NEWS & PUBLICATIONS

Home » Another Arrow in the Quiver of an Employee Fighting a Restrictive Covenant

Another Arrow in the Quiver of an Employee Fighting a Restrictive Covenant

by

Standard fare in the New York Commercial Division today finds (sometimes) overzealous employers seeking to keep former employees “on the sidelines” in order to achieve stated goals of “preserving its business” or “protecting its trade secrets.” Far from involving solely highly compensated, executive-level employees, restrictive covenants in employment agreements today have proliferated the economy to the point that such clauses are undoubtedly included in contracts in most (if not all) industries and could ostensibly affect both high and low-level employees. 

While employees staring down the intimidating barrel of an employer’s preliminary injunction application may have strong arguments at their disposal including that the employer can be compensated in monetary damages (and thus is not likely to suffer irreparable harm in the absence of injunctive relief) or that an employer’s alleged trade secrets do not meet the high bar required to attain such status, the Court’s subject matter jurisdiction is not a common argument analyzed in the preliminary injunction context. Nevertheless, in a July 15, 2020 decision in the matter of Setter Capital, Inc. v. Maria Chateauvert,1 Commercial Division Justice Andrea Masley conducted the all-too-familiar three-pronged preliminary injunction analysis with a jurisdictional twist. 

Soon after commencing an action against its former employee Maria Chateauvert (“Defendant”) asserting claims including breach of contract, unfair competition, and breach of fiduciary duty, Plaintiff Setter Capital, Inc. (“Plaintiff”), a licensed broker-dealer, sought a preliminary injunction seeking to enjoin Defendant from, inter alia, soliciting or attempting to interfere with Plaintiff and its customer’s business relations or to otherwise interfere with Plaintiff’s business pursuant to confidentiality and non-compete provisions contained in a September 2013 agreement between the parties (that the Court noted was signed two years after Defendant graduated from college in exchange for a salary of $45,000).

After resigning from Plaintiff’s brokerage firm in early 2020, Plaintiff alleged that Defendant began “a campaign” of using and divulging Plaintiff’s “proprietary and confidential information” in violation of her restrictive covenant to solicit Plaintiff’s existing contacts and customers and divert business away from Plaintiff. According to the decision, Plaintiff described itself as serving a “nichemarket” by using its “proprietary secondary market network, SecondaryLink&TLRtrade” as a hub for institutional investors, managers and industry participants to follow the “ever-evolving secondary market.” Justice Masley explained that the secondary market is a “marketplace for buying and selling Limited Partners’…interests in private equity funds, and other alternative investments.” Defendant notably described her job as “making cold calls using a script and sending emails to identify buyers and sellers in the secondary market which she would pass off to a more senior Setter employee.”

As explained by Justice Masley, the well-known standard for obtaining a preliminary requires that a movant establish three elements: (1) a likelihood of ultimate success on the merits; (2) the prospect of a irreparable injury if injunctive relief is withheld; and (3) that a balancing of the equities tips in the movant’s favor. See, e.g., Doe v. Axelrod, 73 N.Y.2d 748, 750 (1988). After noting the standard, Justice Masley turned her attention to the “likelihood of success” element but did not initially conduct the typical merits-based review of the claims asserted by Plaintiff. Instead, the Court looked to the threshold issue of jurisdiction noting that both parties were residents of Canada who found themselves litigating in New York State Supreme Court as a result of express choice of law and forum selection clauses contained in their agreement.

While the Court referenced General Obligations Law 5-1401 and 5-1402, which provide for the enforcement of choice of law provisions in contracts over $250,000 and forum selection provisions in contracts over $1,000,000, such provisions were inapplicable under the circumstances presented that dealt with a contract “for labor or personal services” for Defendant – a person two years out of college – who was unlikely to be the “sophisticated business person” the legislature envisioned when it enacted the GOL provisions meant to maintain New York as the renowned commercial center it has been. Ultimately, the Court found (among other reasons) that there was an issue of fact as to its jurisdiction which “undermined plaintiff’s likelihood of success” and denied Plaintiff’s application.

The Court also addressed other problems with Plaintiff’s application. For one, Plaintiff failed to establish a “protectable trade secret” pursuant to Ashland Mgt. Inc. v. Janien, 82 N.Y.2d 395, 407 (1993) and the Restatement of Torts since, inter alia, Plaintiff failed to respond to Defendant’s contention that the client lists at issue were publicly available. Moreover, the Court found that Plaintiff failed to establish irreparable harm because its claim premised upon the “diversion of future deals” meaning that it had an adequate legal remedy in the form of money damages. Finally, the balance of the equities tipped in Defendant’s favor because the requested injunction was impermissibly broad such that Defendant would lose her livelihood to the extent it were imposed. 

In closing, Justice Masley captured the essence of governing New York law on restrictive covenants as taken from the seminal Court of Appeals decision in BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (1999) of which all practitioners in this area – whether seeking to enforce or invalidate such a clause – should take note: “[t]he purpose of a noncompete is to prevent unfair competition; not competition altogether.” If a jurisdictional argument applies, it may serve as just another arrow in counsel’s quiver to obtain a positive result for employee clients.

  1. New York County Supreme Court Index No. 651992/2020 []

SEND US A MESSAGE