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It’s a business owner’s worst nightmare: an employee leaves to work for a competitor, and tucked into the boxes in which he’s packing his diplomas and photos are your customer lists and confidential information.

Enter a non-compete agreement, which prohibits the employee from working for a rival company for a specified amount of time after leaving your employ.  Traditionally, employers have used non-compete agreements as tools to protect their interests with respect to high-level employees with specific skills and those with access to highly valuable information such as trade secrets and customer lists.  But if the New York Attorney General’s recent string of investigations into non-competes is any indication, more and more employers are requiring low-wage, unskilled workers to sign on the dotted line.

In New York, enforceability of non-compete agreements has historically been a highly litigated area of the law.  Courts will enforce only those non-compete agreements where the person received something of value (consideration) for the obligation and where the agreements are narrowly tailored and reasonable in terms of the length of time, geographic scope, restricted activities, and employer’s industry.  The focus of a non-compete should always be to protect the business and not to unnecessarily and unreasonably restrict an employee.  If a judge believes the agreement stands in the way of an employee being able to find a new job and support herself, it is unlikely to be enforced.

Against this backdrop of non-compete enforceability, the office of New York Attorney General Eric Schneiderman announced settlements this summer with several companies whose non-compete agreements were determined to be overly broad.  One such settlement was with Law360, a legal news outlet, which had been requiring editorial employees at all levels to sign non-competes prohibiting them from working for the company’s direct competitors for a year after leaving the company.  The settlement agreement does away with these mandatory non-competes, leaving in place those for only the most senior editorial employees deemed to have highly specialized skills.

With more investigations and settlements expected from the AG’s office regarding overly broad non-compete agreements, New York employers should take this opportunity to review their existing non-compete agreements and take stock of their hiring policies regarding such agreements.

Specifically, employers should considering doing away with blanket policies requiring all employees, regardless of skill and pay level, to sign non-competes.  Instead, they should evaluate employees individually, assessing their access to proprietary information, whether they possess highly specialized skills critical to the role, and whether there is a legitimate and reasonable business interest in barring the employee from working for a competing company after he or she departs.  If a non-compete agreement is in fact warranted, it should be narrowly tailored to maximize its enforceability.

Please contact us for assistance in reviewing your non-compete agreements or with any questions.

Courts are often called upon to interpret the enforceability of restrictive covenants—such as non-compete, non-solicitation, and non-disclosure clauses—contained in employment agreements.  The vast majority of the case law dealing with the enforceability of these clauses often focuses on whether the restrictions are reasonably limited in time and scope, whether they are necessary to protect the employer’s legitimate business interests, and whether they unfairly restrict the employee from obtaining future employment in his or her chosen occupation.   What makes the recent decision from the Commercial Division in Albany County in Integra Optics, Inc. v. Messina (J. Platkin) interesting is that the focus was not about the terms of the restrictive covenants.  Rather, the issue was whether an otherwise enforceable employment agreement is rendered unenforceable as a result of the employer requiring the employee to sign under the threat of withholding commission payments.  The Court’s answer, in short, was that such threats constitute economic duress and, if proven, render the agreement unenforceable.

Plaintiff, Integra Optics, Inc. (“Integra”) is a designer, manufacturer and distributor of fiber optic networks and components.  Defendant, Jonathan Messina, was hired as an account executive in 2013 and was responsible for managing client accounts and relationships and developing new business and sales strategies.  In 2015 alone, Messina’s accounts brought in more than $6 million in revenue, earning Messina nearly $360,000 in compensation.

As an account executive, Messina had access to the company’s proprietary and confidential information including the company’s product lines, manufacturing costs, pricing policies, discounting policies, and business relationships.  As a result, around September 2014, Integra requested that Messina execute a non-competition agreement.  Although he initially refused, Messina ultimately signed the agreement in September 2015 (“Agreement”).  The Agreement contained a one-year covenant against post-employment competition, which included non-solicitation language, as well as a restriction from using or disclosing any of Integra’s proprietary or confidential information.    

Messina subsequently resigned from Integra effective April 1, 2016 and, about a week later, Integra learned that Messina was considering accepting employment from a competitor who was specifically identified in the Agreement.  Thereafter, Integra commenced this lawsuit and filed an Order to Show Cause seeking a preliminary injunction to, among other things, restrain Messina from working for the competitor.

In defense of the motion, Messina raised the usual arguments about the Agreement being unenforceable because it was overly broad and not necessary to protect Integra’s legitimate business interests, but he also claimed the Agreement was unenforceable because it was the product of economic duress.  At the outset, the Court held that Integra was likely to succeed on its claim that the terms of the Agreement were reasonable in time and scope.

However, with respect to the defense of economic duress, Messina submitted an Affidavit claiming that he initially refused to sign the Agreement on multiple occasions because he felt it was too broad in its restrictions.  In June 2015, Daniel Maynard (“Maynard”) joined Integra as Vice President of Sales.  According to Messina, Maynard immediately began pressuring him to sign the Agreement and threatened Messina on multiple occasions that he would not receive his earned commissions and bonuses unless he signed.  Messina brought the issue to Integra’s Chief Operating Officer, who assured him that the Agreement was just a formality and would not be enforced.  Based on the representations from the COO and his fear that his commissions and bonuses would be withheld, Messina relented and signed the Agreement.  In a separate Affidavit, Maynard denied making the threat about withholding commissions. Based on the contradicting Affidavits, the Court ordered an evidentiary hearing.

At the evidentiary hearing, based on witness testimony from other employees who had received similar threats from Maynard, and other evidence presented at the hearing, including text messages confirming Messina’s account of the underlying facts, it became apparent that Maynard did, in fact, likely threaten to withhold commissions from employees, including Messina, who refused to sign the Agreement.

In its holding, the Court noted that a contract may be voided on the ground of economic duress where a party to the contract establishes that he or she was compelled to sign based on wrongful threats from the other party that precludes the exercise of free will.  805 Third Ave. Co. v. M.W. Assoc., 58 N.Y. 2d 447 (1983).  “Conversely, a party cannot be guilty of economic duress for refusing to do that which he or she is not legally required to do.”  Bechard v. Monty’s Bay Recreation, Inc., 35 A.D.3d 1132 (3d Dep’t 2006).

Here, the Court found that withholding earned commission payments, which for Messina was nearly $100,000, would have been a violation of the Labor Law and thus threatening to do so would be deemed economic duress. Based on the credible testimony and evidence presented at the hearing, the Court held that Messina was likely to succeed on the economic duress defense and, as a result, the Court denied Integra’s motion for a preliminary injunction despite holding that Integra was likely to succeed in establishing that the Agreement otherwise was enforceable.   

While employers are often concerned about ensuring that the restrictive covenant language contained in employment agreements will be enforced if the employer ever has to present it to a Court, this case provides an important example of how it is equally important to ensure that the circumstances under which the employee signs the agreement are entirely voluntary and not under any duress.  Integra likely would have been awarded the preliminary injunction it was seeking in this case if not for the employer’s wrongful threats.

CMM is pleased to announce that Donald J. Rassiger, an experienced corporate attorney with significant in-house experience, has joined the firm as Counsel.  Having served as Chief Legal Officer of four companies and created the General Counsel role at three of them, Don brings the management perspective to all matters he handles.

Don focuses on corporate matters and transactions.  He has significant experience drafting and negotiating numerous contracts including construction, IT, financing, teaming arrangements, and joint ventures, and has successfully closed dozens of M&A deals.  Don has maintained a particular focus on the construction industry, where he has represented clients on all sides of the table including owners, developers, general contractors, subcontractors, engineers, architects, construction managers, and program managers.  His corporate work also includes numerous financing transactions including sale/leaseback, lines of credit, and debt/equity financing.

A resident of Huntington Station, Don previously handled corporate finance matters and commercial transactions for LiRo Group and KeySpan (now National Grid).  Immediately prior to joining CMM, Don served as Senior Vice President and General Counsel of Elecnor Hawkeye, LLC, part of a worldwide conglomerate providing engineering, development, and construction of projects relating to utility infrastructure, new technologies, and renewable energy.

A graduate of College of the Holy Cross and Fordham University School of Law, Don serves on the Board of Directors of the Joe Namath Celebrity Golf Classic for the March of Dimes as well as on the Executive Board of the Crab Meadow Men’s Club.  Don can be reached at drassiger@cmmllp.com or (631) 738-9100, ext. 347.

By Scott Middleton

This past June, Governor Cuomo signed legislation that imposes pre-foreclosure duties on banks and servicing companies. After it goes into effect this December, it is anticipated that a problem that has plagued local municipalities for years with respect to abandoned residential properties will begin to subside.

Now, under the Real Property Actions and Proceedings Law (RPAPL) section 1308, first lien mortgage holders on one- to four-family vacant and/or abandoned residential real property must complete an exterior inspection of the property within 90 days of delinquency to determine if the property is vacant. While the loan is delinquent, the property must be re-inspected every 25 to 35 days.

Once it is determined that property is vacant, the loan servicer must post a notice, with contact information, stating that it is maintaining the property.  If no response is received it now falls upon the mortgage holder to secure and winterize the property, replace broken doors and windows, and fix health and safety issues and any outstanding code violations on the property. The lienholder must continue to maintain the property. As every municipal official knows, the problem has always been that until the bank retakes the property after foreclosure, there was no way to gain compliance with local codes with respect to property maintenance. This problem caused surrounding property owners considerable anxiety and drove down property values in many communities. Residents would often turn to municipalities to do something that was nearly impossible. Hopefully, this new legislation will literally help to change the landscape of many communities plagued by this problem.

Where violations are found, civil penalties of up to $500 per day may be levied against the property. This will enable municipalities to hold the only true party in interest in these situations accountable and put an end to neighborhood blight originally caused by predatory lending by various financial institutions.