In a March 27, 2024 decision that was handed down by New York's Appellate Division, Second Department (which covers Kings, Queens, and Staten Island within New York City, as well as Nassau, Suffolk and Westchester Counties - among others outside of the City) in Twitchell Tech. Prods., LLC v Mechoshade Sys., LLC that was focused on a fairly straightforward question:
Are noncompete clauses that are contained within garden-variety commercial contracts - as distinct from the employment context - enforceable as a matter of New York law?
How the Appellate Division Distinguished Between the Treatment of Noncompetes in the Commercial Contract Context from the Employment Realm
The crux of the decision begins as follows:
Under New York law, the enforceability of a restrictive covenant depends in part upon the nature of the underlying contract" (DAR & Assoc., Inc. v Uniforce Servs., Inc., 37 F Supp 2d 192, 196 [ED NY 1999]). "Restrictive covenants may be enforceable in three types of contacts: (a) contracts for the sale of a business, (b) employment contracts, and (c) ordinary commercial contracts" (Steelite Intl. U.S.A., Inc. v McManus, 2021 WL 1648025, *5, 2021 US Dist LEXIS 80528, *11 [SD NY, Apr. 27, 2021, No. 21-CV-2645 (LAK)]; see DAR & Assoc., Inc. v Uniforce Servs., Inc., 37 F Supp 2d at 196-197; Baker's Aid, a Div. of M. Raubvogel Co., Inc. v Hussmann Foodservice Co., 730 F Supp 1209, 1214 [EDNY 1990]). Restrictive covenants in contracts for the sale of a business, which involve the transfer of goodwill, are enforceable because "a buyer of a business should be permitted to restrict [its] seller's freedom of trade so as to prevent the latter from recapturing and utilizing, by . . . competition, the good will of the very business which [it] transferred for value" (Purchasing Assoc. v Weitz, 13 NY2d 267, 271; see DAR & Assoc., Inc. v Uniforce Servs., Inc., 37 F Supp 2d at 196). By contrast, with employment agreements, as "the element of good will, or its transfer, is not involved and since there are powerful considerations of public policy which militate against sanctioning the loss of a [person's] livelihood, the courts have generally displayed a much stricter attitude with respect to covenants of this type" (Purchasing Assoc. v Weitz, 13 NY2d at 272).
Unlike in the employment context, where the former employer seeking to enforce the noncompete must satisfy a 5-factor test, the Appellate Division held that in the commercial contract arena, the rule of reason approach was not held to the same rigorous standard, and was limited to 3 of those factors, stating:
Under this rule of reason, courts should consider: "(1) whether the covenant protects a legitimate business interest; (2) the reasonableness of the covenant with respect to geographic scope and temporal duration; and (3) the degree of hardship upon the party against whom the covenant is enforced" (Express Frgt. Sys. Inc. v YMB Enters. Inc., 623 F Supp 3d at 51 [internal quotation marks omitted]; see Steelite Intl. U.S.A., Inc. v McManus, 2021 WL 1648025, *7, 2021 US Dist LEXIS 80528, *16; see also Dynamic Med. Communications v Norwest Trade Printers, 257 [*5]AD2d 524, 525). Although this simple rule of reason analysis is similar to the factors examined in the context of employment contracts (see BDO Seidman v Hirshberg, 93 NY2d at 388), in cases involving restrictive covenants in ordinary commercial contacts, courts should accord more deference to parties' freedom to contract (see Express Frgt. Sys. Inc. v YMB Enters. Inc., 623 F Supp 3d at 51; Steelite Intl. U.S.A., Inc. v McManus, 2021 WL 1648025, *7, 2021 US Dist LEXIS 80528, *16; Mathias v Jacobs, 167 F Supp 2d 606, 612 [SDNY 2001]).
A Few Words of Caution
First, as this court made clear in its decision, even in the commercial contract context, the enforceability - or unenforceability - of a particular restrictive covenant remains a fact and case specific inquiry, especially when it comes to analyzing the primary concern as to whether the subject clause serves a legitimate business interest.
Second, and in the same vein, even if the clause is ultimately determined to be overbroad, the Twitchell court stated as follows:
... [O]verly broad restrictive covenants in ordinary commercial agreements may be capable of partial enforcement to the extent necessary to protect a legitimate business interest. However, as with restrictive covenants in employment agreements, "severance of the impermissible portions from the valid portions in order to uphold the covenant to the extent that it is reasonable is not always justified by the circumstances of the particular case" (Greenwich Mills Co. v Barrie House Coffee Co., 91 AD2d at 401; see Columbia Ribbon & Carbon Mfg. Co. v A-1-A Corp., 42 NY2d 496, 500; Crye Precision LLC v Bennettsville Print., 755 Fed Appx at 38; Crye Precision LLC v Duro Textiles, LLC, 689 Fed Appx at 107) ...
[T]he determination as to whether to grant partial enforcement of an employment agreement, with ordinary commercial contracts, courts should consider whether the unenforceable portion is an essential part of the agreement, whether there was overreaching, whether there was the coercive use of dominant bargaining power, whether there was other anticompetitive misconduct, or whether there was other evidence of bad faith in the inclusion of the restrictive covenant (see Brown & Brown, Inc. v Johnson, 25 NY3d at 371; BDO Seidman v Hirshberg, 93 NY2d at 394).
