An Invalid Restrictive Covenant Is Just What The Doctor Ordered

• Posted on: Aug 17 2018

Restrictive covenants are frequently found in employment contracts.  Typically, such covenants, among other things, are used to prevent employees (the “Employee”), after the termination of the employment relationship, from:

1. competing with the former employer;
2. soliciting the former employer’s customers;
3. soliciting the former employer’s other employees; and,
4. taking or using the former employer’s confidential business information.

Generally, restrictive covenants contain temporal (time) and geographic (location) limitations.  Not surprisingly, restrictive covenants in employment agreements are a fertile source of litigation.

In Long Island Minimally Invasive Surgery, P.C. v. St. John’s Episcopal Hospital (2^nd Dep’t August 8, 2018), the Court was called upon to determine the enforceability of a restrictive covenant in a surgeon’s employment contract.  The Plaintiff, a medical practice specializing in weight-loss and general surgery, had seven offices in the New York Metropolitan area.  Plaintiff’s doctors performed surgery in Rockville Centre at Mercy Hospital.  Defendant Javier Andrade, a weight-loss and general surgeon, was hired by Plaintiff.  The parties entered into a three-year employment agreement (the “Agreement”) containing a restrictive covenant barring “Andrade from performing any type of surgery for two years [and] within 10 miles of any of the Plaintiff’s seven offices and affiliated hospitals [(the “Restricted Zone”].”  During his employment, Andrade worked in two of Plaintiff’s Nassau County offices.

Andrade was terminated by Plaintiff, without cause, beyond the three-year term of the Agreement.  Thereafter, Andrade was hired by defendant St. John’s Episcopal Hospital (“St. John’s”) as its interim chairman of the general surgery department.  While Andrade’s new office with St. John’s was not located within the Restricted Zone, St. John’s Hospital was in the Restricted Zone.

Plaintiff commenced its action seeking damages and injunctive relief against, inter alia, Andrade and St. John’s for breaching the restrictive covenant.  Supreme court granted Defendants’ motion for summary judgment holding, inter alia, that the restrictive covenant was invalid.

In discussing the law regarding restrictive covenants, the Second Department reiterated that “[a]greements restricting an individual’s right to work or compete are not favored, and thus are strictly construed” and, accordingly, “[a] restrictive covenant will only be subject to specific enforcement to the extent that it is reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee.”  According to the three-prong test set forth by the Court, a restraint is reasonable if it “(1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public” (emphasis in original).  For the covenant to be valid, none of the three prongs can be violated.

Because the covenant in question prohibited Andrade from practicing any kind of surgery for two years and within 10-miles of any of Plaintiffs’ offices or affiliated hospitals even if Andrade never worked at those locations, the Court deemed the covenant to be geographically unreasonable.  If valid, the covenant would effectively prevent Andrade from working in his chosen field of medicine throughout the entire New York Metropolitan area.  Plaintiff failed to raise a triable issue of fact as to whether the broad geographical scope of the covenant “was necessary to protect the employers’ interests.

New York courts are permitted, under certain circumstances, to “blue pencil” restrictive covenants – that is cure the unreasonable aspects of the covenant without invalidating the covenant altogether.  Thus, where “the unenforceable portion is not an essential part of the agreed exchange, a court should conduct a case specific analysis, focusing on the conduct of the employer in imposing the terms of the agreement.”  (BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 394 (1999).)  In situations where the employer demonstrates that it was not, inter alia, overreaching or acting in a coercive manner, but was attempting to protect its legitimate business interests “consistent with reasonable standards of fair dealing,” the court would be justified in “blue penciling,” as opposed to invalidating, the covenant.  (BDO Seidman, 93 N.Y.2d at 394.)

In Long Island Surgery, the Court determined that “blue penciling” was not appropriate and invalidated the entire covenant.  In so doing, the Court noted that: the Plaintiff did not even argue that its motives in requiring the covenant were not anti-competitive; the clear overbreadth of the covenant was consistent with a lack of good faith; and, Plaintiff used its superior bargaining power to force Andrade to sign the non-negotiable covenant.

Interestingly, the Long Island Surgery Court, relying on BDO Seidman, noted that when considering covenants not to compete with respect to professionals, greater weight is afforded to the “interests of the employer in restricting competition in the within a confined geographical area.”  The rationale for this rule is based on the fact that professionals are deemed to “provide ‘unique or extraordinary’ services.”  (BDO Seidman, 93 N.Y.2d at 390.)

Tagged with: Commercial Litigation, Employment Agreements, Restrictive Covenants