found that, since Mr. Strauman was neither in possession of trade secrets (a fact which had not been disputed by Reed Roberts) or confidential customer information, nor had his services reached a sufficient level to qualify as “unique” or “extraordinary.” Therfore, the court ruled that, enforcement of the non-solicitation provision was not necessary to protect Reed Roberts’ legitimate interests.
Furthermore, the Court of Appeals explained that Mr. Strauman’s alleged use of Reed Roberts’ customer list to solicit clients for Curator Associates did not amount to commercial piracy. In support of this finding, the Court of Appeals noted that Reed Roberts had failed to show that Mr. Strauman had engaged in a “studied copying” of the customer list. Additionally, the court pointed out that Reed Roberts’ customer list was not confidential customer information, referencing Reed Roberts’ own admissions that every company with employees was a prospective customer for them and that the names and contact information of current and potential customers was easily ascertainable from public sources, including nationally known publications.
Ottinger Employment Lawyers
If you have questions about the enforceability of your non-compete, contact us today. The Ottinger Firm has extensive experience representing New York employees burdened by restrictive non-competes. With offices in New York City, Los Angeles and San Francisco, our team of employment attorneys is ready and prepared to assist you.