June 12th, 2015

The enforceability of restrictive covenants depends, to some degree, on which State’s law applies to an employment agreement. Many employment contracts have a choice-of-law provision, but a recent case from New York’s highest court makes clear that the parties’ choice of law will not always be honored.

Brown & Brown v. Johnson

In Brown & Brown v. Johnson, a Florida corporation called Brown & Brown, Inc. recruited Theresa Johnson away from her post at Blue Cross/Blue Shield to work at Brown & Brown’s New York office.  On her first day of work, Brown & Brown presented Johnson with an employment contract that included a Florida choice-of-law clause as well as a non-solicitation agreement that barred Johnson from servicing any customers of Brown & Brown’s New York office for two years after her termination.  After several years, Brown & Brown terminated Johnson, prompting her to join a competitor. At the competitor, Johnson worked with former clients of Brown & Brown, and Brown & Brown sued to enforce its non-solicitation agreement.

There were two issues for the Court of Appeals. First, was the Florida choice-of-law provision valid?  Second, was the non-solicitation clause enforceable?

The Florida Choice-of-Law Clause Was Unenforceable as Contrary to Public Policy

The Court of Appeals held that enforcing the Florida choice-of-law provision would violate New York public policy because Florida’s method of assessing restrictive covenants in employment agreements is contrary to New York’s public policy in three principal ways.

First, Florida law places a far lighter burden on employers’ attempts to demonstrate that a restriction on competition is reasonable. In Florida, an employer need only make a basic case for why the agreement is necessary to protect a legitimate business interest in order to shift the burden to the former employee to prove why the agreement should not be enforced. Brown & Brown opinion at 5.  In New York, however, the initial burden is on the employer to show that the agreement protects a legitimate interest, does not harm the employee, and does not harm the general public. If the employer fails to meet any of the three requirements, then courts will not enforce the covenant.

Second, Florida courts only consider the extent to which the agreement protects the employer’s interests without any concern for hardship to the former employee. New York courts, on the other hand, weigh any damage to the former employee’s livelihood when deciding whether to enforce restrictive covenants.

Third, if the language of the agreement is ambiguous, New York courts will read it as narrowly as possible. In Florida, however, courts will read ambiguous language as broadly as is necessary to protect the legitimate interests of the employer.

In short, the court held that “Florida’s nearly-exclusive focus on the employer’s interests, prohibition against narrowly construing restrictive covenants, and refusal to consider the harm to the employee” were so contrary to New York’s emphasis on balancing the interests of the employer, employee, and general public that the former employee in this case had carried the “heavy burden” of showing that the choice-of-law clause was invalid. Brown & Brown opinion at 7.

The Non-Solicitation Clause was Overbroad, but the Court Left Partial Enforcement on the Table

The court next decided whether the non-solicitation clause was valid under New York law. It found that the clause was overbroad on its face because it purported to ban the former employee from working with any of the former employer’s customers, even those with whom the former employee had no contact.

The court further considered whether it could partially enforce the clause—i.e., give effect to the restriction only to the extent necessary to protect a legitimate employer interest.  A New York court may modify a restrictive covenant, but only if the agreement was not the result of coercion, over-reaching, or other misconduct. In Brown & Brown, the Court held that summary judgment was not appropriate on this point because fact questions remained regarding the propriety of the former employer’s conduct. In particular, the Court noted that there was conflicting evidence as to whether the former employer may have used coercive bargaining power when it asked the employee to sign the employment contract after she had resigned from her prior position.

 

 

Posted in: Uncategorized