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Restrictive Covenants are Applicable Between a Company and its Employee or Between a Company and its Competitor

On January 8, 2014, the United States District Court, Southern District of New York rendered its decision in the Reed Elsevier Inc. v. TransUnion Holding Company, Inc. case regarding restrictive covenants contained in an employment contract.

In this case, both Reed Elsevier Inc. (“REI”) and TransUnion are corporations. The first one is a Massachusetts corporation with its principal place of business in in New York; while the second one is a Delaware corporation with its principal place of business in Chicago, Illinois. The issue started when James Peck departed fromhis role as CEO of REI and was hired by TransUnion. Peck’s employment contract with REI contained several restrictive covenants, among which a non-competition clause prohibiting him from taking a job with a REI’s competitor within twelve months of the termination of his employment at REI; and a confidentiality clause stating that he: “will not use, disclose, reveal, publish, or make available to any person or any firm, company, or other entity any Confidential Information.” The issue with this confidentiality clause is that it has no temporal limitation. When James Peck received an offer of employment from TransUnion, he approached REI to request a waiver of these restrictive covenants because they prohibited him from accepting the offer because the two companies were competitors at the time. REI agreed to grant James Peck a waiver in exchange for certain contractual safeguards, specifically, a new set of restrictive covenants contained in two separate agreements: one between REI and James Peck, and the other between REI and TransUnion. The latter agreement contained a clause restricting TransUnion’s right to hire members of REI’s senior management until December 31, 2014. Escalante worked at REI as chief technology officer and was in charge of overseeing a wide range of the Risk Solutions division’s tasks. Escalante’s employment contract contained post-employment restrictions covenants similar to those contained in James Peck’s employment agreement with REI; including a one year non-competition clause and confidentiality clauses. Later, Escalante became employed by TLO, a competitor of REI, to oversee the company’s operations, including its products and technology. However, when Escalante started his employment at TLO, his one-year non-competition restriction contained in his employment agreement with REI had expired. Nevertheless, REI asserts that Escalante’s employment at TLO became unlawful when its assets were acquired by TransUnion, because it violated the agreement signed between REI and TransUnion regarding the non-hiring of REI’s senior management until December 31, 2014.

In its legal analysis the Court reiterated the reasonableness test, which New York Courts should apply to no-hire agreements between competitors like REI and TransUnion stating that: “in order to be enforceable, an anti competitive covenant ancillary to all employment agreement must be reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the public, and not unreasonably burdensome to the employee” and that “under New York law, determination of the enforceability of a restrictive covenant focuses on the particular facts and circumstances giving context to the agreement.”

The Court decided that REI could not pass this test because they could not provide a legitimate business interest for their two-year “no-hire restrictions” imposed on TransUnion. Indeed, the Court decided that Escalante non-compete clause did not meet any of the four legitimate interests that may be asserted to support a restrictive covenant: “(1) protection of trade secrets, (2) protection of confidential customer information, (3) protection of the employer’s client base, and (4) protection against ineparable harm where the employee’s services are unique or extraordinary.”

This case serves as a reminder that, restrictive covenants no matter require a clear and legally recognizing protectable business interest to be enforceable, whether between a company and its employee or between a company and its competitor.

If you are an employee and you believe you rights have been violated, please contact the Harman Firm, P.C.

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