All Noncompetes Not Equal

Waste company owners typically ask key employees to sign agreements that, among other things, prohibit competition against the company after employment. The restrictions usually include a nonsolicitation clause, which blocks an ex-employee from wooing a former employer's customers and prospects.

Post-employment restrictive covenants will be enforced to protect an employer's legitimate interests, but may be limited to the clients with whom the former employee actually worked, according to a ruling by New York State's highest court. [BDO Seidman v. Hirshberg, 93 N.Y. 2d 382 (1999)]

BDO is an accounting firm with offices throughout the United States. When Jeffrey Hirshberg was promoted to manager in BDO's Buffalo office, he signed an agreement that did not limit his post-employment competition but required him to compensate BDO "for loss or damages suffered" from his serving any former client. The amount would be based on the fees the client paid over the last year of its patronage.

Hirshberg left BDO in 1993 and allegedly lured away 100 former clients. He denied having served some accounts or having primary responsibility for others, and claimed that he had recruited many clients on his own.

A trial court ruled that the reimbursement clause was too broad and unenforceable. An appeals court agreed, but invalidated the entire agreement.

The state high court reversed the appellate court, upholding the time and geographic restraints, but finding that BDO had no legitimate interest in lost business of clients with whom Hirshberg never had a direct relationship or clients whom he independently recruited.

Under the common law, as adopted in New York and most other states, restrictive covenants are enforceable to protect the employer's legitimate interests, so long as the ban or limitation does not harm the public or unreasonably burden the employee.

The decision underscores that nonsolicitation and noncompetition are not the same. Noting that the manager agreement did not prevent him from competing with BDO, or soliciting or serving BDO's clients, the court found that BDO had a "legitimate interest ... [in] protection against [Hirshberg's] competitive use of client relationships which BDO enabled him to acquire. ..."

If the employee competes fairly for those clients, "the employer's interest in preserving its client base against competition of the former employee is no more legitimate ... than when it vies with unrelated competitors for those clients," the opinion said.

The court's treatment of Hirshberg's clients, whose goodwill was not "acquired through the expenditure of BDO's resources," implies that employers can enforce a nonsolicitation or a noncompete clause against an employee who used the company expense account to build a client or customer base.

The decision represents a significant and growing trend among courts to prune objectionable or invalid provisions from overly broad restrictive covenants, wherever possible, and enforce the remainder to a reasonable degree.