Avoiding "Obnoxious" Choices of Law and Restrictive Covenants in Employment Agreements

A New York state appellate court recently held that a Florida choice-of-law provision in an employment agreement between a Florida-based employer and a New York-based employee was unenforceable because Florida law governing post-employment restrictive covenants was "truly obnoxious" to New York public policy. Applying New York law, the court also refused to modify and partially enforce a restrictive covenant in the employment agreement because the employer was on notice that the covenant was too broad when it imposed the agreement on the employee.

The decision, Brown & Brown, Inc. v. Johnson,¹ shows that multi-state employers cannot count on applying their home-state law to restrictive covenants with employees in other states and are at risk of losing all protection from a covenant if they over-reach in setting its scope.

Background

A Florida insurance broker hired an actuary to work in its New York office in 2006. The broker required the actuary to sign an employment agreement that was governed by Florida law. The agreement had three restrictive covenants, one of which prohibited the actuary from soliciting or servicing any of the broker’s New York clients for two years after the termination of her employment.

The broker fired the actuary in 2011 and when the actuary took a job with a competitor, the broker sued to enforce the restrictive covenants.

New York public policy disfavors restrictive covenants in employment agreements because "powerful considerations of public policy…militate against sanctioning the loss of a [person’s] livelihood."² Restrictive covenants are construed narrowly and are enforceable only when the restriction is no greater than is required to protect the legitimate interest of the employer, does not impose undue hardship on the employee, and is not injurious to the public.

In contrast, Florida by statute forbids courts from considering employee hardship when evaluating the reasonableness of restrictive covenants, forbids them from construing such covenants narrowly, and requires them to apply restrictive covenants to protect the legitimate business interests of the employer.

Holdings

Because the Florida law prohibiting courts from considering employee hardship and from construing restrictive covenants narrowly conflicts with New York law, the appellate court held that the Florida choice-of-law provision in the actuary’s employment agreement was "truly obnoxious" to New York public policy and unenforceable. The court therefore applied New York law to the restrictive covenants.

Applying New York law, the court held that the non-solicitation covenant was too broad because it prohibited the employee from soliciting any of the broker’s New York clients, whereas the New York Court of Appeals (the state’s highest court) had held in a 1999 case, BDO Seidman v.Hirshberg,³ that employees could only be prohibited from soliciting clients with which they developed a relationship while working for the employer.

The broker argued that the court should modify the covenant to apply only to clients the actuary worked with during her employment and enforce it to that extent, as permitted by New York law, but the appellate court refused to do so. The court held that the broker was on notice when it hired the actuary in 2006 that its restrictive covenant was too broad because of the 1999 decision in the BDO Seidman case. Imposing an overly broad covenant and then asking the court to modify and partially enforce it smacked of "bad faith," so the court threw out the non-solicitation covenant altogether.

_________________________

¹ Brown & Brown, Inc. v. Johnson, CA 13-00340 (4th February 7, 2014).

² Reed, Roberts Assoc. v. Strauman, 40 NY2d 303, 307 (1996).

³ BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (1999).