Restrictive Covenant Project

RVN, Inc., a Pennsylvania corporation,in the business of selling and constructing homes, has a problem.David Johnson, an employee it recently discharged accepted a job with a competitor,PetersonHomes, Inc., a Philadelphia-based home developer and construction company. RVN is not happy about that and wants to know its chances of enforcing the covenant not to compete that Johnson signed and obtaining an order prohibiting Johnson from working for PetersonHomes or for any other company covered by the non-compete clause.

Before RVN sends this case to outside counsel, your supervisor asks you to analyze the situation and provide a recommendation as to RVN's likelihood of success in a case against Johnson. You tell her that in business school you recall reading a case called Long Island Minimally Invasive Surgery v. St. John's Episcopal Hospital (the "LIMIS" case) (see below), which set forth some of the rules that courts apply when analyzing covenants not to compete. Your manager is thrilled. She tells you to reread the case and draft a memorandum applying the law as set forth in LIMIS to the situation facing RVN and providing a well-reasoned analysis of RVN's likelihood of success against Johnson.

By way of background, RVNdoes business in 28 metropolitan areas in fourteen states including Philadelphia, Pennsylvania, where Johnson worked. In addition to working in Philadelphia, Johnson received communications containing information about operations from many of RVN's locations throughout the United States. RVN divided the Philadelphia region into three Divisions covering the city and surrounding counties. Johnson worked for RVN asthe Division Manager in the North Division of Philadelphia from approximately January 1, 2017, until his termination on or about August 30, 2021. As the Division Manager, Johnson was responsible for, among other things, sales functions, profits and losses, ongoing homebuilding efforts, and strategic decisions about the policies and guidelines for RVN's operations in the area. On or about August 24, 2021, RVN informed Johnson that his employment with the Company was terminated due to performance deficiencies.

During Johnson's tenure at RVN, he signed a compensation agreement. The agreement contained a noncompete provision which provides in relevant part that:

During your Service and for a period of twelve (12) months after your service ends...you shall not anywhere in the Restricted Area (as defined below):... (b) render services to...any person or entity that competes with the Company or an Affiliate in the residential homebuilding, mortgage financing, or settlement services business where such services are competitive with any of the services you provided to the Company or to an Affiliate during the twenty-four (24) months prior to termination of your Service.

The Agreements define the "Restricted Area" as:

"those counties and other units of local government in which the Company engaged in residential homebuilding business activities, mortgage financing business activities, or settlement services business activities, as applicable (1) over which you had any management responsibility at any time during the twenty-four months prior to termination of your Service or (2) from which you received, as part of your work duties, critical information regarding such business activity, at any time during the twenty-four months prior to termination of your Service.

Long Is. Minimally Invasive Surgery, P.C. v St. John's Episcopal Hosp.

Supreme Court of New York, Appellate Division, Second Department

August 8, 2018, Decided

Opinion

In an action to recover damages for breach of an employment agreement, the plaintiff appeals from an order of the [Trial] Court, Nassau County. The order granted that branch of the motion of the defendants St. John's Episcopal Hospital and Javier Andrade which was for summary judgment dismissing the complaint insofar as asserted against them. The order is affirmed insofar as appealed from, with costs.

The plaintiff was a medical practice that specialized in weight-loss surgery, but also provided general surgery and related services. During the relevant time period, it had seven offices located throughout the New York metropolitan area, and its doctors performed surgery at Mercy Medical Center in Rockville Centre. In June 2010, the plaintiff hired the defendant Javier Andrade to perform weight-loss and other types of surgery, and related services. The plaintiff and Andrade entered into an employment agreement with a three-year term. The agreement contained a restrictive covenant that barred Andrade from performing any type of surgery for two years, within 10 miles of any of the plaintiff's seven offices and affiliated hospitals (hereinafter the restricted zone). During the term of his employment, Andrade worked almost exclusively in Nassau County, in the plaintiff's Freeport and New Hyde Park offices, and he performed surgery at Mercy. Andrade continued to work for the plaintiff beyond the three-year term of the agreement. The plaintiff terminated Andrade's employment without cause effective April 2014.

In September 2014, Andrade accepted a position as the interim chairman of the department of general surgery at the defendant St. John's Episcopal Hospital. St. John's was located within the restricted zone. The plaintiff subsequently commenced this action against Andrade, St. John's, and the defendant Smithtown-North Suffolk Physician Hospital Organization, Inc., seeking damages and injunctive relief, based on Andrade's alleged breachof the covenant. Prior to any discovery, Andrade and St. John's (hereinafter together the defendants) moved for summary judgment dismissing the complaint arguing that the covenant was invalid as a matter of law. The[Trial] Court granted that branch of the motion which was for summary judgment dismissing the complaint insofar as asserted against them. The plaintiff appeals from that portion of the order. We affirm the order insofar as appealed from.

"Agreements restricting an individual's right to work or compete are not favored and thus are strictly construed"'[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'" The determination of whether a restrictive covenant is reasonable involves the application of a three-pronged test. "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 "violation of any prong renders the covenant invalid"

Here, the defendants made a prima facie showing that the provision of the covenant prohibiting Andrade for a period of two years from practicing surgery of any kind, within a 10-mile radius of all of the plaintiff's offices and affiliated hospitals, even those at which he had never worked, was geographically unreasonable, because it effectively barred him from performing surgery, his chosen field of medicine, in the New York metropolitan area. In opposition, the plaintiff failed to raise a triable issue of fact as to whether imposing such a broad geographical restriction was necessary to protect its interests.

...

The parties' remaining contentions either are without merit or need not be reached in light of our determination.

Accordingly, we agree with the [Trial] Court's determination to grant that branch of the defendants' motion which was for summary judgment dismissing the complaint insofar as asserted against them.

End of Document