Written By Gauri Punjabi
Anti-poaching agreements, non-recruitment pacts, no-hire contracts, whatever you want to call them, require a protectable interest to be enforceable in New York. That’s what a Southern District of New York judge in Reed Elsevier Inc. v. TransUnion Holding Company, Inc. held. This case serves as a good reminder that in New York (like in many other states), restrictive covenants, including anti-poaching agreements, may be rendered meaningless without one key element – evidence of a protectable interest.
In Reed Elsevier, the parties had entered into an agreement restricting TransUnion’s right to hire members of REI’s senior management team for a period of time. After REI’s Chief Technology Officer joined TransUnion, REI sued. But the Court refused to enforce what was otherwise a plainly-worded agreement.
First, the Court made an important ruling: New York’s reasonableness test – the test used to analyze non-compete agreements between employers and employees – applies just the same to no-hire agreements between competitors like REI and TransUnion. That reasonableness test requires the employer to show that the agreement is (i) reasonable in time and area, (ii) necessary to protect the employer’s legitimate interests, (iii) not harmful to the public; and (iv) not unreasonably burdensome to the employee.
REI could not pass this test. The Court had concerns about the agreement’s no-hire window (2+ years), but focused mainly on the absence of a legitimate business interest. As the Court found under the circumstances here, simply being a member of REI’s senior management team did not mean that the former CTO in fact (i) had knowledge or possession of REI’s proprietary trade secrets, (ii) was likely to lure away REI clients, or (iii) had provided unique or extraordinary services to REI – each a factor that ordinarily will establish a protectable interest.
The Court also made another important ruling: New York does not recognize the risk of employee attrition as one of the protectable interests an employer may rely on to enforce a no-hire agreement, putting it in line with the few other New York courts that have addressed this issue.
While the result is perhaps not surprising to many of you, it should not be ignored: restrictive covenants no matter the type (non-compete, non-solicit, non-recruit), whether between a company and its employee or between a company and its competitor, will typically require a clear and legally recognizing protectable interest to be enforceable.