“Personal Client Defense” May Not Apply to a Breach of a Restrictive Covenant Signed in Connection with the Sale of a Business

A restrictive covenant is a provision of an employment contract that restricts the rights of the employee after he leaves a job. For example, a restrictive covenant might prevent a former employee from providing similar services to clients that he established a relationship with while he worked at his previous job. Such a restriction would typically limited to a fixed period, usually between six months and two years. It may also prevent the former employee from providing similar services within a certain number of miles from his former place of employment.

In general, New York courts will uphold restrictive covenants if they are not overly broad or unduly restrictive. However, where an employer sues its former employee for breach of such a covenant, the employee may be able to argue that he brought his own personal clients to the employer. Indeed, under New York law, even where the covenant is not on its face overly broad or unduly restrictive, it may still be unenforceable as to a former employee’s “personal clients.” In determining whether a particular client is considered a “personal client” for purposes of this defense, courts will generally look at whether the client was acquired prior to the hiring of the former employee and how much the former employer contributed to the acquisition of the client.

Notwithstanding that the personal client defense is well established under New York caselaw, an important exception exists where the covenant not to compete was signed during the sale of a business or a merger. In Weiser LLP v. Coopersmith, 2008 WL 2200233 (1st Dept. 2008), the New York Supreme Court Appellate Division, First Department held that where an agreement incorporating a restrictive covenant was signed by the parties in connection with a merger, the personal client defense was not available. In that case, the defendants had merged with the plaintiff to form a new firm and then left that firm to start their own practice. The Court held that the personal client defense could not succeed because the duty not to complete was ancillary to the merger agreement. As such, the Court found that the plaintiff had a right to enjoin the defendants from taking the assets and goodwill of their former company.

The Weiser opinion clearly suggests that a defendant will be very unlikely to prevail on a personal client defense where he signed a covenant not to compete in connection with the sale of a business. In light of this decision, New York courts are likely to find that personal clients that an individual brought into a firm are part of the assets and goodwill acquired by the company in the sale.

Accordingly, when a party seeks to merge or purchase a business, it is imperative that the terms of a restrictive covenant are clearly set forth in detail at the outset. To avoid any confusion, and possibly the preclusion of the personal client defense, the assets to which the restrictive covenant applies should be clearly defined. Otherwise, a party who brought client’s into the business may be left with little in the event that he wishes to strike out on his own.

Comments/Questions: ljm@gdnlaw.com

© 2008 Nissenbaum Law Group, LLC