New York Federal Court Refuses to Enforce No Hire Agreement

In this age of mergers and acquisitions, and increased employee mobility,  it is critical that employers and employees understand their respective noncompetition obligations.  A Southern District of New York court recently applied the “reasonableness” standards governing enforceability of non-competition agreements, or restrictive covenants, to no-hire agreements.  Specifically,in Reed Elsevier Inc. v. TransUnion Holding Company (S.D.N.Y. 13-CV-08739), the court found that the agreement was not necessary to safeguard a “protectable interest” of Reed Elsevier, and was, therefore, unenforceable.

In TransUnion, the parties had entered into an agreement prohibiting TransUnion from hiring certain senior management employees of Reed Elsevier for a time.  Ultimately, TransUnion hired the former Chief Technology Officer of Reed Elsevier, after TransUnion purchased the assets of the employee’s subsequent employer, and assumed the former employee’s employment contract.  It’s not clear to what extent the court was influenced by the fact that the employee had previously left Reed Elsevier to work for another employer (not TransUnion) and ended up becoming a TransUnion employee through a bankruptcy sale of assets.  Thus, the court considered whether under New York law, the no-hire agreement was (1) reasonable in time and area; (2) necessary to protect the employer’s legitimate interest; (3) not harmful to the public; and (3) not unreasonably burdensome to the employee.

Although the court found that the time restriction was unreasonable, because under the circumstances of the case, it would have prevented the employee from working for TransUnion for a period extending 31 months after his departure from Reed Elsevier, the court refused to shorten that restriction to a more reasonable period  because Reed Elsevier could not prove that the agreement was necessary to protect a legitimate interest.  Under New York law, a legitimate interest entitled to protection through a restrictive covenant would include (1) trade secrets; (2) confidential customer information; (3) the employer’s client base; and (4) irreparable harm where the employee’s services are unique and extraordinary.  The court found that none of these interests was at stake in this case.

The outcome would have likely been different had the employee been directly involved in product sales, or possessed specific software information or programming code that was used in Reed Elsevier’s product and service offerings.