New York law generally does not favor non-compete agreements, viewing them as unreasonable restraint of trade. As a result, New York courts apply a rigorous standard when deciding whether to enforce these restrictive agreements. The strict standard was demonstrated in Multiplier Inc. v. Moreno, et al. In Multiplier Inc., the Manhattan Commercial Division considered a request to enforce a non-compete provision against a former employer, while scrutinizing the provision in question to determine whether it was reasonable and necessary to protect legitimate business interests.
Defendant-Employee Joins Plaintiff-Company and Signs Non-Compete Agreement
Plaintiff Multiplier Inc. d/b/a Harness Wealth (“Harness”) is a startup company that focuses in providing financial and tax strategies for equity stock options, business ownership, and equity partnerships. Defendant Laura Moreno joined the team as a Senior Tax Manager in the summer of 2020. Moreno was instrumental in developing and administrating the “Harness for Employers” program, which offers startup companies with valuable resources and assistance in educating their employees on strategies to maximize the value of their equity ownership.
When Moreno joined Harness, she executed a Proprietary Information and Assignment Agreement (“Agreement”). This Agreement included a non-compete covenant, which provided in pertinent part:
“[i]n order to protect the Company’s Proprietary Information and good will, during my Service Relationship and for a period of one (1) year following the termination of my position of as a Service Provider for any reason (the ‘Restricted Period’), I will not directly or indirectly, whether as owner, partner, shareholder, director, manager, consultant, agent, employee, co-venturer or otherwise, engage, participate or invest in any business activity anywhere in the United States that develops, manufactures or markets any products, or performs any services, that are otherwise competitive with or similar to the products or services of the Company (including its subsidiaries (including joint ventures)), or products or services that the Company (including its subsidiaries (including joint ventures)) has under development or that are the subject of active planning at any time during my Service Relationship [], or products or services that the Company [] has under development or that are the subject of active planning at any time during [Moreno’s] Service Relationship[.]”
In the fall of 2021, Moreno resigned from her position at Harness and joined defendant eShares, Inc. (“Carta”), a software company that was offering the same services and products as the Harness for Employers program.
Harness Files Lawsuit Alleging Breach of Non-Compete Agreement
In September 2022, Harness commenced a lawsuit against Moreno and Carta for violating the non-compete covenant of the Agreement. The lawsuit included claims for declaratory judgment, tortious interference with contract, and unjust enrichment. Harness also sought attorneys’ fees, costs, and compensatory and punitive damages.
Defendants moved to dismiss the breach of contract claim, arguing that the non-compete provision was unreasonable and unenforceable. They argued that the non-compete covenant was unreasonable and thus, unenforceable. They contended that because the remaining claims were also based on the non-compete provision, these claims should also be dismissed.
Under New York law, the test for determining the reasonableness of a non-compete agreement consists of a three-prong test. A restraint on employee competition is considered reasonable if it:
- “is no greater than is required for the protection of the legitimate interest of the employer,
- does not impose undue hardship on the employee, and
- is not injurious to the public”
(BDO Seidman v Hirshberg).
New York courts strictly apply this rule to limit enforcement of “broad restraints on competition” (see id.). With respect to agreements not to compete with professionals, courts give “greater weight to the interests of the employer in restricting competition within a confined geographical area” (id.). But to avoid overly broad restraints on competition, courts limit such interests “to the protection against misappropriation of the employer’s trade secrets or of confidential customer lists, or protection from competition by a former employee whose services are unique or extraordinary” (Harris v Patients Med., P.C.). To establish that the former employee performed unique or extraordinary services, the employer must show that the employee was “irreplaceable” and that their departure resulted in “special harm to the employer” (Pure Power Boot Camp, Inc. v Warrior Fitness Boot Camp, LLC). Courts will find restrictive covenants to be unenforceable when the services are not extraordinary or unique (Harris v Patients Med., P.C.).
The New York Court of Appeals also has recognized that employers have a legitimate interest in preventing former employees from “exploiting or appropriating the goodwill of a client or customer, which had been created and maintained at the employer’s expense, to the employer’s competitive detriment” (BDO Seidman v Hirshberg).
In their motion to dismiss, Defendants argued that Harness failed to allege that (1) Moreno’s services were unique or extraordinary, and (2) Moreno misappropriated Harness’ trade secrets or confidential customer lists.
Court Finds that Former Employer Was Not Unique and the Non-Compete Provision Was Overbroad
Applying the test for determining the reasonableness of a non-compete provision, Manhattan Commercial Division Justice Andrea Masley sided with the Defendants, granting their motion to dismiss the cause of action for breach of the non-compete covenant.
Justice Masley found that “there are no allegations that Moreno was ‘irreplaceable and that [her] departure caused some special harm to’ Harness.” Justice Masley further found that Harness’s Complaint contained “no allegations that Moreno had special value to Harness because of any relationships she developed with the clients or that she specifically developed a special or unique relationship with Harness’ clients.” Justice Masley determined that Harness’s allegations that Moreno was the “face of the [Harness for Employers program]” were insufficient because direct interaction with clients alone does not automatically result in the creation of a unique relationship.
Justice Masley also found that Harness failed to allege a legitimate interest in protecting its goodwill. The Court found Harness’s conclusory allegations that Moreno’s breach caused harm to Harness’ goodwill and its relationship with existing and prospective clients insufficient.
The Court also determined that the non-compete clause was overbroad and its geographical scope unreasonable. The Court ruled that the clause’s expansive language was “unrestrained by any limitations keyed to uniqueness, trade secrets, confidentiality or even competitive unfairness” (citing Columbia Ribbon & Carbon Mfg. Co. v A-1-A Corp.).
Takeaway
New York courts impose an “overriding limitation of reasonableness” on non-compete provisions (Pure Power Boot Camp, Inc. v Warrior Fitness Boot Camp, LLC). While wider latitude is given to provisions between professionals, enforcing such a provision requires a demonstration that enforcement is necessary to protect against misappropriation of the employer’s trade secrets or of confidential customer lists or that the former employer was unique or extraordinary. If you are considering entering into or drafting a non-compete agreement, you must be mindful of these limitations.
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