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Who Really Owns Your Clients?

Client Advisory

March 4, 2015

Fifteen years after BDO Seidman v. Hirshberg,[1] the watershed New York Court of Appeals decision on the enforcement of restrictive covenants in employment agreements, courts and practitioners still struggle to solve the question 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.[2]

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 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: 1) be no greater in scope than required for protection of the legitimate interest of the employer, 2) not impose undue hardship on the employee and 3) 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.”[3]

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 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. Since the evidence before it was not sufficiently developed to do so, the court could not conclude the covenant was reasonable. For the same reason, the court could find no way to judicially modify the agreement to limit the scope of the contractual restraint to allocate goodwill created by the employee and by the employer to make it no greater than necessary to protect Marsh’s legitimate interests.

Given the facts before it, the court in BDO Seidman never undertook to distinguish between or to quantify goodwill created by the employee and the employer in the same clients or suggest such an analysis could or should even 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 concluded BDO did not have a legitimate interest in clients brought to BDO by the employee where BDO did not expend its resources to create or maintain goodwill with those clients.[4] 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. In Marsh, the court recognized this had, in fact, occurred.

It is routinely argued and one can reasonably infer from BDO Seidman that once an employer creates goodwill in a client it obtains the right to protect that interest by specifically enforcing a restrictive covenant, regardless of whether the employee may have created goodwill with the same client before arriving at the employer. Such an approach sensibly avoids the quicksand the court waded into in Marsh of attempting to parse or distinguish goodwill created separately by employee and employer; an inevitably vexing, if not impossible task. 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 taking now if they wish to protect clients under these circumstances is to adopt contract language in employee agreements assigning any preexisting client goodwill to the employer.


For more information concerning the matters discussed in this publication, please contact the author, Lawrence F. Carnevale (212-238-8617, carnevale@clm.com) or your regular CL&M attorney.

Endnotes


[1] 93 N.Y.2d 382 (1999).

[2] 653032/2014, NYLJ 1202718296664 at 1 (Sup. Ct. NY Co., decided January 9, 2015).

[3] 93 N.Y.2d at 392.

[4] 93 N.Y.2d at 393.



Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2017 Carter Ledyard & Milburn LLP.
© Copyright 2015


© Copyright 2017 Carter Ledyard & Milburn LLP