Court Enforces Non-Solicitation, But Not Non-Competition, Employment Contract Provisions

The New York Supreme Court (New York County) addressed, in OTG Management, LLC v. Konstantinidis, the propriety of injunctive relief in the restrictive covenant context.

The court upheld an employment agreement’s non-solicitation, but not non-competition, provisions.

In this case, plaintiff OTG hired Mr. Konstantinidis to be an operations manager for its food and beverage services in LaGuardia airport.  Konstantinidis signed, as a condition of his employment, an “Agreement Regarding Post-Employment Competition”, which prohibits him from

  1. being employed by a competitor at any airport in the United States for one year after the end of his employment;
  2. soliciting any OTG employee or customer for two years after the end of his employment; and
  3. disclosing OTG’s proprietary information.

After being transferred to JFK and resigning, Konstantinidis began working for one of the plaintiff’s competitors.  Plaintiff sued (1) Konstantinidis, alleging breach of contract for violating the above provisions and (2) plaintiff’s subsequent employer, SSP America, for tortious interference with contractual relations for “inducing” Konstantinidis to breach the agreement.

Plaintiff also filed a motion seeking a temporary restraining order (TRO) prohibiting Konstantinidis to continue working at his second employer and from recruiting current and former OTG employees to work for SSP.  This decision addresses that motion.

The Law

The court recited the familiar preliminary injunction standard:

A preliminary injunction substantially limits a defendant’s rights and is thus an extraordinary provisional remedy requiring a special showing. Accordingly, a preliminary injunction will only be granted when the party seeking such relief demonstrates a likelihood of ultimate success on the merits, irreparable injury if the preliminary injunction is withheld, and a balance of equities tipping in favor of the moving party. … As a threshold matter, the court must assess whether the non-compete and non-recruitment clauses in the Agreement are enforceable restrictive covenants.

It then recited the law governing the enforceability of restrictive covenants, citing the Court of Appeals’ decision in BDO Seidman v Hirshberg, 93 NY2d 382 (1999):

In order to be enforceable, an anticompetitive covenant ancillary to an employment agreement must be reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the public, and not unreasonably burdensome to the employee. … The Court of Appeals has limited the cognizable employer interests under the [reasonableness prong] to the protection against misappropriation of the employer’s trade secrets or of confidential customer lists, or protection from competition by a former employee whose services are unique or extraordinary. … A restriction on a former employee’s ability to work for a competitor is invalid unless the employee’s services were unique or extraordinary or if the job is considered a learned profession (such as law or accounting).

Application to Facts

The court declined to issue an injunction enforcing the non-compete provisions against Konstantinidis:

His services were not unique nor is a Terminal Director considered a learned profession. Nonetheless, OTG argues that Konstantinidis can be barred from working for SSP because he is in possession of OTG’s trade secrets, which he will inevitably disclose to SSP. … In this case, however, Konstantinidis’ employment managing the food service appears to have little to nothing to do with utilizing the trade secrets at issue, which are complex financial models utilized by OTG that supposedly are what make its unique “concessionaire product” profitable. Though Konstantinidis had access to these trade secrets while employed with OTG (and possibly shortly thereafter), the disclosure of such secrets to SSP, a direct competitor, is both a separate violation of the Agreement and otherwise illegal under New York law. However, this court cannot adjudicate the merits of any alleged illegal disclosure of OTG’s trade secrets because such a dispute is subject to the mandatory arbitration clause in the Agreement. The court’s inquiry is limited to whether OTG has demonstrated a likelihood of success on the merits that would warrant the drastic measure of prohibiting his employment with SSP. OTG has not.

OTG’s concern about Konstantinidis working for SSP is not predicated on whether Konstantinidis will actually use the financial models in the scope of his new employment. Rather, OTG understandably worries about its trade secrets falling into the hands of a competitor. This danger, however, cannot be remedied by granting the requested preliminary injunction because Konstantinidis’ continued employment with SSP has no bearing on whether he has already or is going to illegally give them the trade secrets. Based on the record, he is fully capable or performing his job without relying on OTG’s financial models. Indeed, SSP contends that it uses a completely different type of financial model which cannot be aided by information about OTG’s model. Whether this is true is a question of fact, but OTG has not produced evidence demonstrating a likelihood of success on the merits with respect to this issue.

Additionally, the myriad bad acts alleged throughout OTG’s papers (such as the circumstances of Konstantinidis allegedly forwarding another employee’s login information to his personal email address so he could access a company database after his resignation) do not militate in favor of enjoining his employment with SSP. Rather, they speak to the merits of OTG’s claims against Konstantinidis for breach of the Agreement and unfair competition, which also must be arbitrated.

The Court, however, reached a different result as to the agreement’s non-recruitment clause:

[N]on-recruitment clauses are inherently more reasonable and less restrictive than non-compete clauses. … [A] non-recruitment clause, as opposed to a non-compete clause, does not infringe on an [employee’s] ability to engage in an occupation, but merely infringes on his ability to recruit former co-workers to engage in competitive businesses … [and] does not affect in the same way the powerful considerations of public policy which militate against sanctioning the loss of a man’s livelihood. …

Here, the court finds that the non-recruitment clause is enforceable because it is reasonable in scope and imposes no meaningful burden on Konstantinidis. There is no reason to believe that Konstantinidis’ employment with SSP will be impacted by his inability to recruit his former co-workers. The court originally issued the TRO for these reasons and likewise issues a preliminary injunction.

The Court therefore enofrced the non-solicitation portion of the agreement for the specified period, and stayed the action pending arbitration as to other issues. This stay was necessary, since the only claim against SSP is for tortious interference with contract (which requires plaintiff to prove that Konstantinidis breached the agreement), and failure to issue a stay might result in inconsistent rulings.