New York Appellate Court Upholds Contractual Provision Tolling Employee's Non-Compete Period Due To Employee's Violation of Non-Compete
An increasingly common type of provision found in employment agreements, allowing for extension of an employee’s post-employment non-compete restrictions by a period of time that the employee violates the restrictions, was upheld in a recent decision by New York’s Appellate Division, First Department.
According to the complaint in Delta Enterprise Corp. v. Cohen, the plaintiff Delta Enterprise Corp. is in the business of manufacturing and selling juvenile furniture and other products for infants, toddlers and children. Many of Delta’s products are sold under licenses and use well-known cartoon and other names and images such as Barbie, Spongebob Squarepants, and Hot Wheels. Defendant Ralph Cohen worked in various positions over seven plus years at Delta, and was the co-head of the Toddler Furniture Division in 2009 and early 2010. The complaint alleges that Mr. Cohen misappropriated confidential information from Delta, and began operating a business, called Resolute Trade, in competition with Delta while he was still employed with Delta and afterwards, all in violation of a Confidentiality Agreement (which also contained several two-year non-competition and non-solicitation clauses). Mr. Cohen’s employment with Delta ended on March 1, 2010.
Delta sued Mr. Cohen nearly a year later and on March 1, 2011, secured a temporary restraining order directing Mr. Cohen, among other things, to refrain from engaging in business with any factories with which Delta conducted business, and from interfering with or disrupting any relations between Delta and any of its customers, licensors, employees, or vendors with regard to Delta’s products. After a preliminary injunction hearing, the Supreme Court, New York County, issued a preliminary injunction enjoining Mr. Cohen from taking such actions at any time up through and including February 28, 2012 (i.e., for two years after the end of his employment with Delta).
Although the Court awarded Delta the preliminary injunction, Delta appealed, arguing that it was error for the Court to enforce the two year restrictive covenants only through February 28, 2012, and to fail to enforce the Confidentiality Agreement’s provision tolling the expiration of the restrictive covenants during any period in which Mr. Cohen was in violation of the agreement. In a March 1, 2012 decision, the Appellate Division agreed, holding that the tolling provision should have been given effect and modifying the preliminary injunction to extend until March 1, 2013 (i.e., two years from the date of issuance of the temporary restraining order) or resolution at trial, whichever is earlier.
As more and more employers add such tolling provisions when drafting non-competition and non-solicitation agreements, this appellate court decision, which rejected Mr. Cohen’s arguments that the provision is unenforceable as a matter of law or violates public policy, could prove valuable in employers’ efforts to enforce such tolling provisions. It should be noted, however, that restrictive covenant agreements containing tolling provisions remain subject to judicial analysis as to whether they are necessary to protect the employer’s legitimate business interests, and are reasonable temporally and geographically. Also, the appellate decision specifically noted that Delta proffered an “abundance of unrefuted documentary evidence showing that it was likely that defendant had repeatedly breached multiple provisions of the agreement,” and that there was evidence that Mr. Cohen had consulted with counsel before executing the agreement and received $50,000 in consideration thereof.