Beware of Unduly Restrictive Employment Agreements – The Courts Will Not Enforce All Non-Competition Agreements Made by Employers and Employees

Litigation

In an August 2018 decision, Long Is. Minimally Invasive Surgery, P.C. v. St John’s Episcopal Hosp., 164 A.D.3d 575 (2d Dep’t 2018), the Second Department had the occasion to revisit and apply some of the key holdings in New York employment law regarding restrictive covenants/non-competition agreements from the New York State Supreme Court Appellate Divisions and the New York Court of Appeals over the last 40-plus years.

Long Island Minimally Invasive Surgery, P.C. (“LIMIS”) is a medical practice specializing in weight-loss surgery that also provided general surgery and related services. During the period of time relevant to the case, LIMIS had seven offices located throughout the New York metro area. Its doctors performed surgery at Mercy Medical Center (“Mercy”) in Rockville Centre in Nassau County.

In June 2010, LIMIS hired Javier Andrade to perform weight-loss and other types of surgery, and related services. LIMIS and Andrade entered into an employment agreement with a three-year term which contained a restrictive covenant barring Andrade from performing any type of surgery for two years within 10 miles of any of LIMIS’ seven offices and affiliated hospitals following the end of his employment with LIMIS. Andrade worked almost exclusively in Nassau County at LIMIS’ Freeport and New Hyde Park offices, and performed surgery at Mercy. Andrade continued to work for LIMIS beyond the three-year term of the agreement. In April 2014, LIMIS terminated his employment without cause.

In September 2014, Andrade accepted a position as the interim chairman of the department of general surgery at St. John’s Episcopal Hospital (“St. John’s”). Andrade’s new office, his only office at St. John’s, is located in Rockaway Park, outside the 10-mile “restricted zone,” although St. John’s Episcopal Hospital itself is located within the restricted zone

LIMIS sued Andrade and St. John’s Episcopal Hospital, seeking damages and injunctive relief, based on Andrade’s alleged breach of covenant. Andrade and St. John’s Episcopal Church moved for summary judgment arguing, inter alia, that the covenant was invalid as a matter of law. The lower court granted the motion for summary judgment dismissing the complaint, and the Second Department affirmed that dismissal on appeal.

At the outset of its reasoning, the Second Department set forth well-accepted principles which animate New York employment law on restrictive covenants/non-compete agreements:

  • Agreements restricting an individual’s right to work or compete are not favored and, thus, are strictly construed.
  • A restrictive covenant will only be subject to specific enforcement to the extent that it is reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee.
  • The determination of whether a restrictive covenant is reasonable involves the application of a three-pronged test. The violation of any prong renders the covenant invalid. A restraint is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer; (2) does not impose undue hardship on the employee; and (3) is not injurious to the public.
  • With agreements not to compete between professionals, courts have given greater weight to the interests of the employer in restricting competition within a confined geographical area.
  • The application of the test of reasonableness of employee restrictive covenants focuses on the particular facts and circumstances giving context to the agreement. The rationale for the differential application of the common-law rule of reasonableness was that professionals are deemed to provide unique or extraordinary services.

The Second Department found that Andrade and St. John’s had shown that the provision prohibiting Andrade for a period of two years from practicing surgery of any kind within a 10-mile radius of all LIMIS offices and affiliated hospitals, even those at which he had never worked was geographically unreasonable, because it “effectively barred him from performing surgery, his chosen field of medicine, in the New York metropolitan area.”

The Second Department also found that the lower court was not wrong in declining to modify the provision instead of invalidating it. Partial enforcement is sometimes appropriate if the employer demonstrates a legitimate business interest and an absence of overreaching, coercive use of dominant bargaining power, or other anti-competitive misconduct. LIMIS did not demonstrate, or even argue, that there was an absence of anti-competitive misconduct, and only asserted instead that, because the restrictive covenant can be partially enforced, it should be. The Second Department also found that it undisputed that LIMIS had a superior bargaining position, as it required Andrade to sign the employment agreement as a prerequisite to being hired, and it refused to negotiate the relevant restrictive covenant.

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