When Will a NY Court Enforce a No-Hire Agreement?

Like many states, New York tends to disfavor no-hire clauses and other restrictive covenants in employment agreements.

Most recently, a New York district judge refused to enforce a 31-month no-hire agreement that would have prevented a former Reed Elsevier Inc. (REI) employee from going to work for the competition at TransUnion Holding Co. Inc. (TransUnion). According to Manhattan U.S. District Judge P. Kevin Caste, REI failed to demonstrate a protectable interest under New York employment law.

The Facts of the Case

Armando Escalante served as the chief technology officer of REI’s Lexis Nexis Risk Solutions division from November 2004 to April 2012. Escalante has served as the chief operating officer of TLO, LLC (TLO), a competitor of REI, since July 25, 2013.

REI and TransUnion entered into the no-hire agreement at issue when the CEO of REI’s risk solutions unit sought to join TransUnion as its CEO. Although the move was prohibited under a non-compete covenant, REI consented to the hire upon the condition that TransUnion would not seek to hire any other executives from the risk solutions division through the end of 2014. The essence of REI’s claim is that Escalante’s employment violated the agreement when, on December 15, 2013, TransUnion acquired substantially all of the assets of TLO.

The Court’s Decision

The court refused to grant REI’s request for a preliminary injunction. In his opinion, Judge Caste first noted that restrictive covenants must be “rigorously examined” and “enforced only to the extent necessary to protect the employer from unfair competition….”

The court further highlighted that, under New York law, an anticompetitive covenant ancillary to an employment agreement must be reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the public, and not unreasonably burdensome to the employee.

In this case, the court found that the term of the no-hire agreement was excessive. While Judge Caste acknowledged that New York courts routinely allow one-year restrictions, he found that a 31-month agreement to be unreasonable.

The court also found that the no-hire restriction was unnecessary to protect REI’s business interests. In reaching this decision, Caste noted that New York courts have recognized four legitimate interests that may be asserted to support a restrictive covenant: (1) protection of trade secrets, (2) protection of confidential customer information, (3) protection of the employer’s client base, and (4) protection against irreparable harm where the employee’s services are unique or extraordinary.

In this case, the court found that Escalante had limited access to confidential data and projects; performed managerial rather than client-focused tasks; and demonstrated no special talents that would make his replacement impossible or cause irreparable harm. In addition, the court rejected REI’s argument that the general risk of employee attrition was a legitimate business interest under existing precedent.

The Bottom-line for Employers

As this case highlights, no-hire provisions must be carefully drafted to ensure enforcement. In order to survive scrutiny, they must be narrowly tailored to protect a legitimate business interest.

If you have any questions about this case or would like to discuss your company’s use restrictive covenants, please contact me or the Scarinci Hollenbeck attorney with whom you work.