Eminent Domain: Whose Rights Should be Protected?

The leading New York court case concerning the enforcement of post-employment protective covenants concerned BDO Seidman v. Hirschberg, 93 N.Y.2d 382 (1999). The case demonstrates why accounting firms should include carefully drafted protective covenants in their employment, partnership, and shareholder agreements. In BDO Seidman, the defendant Hirschberg was an accountant whose local Buffalo firm had been acquired by BDO. When Hirschberg was promoted to manager at BDO, he signed an agreement that prohibited him from servicing BDO’s clients for 18 months after the termination of his employment. In addition, it required that if Hirschberg violated the agreement, he would have to pay BDO 150% of a particular client’s fees from the fiscal year prior to his departure from BDO. When Hirschberg resigned four years after his promotion, he then provided accounting services to several BDO clients—the equivalent of $138,000 in revenues to BDO in the year prior to his departure. The New York Court of Appeals examined BDO’s agreement with Hirschberg to determine whether it was enforceable. The law is clear that, regardless of the actual language in the covenant, only reasonable restrictions will be enforced. 

A “restraint is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public.” The court scrutinized Hirschberg’s covenant to determine whether BDO was indeed protecting a legitimate interest, and whether the covenant was tailored only as restrictively as necessary to protect that interest. The court ultimately held that the covenant was overly broad because it prohibited Hirschberg from servicing all BDO clients—even those Hirschberg himself recruited prior to joining BDO and those with whom Hirschberg had not developed any relation-ship as the result of his employment. Rather than simply discarding the overly broad covenant, however, the court next considered whether the covenant should have been enforced to the extent that it was reasonable. It found no evidence of BDO’s deliberate overreaching, bad faith, or coercive abuse of superior bargaining power. 

Because of this, the court rewrote—that is, “blue-penciled”— the covenant to effectively narrow it by precluding Hirschberg only from servicing those clients with whom he had developed a relationship as a result of his employment with BDO. The court then sent the case back to the trial judge to determine whether BDO was entitled to receive damages based on the formula of 150% of the client’s prior year’s revenue, as specified in the covenant. This case demonstrates how valuable protective covenants can be in guarding an accounting firm’s business interests. But BDO Seidman also highlights the importance of choosing appropriate covenants for given employees and carefully drafting such covenants so that they contain reasonable and clearly defined terms. In addition to being clearly defined, a firm’s protective covenants must be reasonable in scope. As BDO Seidman illustrated, courts will not enforce overly broad covenants. Thus, firms must be reasonable in defining their protected interests and their employees’ prohibited conduct. Firms should not overreach; if a court sees overreaching, coercion, or bad faith by a firm, it may decline to partially enforce the agreement and may simply throw out the protective covenant in its entirety.

Do you believe Hirschberg should have been allowed to service all of the clients he serviced while at BDO after leaving the firm?