In a decision illustrating New York’s strong public policy favoring an employee’s right to earn a living free from contractual restrictions, an upstate New York federal court recently rejected a company’s attempt to enforce a non-competition provision against a departing employee. The decision is Veramark Technologies Inc v. Bouk, decided April 2, 2014.
After one-time Veramark employee Joshua Bouk left Veramark for competitor Cass Information Systems, Inc., Veramark sued, alleging breach of contract and tortious interference. Plaintiffs sought a preliminary injunction “to prevent Mr. Bouk from ‘accepting or commencing employment with, or otherwise providing services to, Cass'” and to prevent Cass from employing Bouk.
Generally, the agreement contained provisions prohibiting Bouk from (1) performing services for any competitor of Veramark, (2) soliciting Veramark’s employees, or (3) soliciting Veramark’s customers.
A party seeking a preliminary injunction must establish: “(1) a likelihood of irreparable harm absent preliminary relief; (2) a likelihood of success on the merits; (3) the balance of equities tipping in favor of the moving party; and (4) the public interest is served by an injunction.” Plaintiffs failed to meet their burden.
Initially, the court held that plaintiffs failed to show irreparable harm in the form of the threatened loss of customer goodwill. It rejected plaintiffs’ argument that “enforcement of a non-solicitation provision alone is not sufficient to protect customer goodwill, and rather a broad non-compete provision must also be in place.”
Rather, citing the Court of Appeals’ 1999 BDO Seidman v. Hirshberg decision, the court observed:
[W]here an employer proffers protecting customer goodwill as the legitimate interest it seeks to protect with a restrictive covenant, the covenant must actually protect that interest. A broad non-compete that baldly prevents competition will not be enforced, particularly where the employer is already protected by a nonsolicitation agreement.
Here, there was “no evidence that Mr. Bouk is violating the non-solicitation provisions of the Agreement, that Cass is attempting to solicit Veramark’s customers with Mr. Bouk, or that the non-solicitation provisions are insufficient to protect Plaintiffs’ customer relationships and goodwill.”
The court also rejected plaintiffs’ argument that Bouk was a “unique employee” in light of his relations with customers, such that his employment by Cass necessarily results in irreparable harm. Citing the leading 1999 Second Circuit decision of Ticor Title Insurance v. Cohen, it held:
Plaintiffs’ proof … is wholly insufficient to transform Mr. Bouk from an ordinary salesman into a unique employee. … Not only do Plaintiffs fail to offer any specifics concerning Mr. Bouk’s salary other than the annual base amount, but the amount does not come close to the type of compensation recognized in Ticor as contributing to an employee’s uniqueness. Moreover, the fact that Mr. Bouk was on the road for a significant portion of his job could not possibly make him unique. Otherwise, virtually all salesmen would be classified as unique for purposes of a restrictive covenant analysis. Moreover, while Plaintiffs contend in a conclusory fashion that they invested substantial resources into Mr. Bouk’s ability to develop customer relations, they offer no specifics, not even disclosing the extent of any expense account that he may have used. Mr. Bouk’s knowledge of the intricacies of the sales operation at Veramark, or even his status as its highest ranking sales executive, does not transform him into a unique employee for purposes of a restrictive covenant analysis. …
Perhaps most important to the analysis, there has been no proof offered by Plaintiffs that their customer base is limited and therefore, like in Ticor, the development of business depends greatly on the development of customer relationships. In an effort to satisfy the standard, Plaintiffs make conclusory statements that Veramark’s “strategy” focuses on “relationship-building” because “relationships are a large part of a client’s decision-making process.” But simply stating that a company values relationships with its clients and customers does not satisfy the standard set forth by Ticor. Plaintiffs describe their potential customers as any “large business with employees and offices throughout the U.S.” In other words, by Plaintiffs’ own admission, their potential customer base is quite broad.
The court also rejected plaintiffs’ reliance on a provision of the agreement in which Bouk “consented” to entry of a preliminary injunction, noting that “[a]lthough language in an agreement may buttress a conclusion of irreparable injury, it cannot replace the necessary analysis under New York law” and that plaintiffs “cannot cure” the failure to establish irreparable harm by relying upon the agreement’s language.
Finally, the court held that plaintiffs failed to establish a likelihood of success on the merits, pointing to the overly broad nature of non-compete provision (which prohibits Bouk from “‘directly or indirectly’ performing services for ‘any enterprise that engages in competition with the business conducted by’ Veramark or its affiliates ‘anywhere in the world'”).