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Who really owns your clients?

Summary: Fifteen years after BDO Seidman v. Hirshberg, the watershed New York Court of Appeals decision on the enforcement of restrictive covenants in employment agreements, courts ...

Fifteen years after BDO Seidman v. Hirshberg, the watershed New York Court of Appeals decision on the enforcement of restrictive covenants in employment agreements, courts and practitioners still wrestle with the issue of whether and under what circumstances employees or their employers possess superior rights in client goodwill. A recent case in point is Marsh USA Inc. v. Robert Doerfler, et al.

In Marsh, Doerfler, an experienced insurance broker, left Marsh to join competitor Aon. Doerfler's agreement with Marsh prohibited him from soliciting or servicing Marsh clients for one year after leaving Marsh. Whether Doerfler could continue at Aon to do business with two key clients with whom Doerfler had a relationship predating Marsh was at the heart of Marsh's application for an injunction to enforce the agreement.

BDO Siedman endorsed a three part test for enforcement of restrictive covenants: A restrictive covenant must be no greater in scope than required for protection of the legitimate interest of the employer, not impose undue hardship on the employee, and not be injurious to the public. BDO Siedman recognized that an employer has a legitimate interest in preventing employees from appropriating the goodwill of clients which "had been created and maintained at the employer's expense, to the employer's competitive detriment."

Applying BDO Seidman, Justice Bransten found that Marsh acquired a legitimate interest in clients known to Doerfler before his employment with Marsh because there was evidence Marsh had maintained or enhanced goodwill with those clients by incurring client entertainment expenses. The court however, declined to enforce the agreement to preclude Doerfler from servicing those clients because it observed Doerfler also had acquired goodwill in those client relationships before joining Marsh and the injunction sought would completely deprive him of his legitimate interest in that goodwill. In a novel analysis, the court reasoned that to determine whether the restrictive covenant was reasonable it must somehow distinguish between, and perhaps compare, goodwill independently created by Doerfler and goodwill created by Marsh. The court observed that the evidence before it was not sufficiently developed to properly assess how best to protect the separate interests of Doerfler and Marsh in the client goodwill, and, therefore, the court could not conclude the covenant was reasonable under BDO Seidman. For the same reason, the court could perceive no way to judicially modify the agreement to limit the scope of the contractual restraint to make it no greater than necessary to protect Marsh's legitimate interests.

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The court's reasoning in Marsh arguably distorts the principles of BDO Seidman. The court in BDO Seidman never undertook to quantify or rank goodwill created by the employee and the employer in the same clients or suggest such an analysis could or should be undertaken. Rather, the court distinguished between classes of clients; those developed and maintained by the employee without the employer's assistance and those developed with the employer's assistance. The court in BDO Seidman concludedBDO had not obtained a legitimate interest in clients brought to BDO by the employee sufficient to enforce a restrictive covenant where BDO had not expended its resources to create or maintain goodwill with those clients. BDO Seidman did not hold that an employer may never acquire a legitimate protectable interest in clients in which an arriving employee has already developed goodwill or that it may never enforce a restrictive covenant in respect of those clients. Consistent with that reasoning, in Marsh, the court recognized that Marsh had acquired goodwill in such clients and assumed Marsh deserved protection, but the court's novel approach to determining reasonableness led it inevitably to a dead end.

Instead, it is routinely argued and one can reasonably infer from BDO Seidman that once an employer invests resources in and can fairly claim to have created goodwill in a client, it obtains the right to protect that interest, regardless of whether the employee may have created goodwill with the same client before arriving at the employer. Once the employer's protectable interest is established the reasonableness inquiry then turns, not on the comparative value of the goodwill created by each, but on whether long-recognized criteria, such as geographic scope or the duration of the restraint, match the location and time required by the employer to conduct the activities reasonably needed to attempt to protect the goodwill it acquired free from interference by the employee. Such an approach sensibly avoids the quicksand the court waded into in Marsh of attempting to distinguish and evaluate goodwill created separately by employee and employer; an inevitably vexing, if not impossible task because the subject matter is not susceptible to empirical analysis. The Marsh case suggests that the last chapter in the saga of when precisely an employer acquires a protectable interest in a client and how to properly balance the employer's interests and those of the employee has not yet been written.

Among the practical steps employers should consider to protect client relationships acquired under these circumstances are to adopt contract language in employee agreements assigning any preexisting client goodwill to the employer and, to the extent practicable, invest in and institutionalize client relationships, creating multiple and frequent points of contact with those clients.

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Publication:Inside Counsel
Date:Apr 7, 2015
Words:924
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