As the Court of Appeals explained, New York courts disfavor restrictive covenants in the employment context and will generally enforce them only to the extent that they are reasonable. Lucente, 310 F.3d at 254. There is an exception to this rule, however, known as the "employee choice" doctrine: "New York courts will enforce a restrictive covenant without regard to its reasonableness if the employee has been afforded the choice between not competing (and thereby preserving his benefits) or competing (and thereby risking forfeiture)." Id. In sum, a restrictive covenant is enforceable without regard to reasonableness if an employee left his employer voluntarily, but a court must determine whether such a covenant is "reasonable" if the employee left involuntarily and without cause.
IBM disagrees with plaintiff as to what "reasonableness" standard would apply were a jury to find that Lucente left IBM involuntarily and without cause. In his proposed jury instructions, Lucente relies largely on Reed, Roberts Assocs., Inc. v. Strauman, 40 N.Y.2d 303, 386 N.Y.S.2d 677, 353 N.E.2d 590 (1976), a leading New York case regarding employment agreements not to compete.
Under Reed, Roberts and its progeny (and antecedents), a noncompetition agreement is reasonable if it (1) is not greater than required for the protection of the legitimate interests of the employer; (2) does not impose undue hardship on the employee; and (3) is not injurious to the public. See BDO Seidman, 93 N.Y.2d at 388-89, 690 N.Y.S.2d at 857, 712 N.E.2d 1220. "A violation of any prong renders the covenant invalid." Id.
To apply the first prong, a court must first determine whether the employer has any legitimate interests to protect. Generally speaking, it is legitimate for an employer to protect itself from "unfair or illegal conduct that causes economic injury." American Broadcasting Companies, Inc. v. Wolf, 52 N.Y.2d 394, 404, 438 N.Y.S.2d 482, 487, 420 N.E.2d 363 (1981). Thus, noncompetition agreements may be enforced "to the extent necessary (1) to prevent an employee's solicitation or disclosure of trade secrets, (2) to prevent an employee's release of confidential information, or (3) in those cases where the employee's services to the employer are deemed special or unique." Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 70 (2d Cir. 1999). Against these legitimate interests, a court must then weigh the extent to which the noncompetition agreement is unreasonable in "time, space or scope." American Broadcasting Companies, Inc., 52 N.Y.2d at 403-04, 438 N.Y.S.2d at 486, 420 N.E.2d 363. In other words, "[s]uch covenants will be enforced only if reasonably limited temporally and geographically, and then only to the extent necessary to protect" the employer's legitimate interests. Columbia Ribbon & Carbon Mfg . Co. v. A-1-A Corp., 42 N.Y.2d 496, 499, 398 N.Y.S.2d 1004, 1006, 369 N.E.2d 4 (1977) (internal citations omitted).
In Reed, Roberts, as well as the other cases that Lucente cites in his proposed jury instructions, an employer sought to enjoin its former employee from working for a competitor. Thus, IBM proffers the argument that forfeiture for competition clauses should be evaluated under a different reasonableness standard than noncompetition clauses that an employer seeks to enforce by enjoining an employee from working for a competitor. But the applicable case law does not support this proposition.
First, the New York Court of Appeals' decision in BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 690 N.Y.S.2d 854, 712 N.E.2d 1220 (1999) contradicts IBM's argument. That case involved an agreement requiring defendant, a former employee of BDO, to compensate BDO for serving any client of BDO's Buffalo office within eighteen months after the termination of his employment. The court explained:
Concededly, the [agreement] does not prevent
[defendant] from competing for new clients, nor does
it expressly bar him from serving BDO clients.
Instead, it requires him to pay "for the loss and
damages" sustained by BDO in losing any of its
clients to defendant within 18 months after his
departure, an amount equivalent to 1 ½ times
the last annual billing for any such client who
became the client of defendant. Nonetheless, it is
not seriously disputed that the agreement, in its
purpose and effect, is a form of ancillary employee
anti-competitive agreement that will be carefully
scrutinized by the courts.
Id. at 388, 690 N.Y.S.2d 854, 712 N.E.2d 1220. Thus, the Court of Appeals does not distinguish between enjoining an employee from competing with his former employer and imposing some sort of financial penalty for doing so — whether it be a payment of one and a half times the amount the company lost due to such competition or a forfeiture of stock options the employee had been awarded during his employment. See also Wise v. Transco, Inc., 73 A.D.2d 1039, 1039, 425 N.Y.S.2d 434, 435 (4th Dep't 1980).
Second, the two federal cases IBM relies on — York v. Actmedia, Inc., No. 88 Civ. 8763, 1990 WL 41760 (S.D.N.Y. Mar. 30, 1990) and Bradford v. New York Times Co., 501 F.2d 51, 58 (2d Cir. 1974) — do not apply a different reasonableness standard. Indeed, Judge Griesa specifically quotes Reed, Roberts in Actmedia, 1990 WL 41760, at *2. Rather, what the Bradford and Actmedia courts did was take into account the absence of an injunction as one factor within that very same standard. Specifically, they appear to take it into account in determining whether the restriction is "greater than is needed" to protect the employer's legitimate interests. Whether or not the York and Bradford courts erred in weighing the absence of an injunction within the well-established New York reasonableness standard, I express no opinion at this stage of the proceedings. See Sarnoff v. American Home Products Corp., 798 F.2d 1075 (7th Cir. 1986) (discussing possible rationales for distinguishing between enjoining a former employee from competing and merely forfeiting a monetary benefit, and noting that the prospect of having to forfeit a sizable portion of money in order to compete with a former employer might have an indistinguishable effect from an injunction). What is clear, however, is the contours of the reasonableness standard, as set forth above, are the same in both injunction and forfeiture cases.
Thus, if (1) Lucente left IBM involuntarily and without cause, and (2) the forfeiture provision was unreasonable (pursuant to the principles enunciated above), then IBM cannot enforce the forfeiture provision. Alternatively, if Lucente left IBM voluntarily or if he left involuntarily and the forfeiture provision is reasonable, another issue remains — whether IBM acted fraudulently, arbitrarily, or in bad faith when it determined that Digital was a competitor and that it would divest Lucente of his stock options and restricted stock.
Under New York law, if an employee is a part of a "plan" that gives a "committee" sole discretion to interpret the plan and determine whether the employee is entitled to benefits under the plan, a court can review such determinations to see whether they were made fraudulently, in bad faith, or arbitrarily. See Gitelson v. Du Pont, 17 N.Y.2d 46, 268 N.Y.S.2d 11, 215 N.E.2d 336 (1966); Gehrhardt v. General Motors Corp., 581 F.2d 7 (2d Cir. 1978); Wyper v. Providence Washington Ins. Co., 533 F.2d 57 (2d Cir. 1976); Bradford v. New York Times, 501 F.2d 51, 61 (2d Cir. 1974); Rosenberg v. Salomon, Inc., 992 F. Supp. 513, (D.Conn. 1997) (applying New York law); Sarnoff v. American Home Products Corp., 798 F.2d 1075 (7th Cir. 1986) (applying New York law); Cinelli v. American. Home Products Corp., 785 F.2d 264, 267 (10th Cir. 1986) (applying New York law).
IBM argues that the above cases are inapposite because they only involve instances where a committee's determinations are "binding and conclusive for all purposes," thereby depriving the employee the opportunity to challenge the determination on the merits. But although the operative plans in this case do not contain "binding and conclusive" language, they state that "[t]he [Committee on Executive Compensation] shall have full and exclusive power to interpret the Plan. . . ." [Edwards Declaration, Ex. 1, at 2; Ex. 2, at 4]. Indeed, IBM appears to recognize the implications of these provisions. In its proposed jury instructions, IBM proposes the following language:
Under the terms of the [agreement] as I just read
them to you, Lucente complied with the [agreement]
only if, following his employment with IBM, he worked
for a company that did not, in IBM's reasonable
judgment, compete with IBM. Thus, you must determine
whether IBM had a reasonable basis for its conclusion
that Digital competed with IBM. The issue is not
whether you believe that Digital competed with IBM
but only whether IBM had a reasonable basis for
concluding that it did.
[IBM's Proposed Jury Instructions 6]. Thus, IBM argues (in this motion) that its determination that Digital was a competitor is subject to direct challenge while arguing (in its proposed jury instructions) that it is not. In other words, IBM wants to have its cake (the favorable jury instruction) and eat it too (by preventing Lucente from discovering relevant information). Of course, it cannot.