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Attorney(S)

Abraham Kaplan for appellant-respondent. John J. Palmeri for respondents-appellants.

Judges

Sol Wachtler

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Case Summary: Reed, Roberts Associates, Inc. v. John J. Strauman et al.

Court of Appeals of the State of New York — Decided July 13, 1976 (Argued June 11, 1976). Opinion by Wachtler, J.; Chief Judge Breitel and Judges Jasen, Gabrielli, Jones, Fuchsberg and Cooke concurred.

Factual and Procedural Background

Reed, Roberts Associates, Inc. (hereafter "Reed, Roberts") is described in the opinion as one of the top three companies in its field, serving over 6,000 customers through approximately 21 offices nationwide and reporting gross sales of almost $4 million. The company's principal business involved advising employers about State unemployment laws to minimize tax liability and administrative expenses; it also provided consultation on workmen's compensation, disability benefits and pension plans.

John J. Strauman was employed by Reed, Roberts beginning in November 1962. Upon hiring he signed a restrictive covenant that (in pertinent part) barred him, for three years following termination, from engaging in any business of the type and character of Reed, Roberts within specified geographic limits (City of New York and the counties of Nassau, Suffolk and Westchester) and forever from directly or indirectly soliciting Reed, Roberts' clients.

Strauman worked at Reed, Roberts for approximately 11 years, rising to senior vice-president in charge of operations and contributing to internal forms and the company's computer system; he was not responsible for sales or obtaining new customers. He thereafter formed Curator Associates, Inc., a competing company located in the same municipality. Reed, Roberts alleged Curator solicited its customers; Curator reported substantial first-year losses (about $38,000) and minimal gross sales (approximately $1,100).

Reed, Roberts commenced this action seeking specific enforcement of the restrictive covenant: to enjoin Strauman and Curator from competing in the unemployment tax control business in the metropolitan area for three years and to permanently enjoin them from soliciting Reed, Roberts' customers.

The trial court partially granted relief: it refused to enjoin the defendants from operating a competing enterprise (finding no trade secrets and that Strauman's services were not unique or extraordinary), but it permanently enjoined the defendants from soliciting Reed, Roberts' clients. The Appellate Division affirmed without opinion. The Court of Appeals modified the order by reversing so much of it as imposed a permanent injunction against solicitation.

Legal Issues Presented

Whether a post‑termination restrictive covenant in an employment contract that bars an employee from competing and from soliciting the employer's clients is a proper subject for specific enforcement.
If such a covenant is at issue, whether the covenant is enforceable against the employee when (a) the employee's services are not shown to be unique or extraordinary, and (b) the employer has not established that customer lists or other customer information constitute trade secrets or were surreptitiously taken or copied.
Whether permanent injunctive relief is appropriate to prevent solicitation of customers where customers are generally discoverable through public sources and no wrongful conduct in procuring customer information is shown.

Arguments of the Parties

Appellant-Respondent (Reed, Roberts) — Principal Arguments

Reed, Roberts sought to enforce the restrictive covenant signed by Strauman to prevent him and his new company, Curator, from competing within the metropolitan area for three years and to permanently enjoin solicitation of Reed, Roberts' customers.
The thrust of Reed, Roberts' argument, as described in the opinion, was that Strauman, by virtue of his position in charge of internal administration, had access to sensitive and confidential customer information which he should not be permitted to convert to his own use.

Respondents-Appellants (Strauman and Curator) — Account in Opinion

The opinion does not contain a detailed account of the respondents' legal arguments in a party‑by‑party pleading format beyond the record findings and defenses discussed by the court (for example, that there was no finding of wrongful conduct and that customer information was generally discoverable). The court's discussion reflects the factual and legal positions necessary to resolve the issues but does not present a separately enumerated list of the defendants' formal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Purchasing Assoc. v. Weitz, 13 N.Y.2d 267	Anticompetition covenants in the sale of a business are enforceable if reasonable in time, scope and extent to protect goodwill; also cited for public policy concerns against depriving a person of livelihood.	The court used the case to distinguish sale‑of‑business covenants from employee covenants and to highlight the policy tension favoring employee mobility; the decision supports applying a stricter standard to employee restrictive covenants.
Clark Paper Mfg. Co. v. Stenacher, 236 N.Y. 312	Example of case law applying the requirement that employee restrictive covenants must be reasonable and protect legitimate employer interests.	Referenced as one of the authorities establishing the stricter standard of reasonableness for covenants given by employees.
Service Systems Corp. v. Harris, 41 A.D.2d 20	Example of precedent applying limitations on enforceability of employee restrictive covenants.	Cited as illustrative authority for the principles governing reasonableness and protection of employer interests in employee covenants.
Lepel High Frequency Labs. v. Capita, 278 N.Y. 661	Restrictive covenants enforceable to prevent disclosure or use of trade secrets or confidential customer information.	Used to demonstrate that injunctive relief is appropriate to prevent misuse of trade secrets or confidential customer information when such information exists.
Carpenter Hughes v. De Joseph, 10 N.Y.2d 925	Similar to Lepel: enforcement to protect trade secrets/confidential customer information.	Referenced among authorities that justify injunctive relief where trade secrets or confidential information are at risk.
Lumley v. Wagner, 42 Eng. Rep. 687	Authority for granting injunctions where an employee's services are unique or extraordinary.	Invoked to show that injunctive relief may be proper when an individual's services are unique, a category not applicable here per the trial court's finding.
Frederick Bros. Artists Corp. v. Yates, 271 App. Div. 69; aff'd 296 N.Y. 820	Illustration of injunctions in contexts where extraordinary or unique services warrant protection.	Cited as an example of cases where courts have enforced restrictive covenants under the unique‑services principle; the Court noted that principle but found it inapplicable here.
Karpinski v. Ingrasci, 28 N.Y.2d 45	Application of the unique/extraordinary services principle to agreements among members of the learned professions.	Referenced to show the scope of the unique‑services exception, but held not to control because Strauman's services were not extraordinary.
Leo Silfen, Inc. v. Cream, 29 N.Y.2d 387	Where an employee engaged in no wrongful conduct and customer names/addresses are readily discoverable through public sources, an injunction to prevent solicitation will not lie.	The court treated this case as dispositive for the solicitation issue: because Reed, Roberts failed to show theft or piracy of a customer list and customers were generally discoverable, a permanent injunction against solicitation was improper.
Lincoln Steel Prods. v. Schuster, 49 A.D.2d 618	Contrast case where wrongful conduct (e.g., pilfering/memorizing a customer list) might justify injunctive relief.	The opinion cites Lincoln Steel as a contrast to the present facts, noting that here there was no similar finding of wrongful conduct to justify an injunction.

Court's Reasoning and Analysis

The Court analyzed the enforceability of the post‑termination restrictive covenant according to established principles distinguishing covenants incident to the sale of a business from covenants given by an employee. It emphasized the overarching requirement of reasonableness (time, geographic scope and extent) but noted that employee covenants are subject to a stricter standard because of public‑policy concerns about depriving individuals of the ability to earn a livelihood and the importance of allowing the free flow of services, talent and ideas.

The court applied the following analytical steps:

Identified the specific protections for which injunctive relief may be appropriate: (a) protection against disclosure or use of trade secrets or confidential customer information; and (b) protection where an employee's services are unique or extraordinary such that specific enforcement is justified.
Examined the record and the trial court's findings. The courts below found — and Reed, Roberts did not dispute — that there were no trade secrets here. The court therefore evaluated whether Reed, Roberts had established surreptitious copying or wrongful procurement of a customer list; the record did not support such a finding.
Considered the accessibility of the customer information. The opinion relied on the principle in Leo Silfen, Inc. v. Cream that where customer names and addresses are readily discoverable through public sources (e.g., Dun and Bradstreet publications), and there is no wrongful conduct by the employee, an injunction against solicitation is not appropriate. The court observed that Reed, Roberts itself acknowledged that every company with employees is a prospective customer and that solicitation commonly involves nationally available directories.
Considered whether Strauman's services were "unique or extraordinary." Although Strauman was an important, valuable and high‑level employee who aided in developing forms and the computer system and had been promoted to senior vice‑president, the trial court had found that his services were not extraordinary or unique. The Court of Appeals accepted that finding and concluded that, absent trade secrets or wrongful conduct, Strauman could not be enjoined from using the general knowledge and skills acquired in his employment.
Reconciled competing considerations: while recognizing an employer's legitimate interest in protecting business goodwill and preventing deliberate commercial piracy, the court emphasized that protection must not extend to restraining normal competition or to barring an employee from applying general skillful variations of trade processes (citing Restatement, Agency 2d, §396, Comment b).

On that basis the court concluded that the permanent injunction against solicitation was not justified by the record, and that the trial court correctly refused to enjoin the defendants from operating a competing business because Strauman's services were not extraordinary and no trade secrets or wrongful conduct were shown.

Holding and Implications

Holding: The Court modified the Appellate Division's order by reversing the portion that permanently enjoined the defendants from soliciting Reed, Roberts' customers; the order was otherwise affirmed as modified. The opinion directs that costs be awarded to the defendants.

Implications:

The court denied specific enforcement of the covenant to the extent it would permanently bar solicitation where there was no showing of trade secrets or wrongful conduct in procuring customer information and where customer identities were generally publicly discoverable.
The court affirmed the denial of an injunction preventing the defendants from operating a competing business, given the finding that Strauman's services were not unique or extraordinary.
No broader novel legal rule was announced; the decision applies and illustrates existing New York principles distinguishing employee restrictive covenants from those incident to the sale of a business and reiterates the limited circumstances (trade secrets, confidential customer information, or uniquely extraordinary services) under which injunctive relief against an employee will be granted.

Order modified, with costs to defendants, in accordance with the opinion herein and, as so modified, affirmed.

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REED, ROBERTS ASSOCIATES, INC., Appellant-Respondent, v. JOHN J. STRAUMAN et al., Respondents-Appellants.

WACHTLER, J.

These cross appeals involve the efficacy of an employment contract provision barring an employee from either directly or indirectly competing with, or soliciting clients of his former employer. This restrictive covenant is not a proper subject for specific enforcement since the services of the employee were not unique or extraordinary and the employer failed to establish a studied copying of a customer list.

Reed, Roberts Associates, Inc., with over 6,000 customers being served through some 21 offices scattered throughout the Nation and with gross sales of almost $4 million, is one of the top three companies in its field. The lion's share of its business involves supplying advice and guidance to employers with respect to their obligations under State unemployment laws. The object of this service is to minimize the tax liability and administrative expenses involved in complying with these laws. Other services performed by Reed, Roberts include consultation regarding workmen's compensation, disability benefits and pension plans. This action was commenced by Reed, Roberts to prevent a former employee from competing against them and soliciting their customers.

When John Strauman was hired by Reed, Roberts in November, 1962 he signed a restrictive covenant which read in pertinent part: "I do therefore consent that at no time shall I either directly or indirectly solicit any of your clients, and I do further agree that for a period of three years from the date of termination of my employment that I will not either directly or indirectly be engaged in, nor in any manner whatsoever become interested directly or indirectly, either as employee, owner, partner, agent, stockholder, director or officer of a corporation or otherwise, in any business of the type and character engaged in by your company within the geographical limits of the City of New York and the counties of Nassau, Suffolk and Westchester."

Apparently at that time Reed, Roberts was organized as a partnership; and a few months later it was incorporated.

Strauman's first position as an employee of Reed, Roberts was technical man-auditor. Since he had four years' experience in the field by virtue of having previously worked for a major competitor, Strauman became a valuable employee and over the next 10 years received three important promotions rising to senior vice-president in charge of operations. Throughout his tenure with Reed, Roberts, Strauman was instrumental in devising most of the forms utilized by the company in rendering its service and in setting up its computer system. On becoming vice-president he was given increased responsibility with regard to internal affairs including the formulation of company policy. Importantly, however, he was not responsible for sales or obtaining new customers. The record indicates that while the business forms used by Reed, Roberts were unique to that service industry, they were not much different from those used by other companies.

Interestingly, one of Reed, Roberts' founding partners testified that the company was initiated with the assistance of an employee of one of the leading firms in the area of unemployment tax control. This employee showed them the competitor's internal forms including the pricing schedules which were copied verbatim.

After 11 years with Reed, Roberts, Strauman decided to strike off on his own and formed a company called Curator Associates, Inc. This company was in direct competition with his former employer and was even located in the same municipality. Although Reed, Roberts alleges that Curator has been soliciting its customers, Curator sustained losses of some $38,000 with gross sales of only $1,100 during its first year of operations. Nevertheless, fearful of competition from the former employee, Reed, Roberts commenced this action seeking to enforce the posttermination covenant not to compete signed by Strauman in 1962. Specifically Reed, Roberts seeks to enjoin Strauman and Curator from engaging in the business of unemployment tax control within the metropolitan area for a period of three years and to enjoin them from soliciting any of Reed, Roberts' customers permanently.

The trial court granted this relief in part. The court refused to prohibit defendants from engaging in a competitive enterprise finding that there were no trade secrets involved here and that although Strauman was a key employee his services were not so unique or extraordinary as to warrant restraining his attempt to compete with his former employer. Nevertheless the court believed that it would be unjust and unfair for Strauman to utilize his knowledge of Reed, Roberts' internal operations to solicit its clients and permanently enjoined defendants from doing so. The Appellate Division affirmed, without opinion. We believe the order of the Appellate Division should be modified to the extent of reversing so much thereof as grants a permanent injunction against the defendants.

Generally negative covenants restricting competition are enforceable only to the extent that they satisfy the overriding requirement of reasonableness. Yet the formulation of reasonableness may vary with the context and type of restriction imposed. For example, where a business is sold, anticompetition covenants will be enforceable, if reasonable in time, scope and extent. These covenants are designed to protect the goodwill integral to the business from usurpation by the former owner while at the same time allowing an owner to profit from the goodwill which he may have spent years creating. (See, e.g., Purchasing Assoc. v Weitz, 13 N.Y.2d 267, 271, and authorities cited there; see, also, Mandel, Preparation of Commercial Agreements [1970 ed], pp 52-54.) However, where an anticompetition covenant given by an employee to his employer is involved a stricter standard of reasonableness will be applied.

In this context a restrictive covenant will only be subject to specific enforcement to the extent that it is reasonable in time and area, necessary to protect the employer's legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee (e.g., Clark Paper Mfg. Co. v Stenacher, 236 N.Y. 312; Service Systems Corp. v Harris, 41 A.D.2d 20; see, generally, Richards, Drafting and Enforcing Restrictive Covenants Not to Compete, 55 Marquette L Rev 241). Undoubtedly judicial disfavor of these covenants is provoked by "powerful considerations of public policy which militate against sanctioning the loss of a man's livelihood" (Purchasing Assoc. v Weitz, supra, p 272). Indeed, our economy is premised on the competition engendered by the uninhibited flow of services, talent and ideas. Therefore, no restrictions should fetter an employee's right to apply to his own best advantage the skills and knowledge acquired by the overall experience of his previous employment. This includes those techniques which are but "skillful variations of general processes known to the particular trade" (Restatement, Agency 2d, § 396, Comment b; see, also, Customer List — as Trade Secret-Factors, Ann., 28 ALR3d 7).

Of course, the courts must also recognize the legitimate interest an employer has in safeguarding that which has made his business successful and to protect himself against deliberate surreptitious commercial piracy. Thus restrictive covenants will be enforceable to the extent necessary to prevent the disclosure or use of trade secrets or confidential customer information (e.g., Lepel High Frequency Labs. v Capita, 278 N.Y. 661; Carpenter Hughes v De Joseph, 10 N.Y.2d 925). In addition injunctive relief may be available where an employee's services are unique or extraordinary and the covenant is reasonable (e.g., Lumley v Wagner, 42 Eng Rep 687; Frederick Bros. Artists Corp. v Yates, 271 App. Div. 69, affd 296 N.Y. 820). This latter principle has been interpreted to reach agreements between members of the learned professions (e.g., Karpinski v Ingrasci, 28 N.Y.2d 45).

With these principles in mind we consider first the issue of solicitation of customers in the case at bar. The courts below found, and Reed, Roberts does not dispute, that there were no trade secrets involved here. The thrust of Reed, Roberts' argument is that by virtue of Strauman's position in charge of internal administration he was privy to sensitive and confidential customer information which he should not be permitted to convert to his own use. The law enunciated in Leo Silfen, Inc. v Cream ( 29 N.Y.2d 387) is dispositive. There, as here, the plaintiff failed to sustain its allegation that the defendant had pirated the actual customer list. Rather Silfen argued that in light of the funds expended to compile the list it would be unfair to allow the defendant to solicit the clients of his former employer. We held that where the employee engaged in no wrongful conduct and the names and addresses of potential customers were readily discoverable through public sources, an injunction would not lie. Similarly here there was no finding that Strauman acted wrongfully by either pilfering or memorizing the customer list (compare Lincoln Steel Prods. v Schuster, 49 A.D.2d 618). More important, by Reed, Roberts' own admission every company with employees is a prospective customer and the solicitation of customers was usually done through the use of nationally known publications such as Dun and Bradstreet's Million Dollar Directory where even the name of the person to contact regarding these services is readily available (Leo Silfen, Inc. v Cream, supra, pp 392-393). It strains credulity to characterize this type of information as confidential. Consequently, the trial court's determination that Strauman and Curator should be permanently enjoined from soliciting Reed, Roberts' customers as of the date of his termination was erroneous.

Apparently, the employer is more concerned about Strauman's knowledge of the intricacies of their business operation. However, absent any wrongdoing, we cannot agree that Strauman should be prohibited from utilizing his knowledge and talents in this area (see Restatement, Agency 2d, § 396, Comment b). A contrary holding would make those in charge of operations or specialists in certain aspects of an enterprise virtual hostages of their employers. Where the knowledge does not qualify for protection as a trade secret and there has been no conspiracy or breach of trust resulting in commercial piracy we see no reason to inhibit the employee's ability to realize his potential both professionally and financially by availing himself of opportunity. Therefore, despite Strauman's excellence or value to Reed, Roberts the trial court's finding that his services were not extraordinary or unique is controlling and properly resulted in a denial of the injunction against operating a competing business.

Accordingly, the order of the Appellate Division should be modified in accordance with this opinion.

Chief Judge BREITEL and Judges JASEN, GABRIELLI, JONES, FUCHSBERG and COOKE concur.