Court Determines Non-Solicitation Clauses Enforceable

In an Opinion, dated May 24, 2023, in Perella Weinberg Partners LLC v. Kramer, 2023 NY Slip Op 50501(U), Justice Robert R. Reed determined that non-solicitation clauses, which barred the solicitation of both employees and clients of plaintiff, in the parties’ agreements were enforceable. Defendants argued that the restrictive covenants were unenforceable insofar as they purported to bar defendants from communicating with persons with which they had relationships prior to their tenure at plaintiff and that each restrictive covenant was void as a matter of law. Plaintiffs argued the converse. The Court agreed with Plaintiffs, explaining:

The first prong in determining whether a restrictive covenant is reasonable requires that the restrictive covenant be no greater than required for the protection of the legitimate interest of the employer…. The court accordingly finds that PWP has demonstrated a legitimate interest in preventing the solicitation of the Individual Defendants and the employees allegedly solicited in the matter at hand… The court finds that the restrictive covenants at issue past the first prong of the reasonableness test.

The second prong to determine whether a restrictive covenant is reasonable requires that the provision not impose undue hardship on the employee…

The court does not find that the non-solicitation provisions create undue hardship on employees of PWP, including the Individual Defendants. Defendants make no argument against the length of the non-solicitation period, nor do they argue that such provisions might impact their ability to make a living. Defendants argue, rather, that the non-solicitation provisions, among other things, "impermissibly prohibit employees from ever complaining about their jobs or discussing future employment options" (Ds.' Memo. In Supp., at 27). Defendants rely on a case from the Southern District of New York, in which the Court refused to enforce a non-solicitation provision, finding that "the covenant is thus nothing short of a contractual gag rule on employee complaints . . ." (in re Document Technologies Litigation, 275 F.Supp.3d 454, 468 [SDNY 2017]). In that case, plaintiff-employers acknowledged that "the non-solicitation provision prohibits any speech that 'encourages' or 'induces' an employee to terminate his or her employment, from direct solicitations to such banal statements as an employer is a 'mess' and that an employee 'would be able to find other gainful employment without an issue'" (id., 467-68). The court does not find that the language of the non-solicitation provisions creates undue hardship, and the second prong of the reasonableness test is therefore satisfied.

The final prong in the test for reasonableness of restrictive covenants is that such covenants must not be injurious to the public. Defendants argue that, in analyzing this prong, courts must "take account of any diminution in competition likely to result from slowing down the dissemination of ideas and of any impairment of the function of the market in shifting manpower to areas of greatest productivity" (Ds.' Memo. In Supp., at 29, quoting in re Document Technologies Litigation, 275 F.Supp.3d at 468). They also argue that the public interest supports "the free flow of information concerning alternative employment" particularly where "the allegedly solicited employee is already considering departing the firm" (Ds.' Memo. In Supp., at 29 [internal quotation marks, citation, and emphasis omitted]). Plaintiffs argue that the contemporaneous evidence does not show that the Individual Defendants were already considering leaving the firm (Ps.' Memo. In Opp., at 21). They further argue that "by that time, Kramer had already recruited other Restructuring Group members to join 'NewCo'" (id., at 22). Plaintiffs also argue that the caselaw does not support Defendants' argument that "a defendant is exempt from a non-solicitation clause simply because the solicited employees were 'considering departing from the firm'" (id.). The three prongs all support a finding that the non-solicitation clauses are enforceable, and Plaintiffs are therefore entitled to summary judgment on their first cause of action for a declaratory judgment and dismissing Defendants' fourth and fifth counterclaims solely to the extent of declaring the restrictive covenants are valid.

The attorneys at Schlam Stone & Dolan frequently litigate non-solicitation provisions and other types of restrictive covenants. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning such issues.