Opinion ID: 406060
Heading Depth: 2
Heading Rank: 1

Heading: The Restrictive Covenant

Text: 15 New York courts 5 adhere to a strict approach to enforcement of restrictive covenants because their enforcement conflicts with the general public policy favoring robust and uninhibited competition, and powerful considerations of public policy which militate against sanctioning the loss of a man's livelihood. 6 American Broadcasting Companies, Inc. v. Wolf, 52 N.Y.2d 394, 404, 438 N.Y.S.2d 482, 487, 420 N.E.2d 363, 368 (1981) (quoting Purchasing Assocs., Inc. v. Weitz, 13 N.Y.2d 267, 272, 246 N.Y.S.2d 600, 604, 196 N.E.2d 245, 247 (1963)). Thus, a restrictive covenant will be rigorously examined, American Broadcasting Companies, supra, 52 N.Y.2d at 403, 438 N.Y.S.2d at 486, 420 N.E.2d 363, 367, and enforced only to the extent necessary to protect the employer from unfair competition which stems from the employee's use or disclosure of trade secrets or confidential customer lists, Columbia Ribbon & Carbon Mfg. v. A-1-A Corp., 42 N.Y.2d 496, 499, 398 N.Y.S.2d 1004, 1006, 369 N.E.2d 4, 6 (1977), or confidential customer information, Reed, Roberts Assocs., Inc. v. Strauman, 40 N.Y.2d 303, 308, 386 N.Y.S.2d 677, 680, 353 N.E.2d 590, 593 (1976), to protect the good will of the employer's business, or perhaps when the employer is exposed to special harm because of the unique nature of the employee's services. American Broadcasting Companies, supra, 52 N.Y.2d at 403, 438 N.Y.S.2d at 486, 420 N.E.2d 363, 367. Only after determining that a restrictive covenant would serve to protect against such unfair and illegal conduct and not merely to insulate the employer from competition, does the reasonableness of the covenant in terms of its time, space or scope, or the oppressiveness of its operation become an issue. American Broadcasting, supra, 52 N.Y.2d at 403-04, 438 N.Y.S.2d at 486-87, 420 N.E.2d 363, 367-68. In the case before us we need not reach the question of the reasonableness of the scope of the covenant because legitimate interests of the employer are not implicated. 16 A customer list is not confidential where the past or prospective customers are readily ascertainable from sources outside the employer's business. Columbia Ribbon & Carbon, supra, 42 N.Y.2d at 499, 398 N.Y.S.2d at 1006, 369 N.E.2d 4, 6 (citing Leo Silfen, Inc. v. Cream, 29 N.Y.2d 387, 392, 328 N.Y.S.2d 423, 427, 278 N.E.2d 636, 639 (1972)). However, a court will prevent the solicitation by a former employee of customers who are not openly engaged in business in advertised locations or whose availability as patrons cannot readily be ascertained but 'whose trade and patronage have been secured by years of business effort and advertising, and the expenditure of time and money, constituting a part of the good will of a business which enterprise and foresight have built up.'  Town & Country House & Home Serv., Inc. v. Newberry, 3 N.Y.2d 554, 558, 170 N.Y.S.2d 328, 331, 147 N.E.2d 724, 726 (1958) (quoting Witkop & Holmes Co. v. Boyce, 61 Misc. 126, 131, 112 N.Y.S. 874, 878 (1908), aff'd, 131 App.Div. 922, 115 N.Y.S. 1150 (1909)). Town & Country and Leo Silfen, Inc. v. Cream, supra, 29 N.Y.2d 387, 328 N.Y.S.2d 423, 278 N.E.2d 636, illustrate the qualities of a protectable customer list. In Town & Country, plaintiff corporation was engaged in providing a somewhat unique home cleaning service and after three years of operation and thousands of telephone calls and visits to homeowners to discuss price and services had compiled a list of about two hundred and forty customers. The court found the requisite expenditure of time and money to prevent defendant, a former employee, from soliciting those customers. In contrast, in Leo Silfen, Inc. v. Cream, plaintiffs were engaged in the business of supplying building maintenance materials. To procure customers plaintiffs employed mailing houses which provided lists of prospects to whom brochures and business reply cards were forwarded. The court refused to enjoin defendant from soliciting plaintiffs' customers. Although plaintiffs have demonstrated an investment of time and money in developing a patronage of approximately 15,000 enterprises, the investment was not an attempt to create a market for a new type of service as was the case in the Town & Country case. Rather, that investment reflected simply widespread canvassing of an obvious and highly competitive market. 29 N.Y.2d at 394, 328 N.Y.S.2d at 429, 278 N.E.2d 636, 640. 17 The list of exhibitors in this case was gathered from publicly available sources, and for the most part consists of well-known national corporations in the petroleum industry. In addition, the names of the exhibitors, the addresses and their primary products is information which has been made available to the public through the distribution of exposition directories at each AIChE show. Other relevant information about each exhibitor has also been made publicly available. For instance, the floor plan of each AIChE show indicating the relative sizes of exhibits and their location in the exposition hall is distributed to the public at each show. Plaintiff has made no allegation and submitted no proof that Reber-Friel by virtue of its position as manager of AIChE's shows has in its possession any confidential information or information acquired at substantial expense which is not also available to the general public. 7 Under these circumstances Reber-Friel cannot be precluded from using that same information on the theory that it is an asset of AIChE. As stated in the case of Abdallah v. Crandall, 273 App.Div. 131, 133, 76 N.Y.S.2d 403, 406 (3d Dep't. 1948), in determining whether a customer list was a protectable asset: A trade secret, like any other secret, is nothing more than private matter; something known to only one or a few and kept from the general public; and not susceptible to general knowledge. AIChE's frequent references to Reber-Friel's important position is also unavailing. New York cases make clear that a former employee should not be penalized for having held an executive position in a company if disclosure or use of confidential information is not threatened. Reed, Roberts Assocs., Inc. v. Strauman, supra, 40 N.Y.2d 303, 386 N.Y.S.2d 677, 353 N.E.2d 590; Purchasing Associates, Inc. v. Weitz, supra, 13 N.Y.2d 267, 246 N.Y.S.2d 600, 196 N.E.2d 245; Leo Silfen, Inc. v. Cream, supra, 29 N.Y.2d 387, 328 N.Y.S.2d 423, 278 N.E.2d 636; compare Bradford v. N. Y. Times Co., 501 F.2d 51 (2d Cir. 1974). 18 AIChE's claim that the covenant should be enforced to prevent Reber-Friel from profiting from relationships with exhibitors established while in its position as AIChE's trade show manager is also without merit. New York courts have upheld covenants prohibiting employees from soliciting former customers to the extent necessary to protect the good will of the employer. E.g., Karpinski v. Ingrasci, 28 N.Y.2d 45, 320 N.Y.S.2d 1, 268 N.E.2d 751 (1971); Bates Chevrolet Corp. v. Haven Chevrolet, Inc., 13 A.D.2d 27, 213 N.Y.S.2d 577 (1st Dep't 1961), aff'd, 13 N.Y.2d 644, 240 N.Y.S.2d 759, 191 N.E.2d 290 (1963). In USA Chem, Inc. v. Goldstein, 512 F.2d 163, 167 (2d Cir. 1975) this court, upholding such a covenant, quoted the reasoning of the Texas Court of Appeals in Grace v. Orkin Exterminating Co., 255 S.W.2d 279, 284 (Tex.Civ.App.1953), in further explaining the purpose of the rule: 19 Covenants in favor of the former employer, restricting competition by a former employee after the employment has terminated, which lasted for a reasonable time and which operated over a reasonable area, have been specifically enforced by injunction in cases where the good will of the employer's customers had attached to the employee during the latter's employment and the employee thus had acquired during his employment a special influence with the customer which gave him an advantage over the employer in competition for the customer's business. 20 Assuming the continued validity in New York of this justification for restrictive covenants absent extenuating circumstances, 8 but see Columbia Ribbon & Carbon Mfg. v. A-1-A Corp., supra, 42 N.Y.2d 496, 398 N.Y.S.2d 1004, 369 N.E.2d 4, we conclude that New York courts would not accept such a justification in this case. In those cases where courts enforced restrictive covenants to prevent a former employee from unfairly profiting from the good will of the employer it was apparent that the good will was indeed an asset of the employer. The clearest case is that of the salesman whose acquisition of good will is dependent on the past and future performance of the product or service being sold. Bates Chevrolet, supra, 13 A.D.2d 27, 213 N.Y.S.2d 577. The same factor has been present and noted in other contexts as well. Thus, in Millet v. Slocum, 4 A.D.2d 528, 167 N.Y.S.2d 136 (4th Dep't. 1957), aff'd, 5 N.Y.2d 734, 177 N.Y.S.2d 716, 152 N.E.2d 672 (1958), the court upheld a restrictive covenant prohibiting a physician, a former partner, from performing surgery in a 25-mile radius. It noted that the clinic had been in operation since 1938 and had earned an excellent reputation and that as a member from 1949-1955 the expelled partner would acquire its confidence and good will. Similarly, in Karpinski v. Ingrasci, supra, 28 N.Y.2d at 50, 320 N.Y.S.2d at 5, 268 N.E.2d 751, 754, the court noted that it was clear that nearly all of the defendant's practice was, and would be, directly attributable to his association with his former employer. Accord, Gelder Medical Group v. Webber, 41 N.Y.2d 680, 394 N.Y.S.2d 867, 363 N.E.2d 573 (1977); Foster v. White, 248 App.Div. 451, 290 N.Y.S. 394 (1936), aff'd, 273 N.Y. 596, 7 N.E.2d 710 (1937). 21 However, where it appeared that the person against whom the restrictive covenant was sought to be enforced brought with it to the enterprise much of the good will for which the enterprise is seeking protection, at least one New York court noted the inequity in enforcing such a covenant. In Lynch v. Bailey, 275 App.Div. 527, 531-32, 90 N.Y.S.2d 359, 363 (1st Dep't), aff'd, 300 N.Y. 615, 90 N.E.2d 484 (1949), the Appellate Division refused to enforce a covenant against an accountant partner, an original member of the firm noting among other things: 22 When the new firm was constituted, the parties entered into a joint venture to practice accountancy together, each one bringing his own clients, his own personal professional skill and reputation, his personal ability and his business associations.... But under the terms of the restrictive clause before us, an active partner such as plaintiff upon withdrawal receives nothing back for his contribution of good will. All that, including his own clientele, doubtless the net result of a lifetime of effort and practice in his chosen profession is supposed to remain with the new firm without any continuing participation interest whatever. 23 The holding in Lynch v. Bailey makes clear that there are no hard and fast rules to determine the validity of restrictive covenants. The court itself stated that it was not deciding whether any agreement of a partner not to compete with his former partnership is void as opposed to public policy; rather the only issue was whether this particular agreement in the light of its extent, scope and purpose and all the facts and circumstances presented, is invalid and void. 275 A.D.2d at 530, 90 N.Y.S.2d at 362. 24 In assessing the covenant before us in light of the facts and circumstances of this case we find the equities presented resemble those in Lynch v. Bailey. Reber-Friel brought with it to this joint effort years of experience in the trade show management business, its business connections and its excellent reputation and used these talents successfully to create the AIChE shows. It also used its expertise and reputation as a general contractor for exhibitors and further developed its own good will in that regard. Indeed, much of AIChE's good will is directly attributable to the good will contributed by Reber-Friel upon joining AIChE and not that developed on behalf of AIChE thereafter. The extent to which Reber-Friel will benefit from good will belonging to AIChE does not under the circumstances presented justify enforcement of the restrictive covenant. 9 25 AIChE has offered no evidence to show that it cannot fairly compete with Reber-Friel because of Reber-Friel's past relationship with exhibitors. The restrictive covenant has no legal justification. Its effect is merely to remove from possible competition one whose knowledge and skill, acquired before he came into its employ, has been found valuable to it, and to prevent that same knowledge and skill being utilized for the benefit of himself and others, after he has ceased to be employed by plaintiff. Such a covenant is an unreasonable restraint of trade and competition, and will not be enforced in a court of equity. Kaumagraph Co. v. Stampargraph Co., 197 App.Div. 66, 188 N.Y.S. 678 (1st Dep't. 1921), aff'd, 235 N.Y. 1, 138 N.E. 485 (1923). 26