Employers Cannot Rely on Favorable Out-of-State Law to Restrict New York Employees

In February 2014, a New York state appellate court held that an employer cannot rely on another state’s law to enforce a restrictive covenant over a New York employee when it is "obnoxious" to New York public policy.¹ New York’s highest court, the Court of Appeals, has now affirmed the principle.²

What You Need To Know

• "New York’s requirements that courts strictly construe restrictive covenants and balance the interests of the employer, employee and general public" apply to a New York employee when another state’s pro-employer law governs the employment agreement.³ A multi-state employer, therefore, cannot benefit from state law that is more favorable than New York’s to the employer’s interests.
• The Court of Appeals reiterated New York’s three-prong test for determining that a restrictive covenant is reasonable if it: "(1) is no greater than required for the protection of legitimate interest of the employer; (2) does not impose undue hardship on the employee; and (3) is not injurious to the public." A violation of any prong renders the covenant invalid.⁴
• In this instance, the covenant was over-broad because it prohibited the employee, in her job for a new employer, from working with any of the former employer’s New York customers, even those she had never met, did know about and for whom she had performed no work.⁵
• The Court of Appeals remanded the case to the trial court to determine whether the restrictive covenant might be susceptible to partial enforcement. New York recognizes the "reformation" doctrine, permitting a court to enforce the reasonable portion of a restrictive covenant.
• Partial enforcement is determined on a case-specific basis and requires the employer to demonstrate an absence of overreaching, coercive use of dominant bargaining power or other anti-competitive misconduct, and a legitimate business interest consistent with reasonable standards of fair dealing.⁶

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¹ For more information about the lower court's decision, read our bulletin, "Avoiding ‘Obnoxious’ Choices of Law and Restrictive Covenants in Employment Agreements."

² Brown & Brown Inc. v. Johnson, 25 N.Y.3d 364, slip op.(2015).

³ Slip op. at 7.

⁴ Id. at 5.

⁵ Id. at 7-8.

⁶ Id. at 8-9.

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