Types of Restrictive Covenants
An agreement containing a restrictive covenant is an agreement in which one party agrees to limit his conduct in exchange for a benefit. Two common types of restrictive covenants include agreements not to compete and agreements not to solicit. A non-competition agreement is a contract that an individual, often an employee, enters into with another party, often an employer, in which the individual agrees not to offer or engage in services that are competitive with the other party. A non-solicitation agreement is a contract in which an individual, often an employee, enters into with another party, often an employer, in which the individual agrees not to poach employees and/or clients of the other party.
Non-competition and non-solicitation agreements may be beneficial to employers because they offer protection for their business models, clients, and/or employees, which they may have spent years developing and training.
Restrictive Covenants Under New York Law
The laws governing non-competition and non-solicitation agreements vary from state to state. New York law generally recognizes these restrictive covenants as enforceable to the extent they are reasonable. For more information as to whether or not your restrictive covenants are enforceable, see Enforceability of Restrictive Covenants in New York.
There are several types of claims available to employers for a violation of a restrictive covenant agreement that are commonly recognized by New York courts. One such claim is for breach of fiduciary duty by the party whom the employer is seeking to enforce the restrictive covenant against.
Establishing a Claim for Breach of Fiduciary Duty
In order to assert a claim for breach of fiduciary duty, an employer must first establish that a fiduciary relationship exists between the employer and the party against whom it is trying to enforce the restrictive covenant. A fiduciary is an individual who maintains a certain legal or ethical responsibility as to another person or entity.
Since fiduciaries are individuals in positions of great trust, they are legally bound to conduct themselves with a higher level of care when it comes to their fiduciary relationship and the duties of their position, as compared to individuals conducting business at arm’s length or otherwise in the absence of a fiduciary relationship. Fiduciaries, for example, owe their principal (here, the employer) a duty of loyalty. A duty of loyalty requires that the fiduciary act in the best interest of the employer and avoid all personal and professional conflicts.
If the employer is able to demonstrate that the individual is or was a fiduciary at the time of breach, thereby establishing a fiduciary relationship, the employer must then demonstrate that the fiduciary engaged in misconduct, which, in turn, directly caused damage to the employer. Pokoik v Pokoik, 115 AD3d 428, 982 NYS2d 67 (1st Dept 2014); Deblinger v Sani-Pine Products Co., Inc., 107 AD3d 659, 967 NYS2d 394 (2d Dept 2013); Kurtzman v Bergstol, 40 AD3d 588, 835 NYS2d 644 (2d Dept 2007). If a fiduciary owes a duty of loyalty to an employer, directly competing with the employer or soliciting its employees and clients to leave the employer may be deemed a violation of this duty.
Separating a Breach of Fiduciary Duty Claim from a Contractual Duty
It must be noted that New York courts decline to recognize a breach of fiduciary duty claim if it is not separate and distinct from a contractual duty, which may be pursued via a breach of contract claim. Brooks v Key Trust Co. Nat. Ass’n, 26 AD3d 628, 809 NYS2d 270 (3d Dept 2006); William Kaufman Organization, Ltd. v Graham & James, LLP, 269 AD2d 171, 703 NYS2d 439 (1st Dept 2000); Kassover v Prism Venture Partners, LLC, 53 AD3d 444, 862 NYS2d 493 (1st Dept 2008); Sally Lou Fashions Corp. v Camhe-Marcille, 300 AD2d 224, 755 NYS2d 67 (1st Dept 2002); Mandelblatt v Devon Stores, Inc., 132 AD2d 162, 521 NYS2d 672 (1st Dept 1987).
Aiding and Abetting a Breach of Fiduciary Duty
A related claim that an employer may have available to it is a claim for aiding and abetting a breach of fiduciary duty. This is the type of claim that an employer would assert against a party who encouraged or assisted a fiduciary to breach one of their duties. The party accused of aiding and abetting need not have any fiduciary duty to the employer.
In order to assert such a claim, an employer must establish 1. A breach of a fiduciary duty by the fiduciary; 2. That the defendant knowingly induced or participated in the breach; and 3. That the employer suffered damages as a result of the breach. Bullmore v Ernst & Young Cayman Islands, 45 AD3d 461, 846 NYS2d 145 (1st Dept 2007); Global Minerals and Metals Corp. v Holme, 35 AD3d 93, 824 NYS2d 210 (1st Dept 2006); Kaufman v Cohen, 307 AD2d 113, 760 NYS2d 157 (1st Dept 2003).
A defendant knowingly participates in a breach of a fiduciary duty if he provides substantial assistance to the violating fiduciary. “Substantial assistance” has been defined by the courts to mean that a defendant affirmatively assists, helps conceal or fails to act when required to do so, thereby enabling the breach to occur. Sanford/Kissena Owners Corp. v Daral Properties, LLC, 84 AD3d 1210, 923 NYS2d 692 (2d Dept 2011); Kaufman, 307 AD2d 113, 760 NYS2d 157.
If you are an employer seeking to enforce a restrictive covenant or a party who is subject to a restrictive covenant, contact Joseph Maya and the other experienced attorneys at Maya Murphy, P.C. at (203) 221-3100 for a complimentary consultation to discuss your case.