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.