Narrowly-tailored restrictive covenants can be most effective

July 15, 2013 / By Robert Wood

              A preliminary injunction granted by the United States District Court for the Southern District of New York enforcing restrictive covenants against a former executive illustrates how narrowly tailored employment agreements are effective because of the willingness of courts to find them reasonable. 

In DeWitt Stern Group, Inc. v. Eisenberg, 2013 WL 2420835 (S.D.N.Y 2013), the court held that the former employer, Dewitt Stern Group, faced irreparable harm and hardship should its former Senior Vice President and producer,  Richard Eisenberg, be permitted to continue breaching non-compete and non-disclosure agreements. Eisenberg joined Dewitt Stern Group after leaving Aon/AGRIS where he worked under similar restrictive covenants. Because of this move, and in light of the restrictive covenants with Anon/AGRIS, Dewitt Stern Group paid Anon/AGRIS $425,000 in order for Eisenberg to continue to develop his client relationships for DeWitt Stern.

During Eisenberg’s tenure at Dewitt Stern Group, he held the positions of Senior Vice President and producer in the entertainment division. By the nature of this position, he gained access to trade secrets and confidential information held by Dewitt Stern Group. This information extended to application and pricing information, key account contacts, and lists of accounts. By virtue of his access to this information, Eisenberg was required to sign employment agreements that required, among other things, him to: “not use or disclose, directly or indirectly, and [he] will keep strictly secret and confidential all Confidential information and Trade Secrets except as required in the course of Employee’s employment by the Company.” Eisenberg, 2013 WL 2420835 *4. Furthermore, the employment agreement also provided that:

[D]uring the term of employment, and for the two (2) year period immediately following termination of employment for any reason, Employee will not use Company’s Confidential Information or Trade Secrets to solicit, accept, divert, or take away, in whole or in part, directly or indirectly, any clients or “Prospect” (as hereinafter defined) of Company who were solicited or serviced by Employee or by anyone directly or indirectly under Employee’s supervision, or with whom Employee had any business relationship, within the two (2) year period immediately prior to Employee’s termination of employment.

Id., at *5.

Less than a year later, in April of 2013, Eisenberg decided to resign from Dewitt Stern Group, because he felt that he was being undercompensated. After Eisenberg’s departure, Dewitt Stern Group began to receive notices from clients that they were moving to its competitor Gallagher, where he had taken up a position as Area Executive Vice President. Additionally, around the time period of March 2013, Eisenberg began sending emails containing confidential company information to his personal email account. The emails contained matters such as v movie scripts, cast logs, policy renewal applications and, coverage issues for clients.

Subsequently in the lawsuit that followed, Dewitt Stern Group moved to show cause for a preliminary injunction that would prohibit Eisenberg from continuing his violations of the employment agreement. In order for a preliminary injunction to be imposed, the moving party is required to show that it will suffer irreparable harm and that it is likely to succeed on the merits of the case. The court first determined that Dewitt Stern Group had demonstrated that it would suffer irreparable harm should Eisenberg be allowed to continue violating the employment agreement. Based on both the loss of clients to Gallagher and Eisenberg’s disclosure of confidential information, the court determined that the potential that Dewitt Stern Group would suffer irreparable harm in the future existed because of Eisenberg’s violations.

Further, the court determined that Dewitt Stern Group demonstrated that there was a likelihood that it would succeed on the merits. Although, Eisenberg stated that he did not believe that any non-compete agreement was enforceable against him, the court looked to existing New York case law and determined otherwise. First, the covenant here was reasonable in time and area to protect the interests of Dewitt Stern Group, was not unreasonably burdensome on Eisenberg, and did not harm public interest. Under New York law, even agreements that prevented former employees from accepting business from clients that voluntarily and without solicitation decided to take their business to the employee are not considered overbroad or unreasonable. Thus, looking to Eisenberg’s agreement with Dewitt Stern Group, the court found a much more narrowly tailored restrictive covenant.  Among all other things, the agreement did not prohibit Eisenberg from competing directly with Dewitt Stern Group when he became an executive with Gallagher. Instead, it merely prevented him from using confidential information obtained from Dewitt Stern Group or actively diverting clients that he held during his tenure there. Eisenberg was still free to solicit clients he held before his employment with Dewitt Stern Group or those he obtained without assistance from Dewitt Stern Group.

With respect to the non-disclosure agreement, the court held that the explicit agreement by Eisenberg not to “use or disclose…and keep strictly secret and confidential all Confidential Information and Trade Secrets” he had obtained for two years after his employment was reasonable and enforceable looking at New York law. Accordingly the court held that this agreement should also be upheld. Ultimately, looking at the situations of both Eisenberg and Dewitt Stern Group, the court found that Dewitt Stern Group would suffer the much greater burden were Eisenberg be allowed to continue his breach of the agreement. The agreement did not ultimately prevent Eisenberg from earning a livelihood or cause undue harm on his part. Instead, it narrowly restricted his ability to make use of the information and relationships he obtained during his tenure at Dewitt Stern Group. In light of this, the court granted the motion and enjoined Eisenberg from violating both the non-compete and non-disclosure agreements.

Comment:

As this case demonstrates, employers should resist the urge to have noncompete/nondisclosure agreements that are overly broad.  A narrowly-tailored restriction may be more likely to be enforced than one which appears to be unreasonable and unnecessary.

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About the Author

Robert Wood has been a Texas trial lawyer since 1993. During that time, he has represented small, mid-sized, and Fortune 100 companies in business and employment litigation matters all over Texas and the United States. He has also advised and represented hundreds of individuals in employment litigation matters. Read more about Robert Wood