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

_________________________

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.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2017 by Torys LLP.
All rights reserved.

Tags: