Non-Authority for Non-Recruitment Covenants Under New York Law

At least in recent decisions, the courts addressing non-recruitment covenants under New York law have routinely utilized the same analysis applicable to broader restrictive covenants. For example, in Cenveo Corp. v. Diversapack, Judge Shira Scheindlin of the Southern District summarized the prevailing analytical approach as follows:

To establish a breach of contract claim on the basis of the Anti-Raiding Provisions, [Plaintiff] Cenveo must first show that they are enforceable under New York law. “New York recognizes the enforceability of covenants not to solicit employees,” but such covenants “are subject to careful judicial scrutiny” and must be reasonable. Under New York law, a restrictive covenant in an employment agreement “'is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public.'” “An employer may assert only four types of legitimate interests ' (1) protection of trade secrets; (2) protection of confidential customer information; (3) protection of an employer's client base; and (4) protection against irreparable harm where an employee's services are unique or extraordinary.” Cenveo Corp. v. Diversapack LLC, No. 09 Civ. 7544, 2009 WL 3169484, at 7 (S.D.N.Y. Oct. 1, 2009) (quoting and citing authority omitted).

In Cenveo, Judge Scheindlin ultimately denied the motion for a preliminary injunction ruling, among other things, that: 1) the anti-raiding provisions at issue were not supported by a legitimate interest of the employer (with uniqueness of the employees being the only potential ground advanced); 2) there was no likelihood of breach of the anti-raiding provisions where the new employer was not a competitor of the plaintiff; and 3) the evidence substantiated only the hiring of former Cenveo employees, not that they were recruited while still in the employ of Cenveo. Id. at 7-8. While the reasoning is sound, nothing in the Cenveo decision serves to differentiate the anti-raiding provision there from a customary restrictive covenant.

Other Decisions

Similarly, other decisions in the past 10 years addressing non-recruitment provisions under New York law have declined to address any distinction between non-recruitment provisions and more general non-compete clauses. For example, in Lazer Inc. v. Kesselring, 13 Misc.3d 427, 823 N.Y.S.2d 834 (Monroe Co. 2005), the court granted summary judgment dismissing a claim for breach of a non-recruitment provision by a former employee. In doing so, the court referred to the three-prong reasonableness test for restrictive covenants set forth in BDO Seidman v. Hirschberg, 93 N.Y.2d 382, 690 N.Y.S.2d 854 (1999), which has been utilized in many cases, including the Cenveo decision discussed above, but ruled that “the reasonableness inquiry may be avoided altogether when the court finds that application of a particular restrictive covenant will not serve any legitimate employer interest.” 13 Misc.3d at 432, 823 N.Y.S.2d at 838; see also Kelly v. Evolution Markets Inc., 626 F.Supp.2d 364, 374 (S.D.N.Y. 2009) (citing Lazer Inc. as support for applying the “three-part reasonableness test to non-recruit covenants,” but declining to reach the merits on ripeness grounds).

The Lazer Inc. court went on to find that the plaintiff had not established any legitimate employer interest ' absent allegations that the employee recruited possessed confidential information or trade secrets, or was special and unique ' and that the plaintiff and the defendant's new employer were not “competitors in any sense of the word other than that any two employers would like the services of a good employee.” Id. at 433, 823 N.Y.S.2d at 839. Again, the focus on threshold issues such as employer interest and competition do not distinguish the non-recruitment provision from any other restrictive covenant.

There are a number of cases appearing to enforce non-recruitment provisions, but many of them do not provide compelling authority going forward. In some cases, the defendants barely bothered to oppose the attempts to enforce non-recruitment provisions. In other cases, broader preliminary injunctions have included relief regarding non-recruitment provisions, without extensive separate analysis.

There are also a number of cases arising in slightly different contexts, such as where non-recruitment provisions are included in an agreement relating to the sale of a business or a transaction not wholly involving an employment relationship. See, e.g., Marsh USA Inc. v. Karasaki, No. 08 Civ. 4195, 2008 WL 4778239, at 20 (S.D.N.Y. Oct. 31, 2008); Garber Bros. Inc. v. Evlek, 122 F.Supp.2d 375, 384 (S.D.N.Y. 2000). Cases in these categories can hardly be said to constitute broad support for the enforceability of non-recruitment provisions regardless of the context.

In fact, there are notable cases declining to enforce non-recruitment provisions, such as the Cenveo and Lazer Inc. decisions discussed above. These precedents and others suggest some of the grounds that may be used to defend against attempts to enforce non-recruitment covenants. Certainly, there is authority requiring a party seeking to enforce such a covenant to demonstrate that the covenanting party is, in fact, recruiting or soliciting in violation of the agreement. See Production Resource Group, LLC v. Oberman, No. 03 Civ. 5366, 2003 WL 22350939, at 12 (S.D.N.Y. Aug. 27, 2003) (finding no likelihood of success on the merits where defendant “credibly denied” soliciting and the employee at issue had not left plaintiff's employment).

Similarly, there are cases noting the need to show that the recruitment or solicitation has in fact caused employee departures. See Mercator Risk Services Inc. v. Girden, No. 08 Civ. 10795, 2009 WL 466150, at 6 (S.D.N.Y. Feb. 23, 2009 (“[a]lthough the Court acknowledges that the fact that so many employees left Mercator to join Vista in a short period of time following Girden's resignation is strong circumstantial evidence that Girden violated his non-recruitment clause, given the longstanding relationship between Girden and many of the employees at issue, the Court finds it equally likely that these employees joined Vista on their own, without any solicitation from Girden. Thus, while Girden's non-recruitment clause may well be enforceable under Illinois law, under these circumstances the Court will not enjoin”); AVGraphics Inc. v. NYSE Group Inc., 22 Misc.3d 1139(A), 2009 WL 806798, at 3 (N.Y. Co. March 20, 2009) (dismissing claim in part because the complaint failed to identify employees “who were so solicited” or that any “employees actually left” plaintiff's employment).

Specific Wording

Moreover, as is always true in matters involving restrictive covenants, care must be paid to the wording of the specific clause at issue and any other relevant provisions in the agreement. For example, in Zvue Corp. v. Bauman, 23 Misc.3d 1111(A), 2009 WL 1025744 (N.Y. Co. 2009), the non-solicitation covenant did not apply in situations where the employee was terminated without cause. Upon concluding that the plaintiffs were unlikely to succeed on their claims that the defendant former employee breached his employment agreement, the court held that “[c]onsequently, plaintiffs are not likely to succeed in showing that the non-solicitation provision in Section 11 of the employment agreements is enforceable.” Id. at 12.

Conclusions

Despite contrary assumptions by lawyers, courts and commentators, the authority under New York law does not support the assumption that non-recruitment provisions are “easier” to enforce than broader non-compete clauses. Indeed, it may be more difficult in some respects to seek an injunction involving a non-recruitment clause. Both require a plaintiff to demonstrate basic contractual prerequisites, as well as the reasonableness of the restraint, including that it is necessary to protect a legitimate interest of the employer. Then, of course, a plaintiff must prove that the provision has been breached.

While it may be relatively easy to prove that a former employee is “competing” by virtue of a new job at a competitor, it could be much harder to prove that he is “soliciting,” a matter that may only be known between the individuals involved, or that such solicitation has resulted in any damage to the former employer. Moreover, the public policy implications appear to be untested. A covenant against competition directly impacts only the parties who sign it'presumably the employer and employee. But a non-recruitment provision may have the impact of precluding other employees from seeking new employment, a result that can be particularly troubling in difficult economic times.

The employer wishing to ensure that its employees do not recruit others upon moving to a new company must be cautious to draft non-recruitment covenants with the same care and caution that have become commonplace with broader restrictive covenants. The employer's protectable interests should be made clear, if possible, in the agreement itself. The restrictions should be appropriately limited in terms of scope (geographic, industry, etc.) and duration, as some judges will continue to resist blue penciling.

It may make sense to limit the restrictions to those employees of the company who did not know the signatory prior to his employment, as it is arguably overreaching to bind an individual not to discuss with old friends the possibility of moving to a new job. Employers should also consider that any such covenant may not be held enforceable where an employee is terminated without cause or where the company is otherwise arguably in breach of an employment agreement.

In many cases, of course, non-recruitment provisions will not be tested. While employees may not be able to move to a new job without competing and/or soliciting their existing customers, they often can do so without recruiting other employees, particularly if they are moving to an already established competitor. Or, at least, they are willing to wait out the term of a reasonable non-recruitment provision to do so.

But where teams of employees are likely to be recruited by competitors, or in other situations where the departure of one employee may trigger further losses, companies are well advised not to assume the enforceability of non-recruitment provisions and to keep in mind that it may ultimately prove more effective and less costly to pursue more traditional avenues to enhance employee retention.

Richard C. Schoenstein is a partner at Pryor Cashman. Yavonia G. Wise, an associate with the firm, assisted in the research for this article. This article also appeared in the New York Law Journal, an ALM sister publication of this newsletter.

As hiring resumes in the financial services industry and elsewhere, potential employers undoubtedly will renew consideration of the recruitment of employees from competitors. While many employers have written employment contracts with restrictive covenants designed to hinder employees from departing for a competitor, the state and federal courts considering New York law have not uniformly enforced such provisions. Thus, many employers have attempted to utilize more specific contractual limitations on the conduct of former employees, including covenants variously referred to as “non-solicitation,” “non-recruitment,” “non-hire” or “anti-raiding” provisions, which are designed to prevent employees who leave from immediately turning around and poaching their now-former fellow employees to leave with them.

Significantly, the enforceability of a covenant not to solicit or recruit employees of one's former employer has never been addressed by the New York's highest court, the Court of Appeals. Variations of such provisions have been considered, and sometimes enforced through preliminary injunctions, by trial level New York state and federal courts. But these decisions turn on specific facts and typically fail to address the broad questions with intellectual rigor. Thus, the prevailing notion that non-recruitment provisions are somehow “easier” to enforce than broader non-compete covenants is not supported by case precedent. Instead, the analysis that has been applied to non-recruitment provisions simply mirrors the approach that has been used in typical non-compete cases for years.

Courts' Analysis

At least in recent decisions, the courts addressing non-recruitment covenants under New York law have routinely utilized the same analysis applicable to broader restrictive covenants. For example, in Cenveo Corp. v. Diversapack, Judge Shira Scheindlin of the Southern District summarized the prevailing analytical approach as follows:

To establish a breach of contract claim on the basis of the Anti-Raiding Provisions, [Plaintiff] Cenveo must first show that they are enforceable under New York law. “New York recognizes the enforceability of covenants not to solicit employees,” but such covenants “are subject to careful judicial scrutiny” and must be reasonable. Under New York law, a restrictive covenant in an employment agreement “'is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public.'” “An employer may assert only four types of legitimate interests ' (1) protection of trade secrets; (2) protection of confidential customer information; (3) protection of an employer's client base; and (4) protection against irreparable harm where an employee's services are unique or extraordinary.” Cenveo Corp. v. Diversapack LLC, No. 09 Civ. 7544, 2009 WL 3169484, at 7 (S.D.N.Y. Oct. 1, 2009) (quoting and citing authority omitted).

In Cenveo, Judge Scheindlin ultimately denied the motion for a preliminary injunction ruling, among other things, that: 1) the anti-raiding provisions at issue were not supported by a legitimate interest of the employer (with uniqueness of the employees being the only potential ground advanced); 2) there was no likelihood of breach of the anti-raiding provisions where the new employer was not a competitor of the plaintiff; and 3) the evidence substantiated only the hiring of former Cenveo employees, not that they were recruited while still in the employ of Cenveo. Id. at 7-8. While the reasoning is sound, nothing in the Cenveo decision serves to differentiate the anti-raiding provision there from a customary restrictive covenant.

Other Decisions

Similarly, other decisions in the past 10 years addressing non-recruitment provisions under New York law have declined to address any distinction between non-recruitment provisions and more general non-compete clauses. For example, in Lazer Inc. v. Kesselring , 13 Misc.3d 427, 823 N.Y.S.2d 834 (Monroe Co. 2005), the court granted summary judgment dismissing a claim for breach of a non-recruitment provision by a former employee. In doing so, the court referred to the three-prong reasonableness test for restrictive covenants set forth in BDO Seidman v. Hirschberg , 93 N.Y.2d 382, 690 N.Y.S.2d 854 (1999), which has been utilized in many cases, including the Cenveo decision discussed above, but ruled that “the reasonableness inquiry may be avoided altogether when the court finds that application of a particular restrictive covenant will not serve any legitimate employer interest.” 13 Misc.3d at 432, 823 N.Y.S.2d at 838; see also Kelly v. Evolution Markets Inc. , 626 F.Supp.2d 364, 374 (S.D.N.Y. 2009) (citing Lazer Inc. as support for applying the “three-part reasonableness test to non-recruit covenants,” but declining to reach the merits on ripeness grounds).

The Lazer Inc. court went on to find that the plaintiff had not established any legitimate employer interest ' absent allegations that the employee recruited possessed confidential information or trade secrets, or was special and unique ' and that the plaintiff and the defendant's new employer were not “competitors in any sense of the word other than that any two employers would like the services of a good employee.” Id. at 433, 823 N.Y.S.2d at 839. Again, the focus on threshold issues such as employer interest and competition do not distinguish the non-recruitment provision from any other restrictive covenant.

There are a number of cases appearing to enforce non-recruitment provisions, but many of them do not provide compelling authority going forward. In some cases, the defendants barely bothered to oppose the attempts to enforce non-recruitment provisions. In other cases, broader preliminary injunctions have included relief regarding non-recruitment provisions, without extensive separate analysis.

There are also a number of cases arising in slightly different contexts, such as where non-recruitment provisions are included in an agreement relating to the sale of a business or a transaction not wholly involving an employment relationship. See, e.g., Marsh USA Inc. v. Karasaki, No. 08 Civ. 4195, 2008 WL 4778239, at 20 (S.D.N.Y. Oct. 31, 2008); Garber Bros. Inc. v. Evlek , 122 F.Supp.2d 375, 384 (S.D.N.Y. 2000). Cases in these categories can hardly be said to constitute broad support for the enforceability of non-recruitment provisions regardless of the context.

In fact, there are notable cases declining to enforce non-recruitment provisions, such as the Cenveo and Lazer Inc. decisions discussed above. These precedents and others suggest some of the grounds that may be used to defend against attempts to enforce non-recruitment covenants. Certainly, there is authority requiring a party seeking to enforce such a covenant to demonstrate that the covenanting party is, in fact, recruiting or soliciting in violation of the agreement. See Production Resource Group, LLC v. Oberman, No. 03 Civ. 5366, 2003 WL 22350939, at 12 (S.D.N.Y. Aug. 27, 2003) (finding no likelihood of success on the merits where defendant “credibly denied” soliciting and the employee at issue had not left plaintiff's employment).

Similarly, there are cases noting the need to show that the recruitment or solicitation has in fact caused employee departures. See Mercator Risk Services Inc. v. Girden, No. 08 Civ. 10795, 2009 WL 466150, at 6 (S.D.N.Y. Feb. 23, 2009 (“[a]lthough the Court acknowledges that the fact that so many employees left Mercator to join Vista in a short period of time following Girden's resignation is strong circumstantial evidence that Girden violated his non-recruitment clause, given the longstanding relationship between Girden and many of the employees at issue, the Court finds it equally likely that these employees joined Vista on their own, without any solicitation from Girden. Thus, while Girden's non-recruitment clause may well be enforceable under Illinois law, under these circumstances the Court will not enjoin”); AVGraphics Inc. v. NYSE Group Inc. , 22 Misc.3d 1139(A), 2009 WL 806798, at 3 (N.Y. Co. March 20, 2009) (dismissing claim in part because the complaint failed to identify employees “who were so solicited” or that any “employees actually left” plaintiff's employment).

Specific Wording

Moreover, as is always true in matters involving restrictive covenants, care must be paid to the wording of the specific clause at issue and any other relevant provisions in the agreement. For example, in Zvue Corp. v. Bauman , 23 Misc.3d 1111(A), 2009 WL 1025744 (N.Y. Co. 2009), the non-solicitation covenant did not apply in situations where the employee was terminated without cause. Upon concluding that the plaintiffs were unlikely to succeed on their claims that the defendant former employee breached his employment agreement, the court held that “[c]onsequently, plaintiffs are not likely to succeed in showing that the non-solicitation provision in Section 11 of the employment agreements is enforceable.” Id. at 12.

Conclusions

Despite contrary assumptions by lawyers, courts and commentators, the authority under New York law does not support the assumption that non-recruitment provisions are “easier” to enforce than broader non-compete clauses. Indeed, it may be more difficult in some respects to seek an injunction involving a non-recruitment clause. Both require a plaintiff to demonstrate basic contractual prerequisites, as well as the reasonableness of the restraint, including that it is necessary to protect a legitimate interest of the employer. Then, of course, a plaintiff must prove that the provision has been breached.

While it may be relatively easy to prove that a former employee is “competing” by virtue of a new job at a competitor, it could be much harder to prove that he is “soliciting,” a matter that may only be known between the individuals involved, or that such solicitation has resulted in any damage to the former employer. Moreover, the public policy implications appear to be untested. A covenant against competition directly impacts only the parties who sign it'presumably the employer and employee. But a non-recruitment provision may have the impact of precluding other employees from seeking new employment, a result that can be particularly troubling in difficult economic times.

The employer wishing to ensure that its employees do not recruit others upon moving to a new company must be cautious to draft non-recruitment covenants with the same care and caution that have become commonplace with broader restrictive covenants. The employer's protectable interests should be made clear, if possible, in the agreement itself. The restrictions should be appropriately limited in terms of scope (geographic, industry, etc.) and duration, as some judges will continue to resist blue penciling.

It may make sense to limit the restrictions to those employees of the company who did not know the signatory prior to his employment, as it is arguably overreaching to bind an individual not to discuss with old friends the possibility of moving to a new job. Employers should also consider that any such covenant may not be held enforceable where an employee is terminated without cause or where the company is otherwise arguably in breach of an employment agreement.

In many cases, of course, non-recruitment provisions will not be tested. While employees may not be able to move to a new job without competing and/or soliciting their existing customers, they often can do so without recruiting other employees, particularly if they are moving to an already established competitor. Or, at least, they are willing to wait out the term of a reasonable non-recruitment provision to do so.

But where teams of employees are likely to be recruited by competitors, or in other situations where the departure of one employee may trigger further losses, companies are well advised not to assume the enforceability of non-recruitment provisions and to keep in mind that it may ultimately prove more effective and less costly to pursue more traditional avenues to enhance employee retention.

Richard C. Schoenstein is a partner at Pryor Cashman. Yavonia G. Wise, an associate with the firm, assisted in the research for this article. This article also appeared in the New York Law Journal, an ALM sister publication of this newsletter.