BDO Seidman v. Hirshberg

Decision Date13 May 1999
Citation93 N.Y.2d 382,690 N.Y.S.2d 854,712 N.E.2d 1220
PartiesBDO SEIDMAN, Appellant, v. JEFFREY HIRSHBERG, Respondent.
CourtNew York Court of Appeals Court of Appeals

Willkie Farr & Gallagher, New York City (Michael R. Young and Jeffrey O. Grossman of counsel), Kavinoky & Cook, L. L. P., Buffalo (Joseph J. Welter of counsel), Scott M. Univer and Barbara A. Taylor, of the Illinois Bar, admitted pro hac vice, for appellant.

Jaeckle Fleischmann & Mugel, L. L. P., Buffalo (Philip H. McIntyre and Jennifer M. Demert of counsel), for respondent. Vedder, Price, Kaufman, Kammholz & Day, New York City (Dan L. Goldwasser and Michael J. Crisafulli of counsel), for New York State Society of Certified Public Accountants, amicus curiae.

Chief Judge KAYE and Judges BELLACOSA, SMITH, CIPARICK, WESLEY and ROSENBLATT concur.

OPINION OF THE COURT

LEVINE, J.

BDO Seidman (BDO), a general partnership of certified public accountants, appeals from the affirmance of an order of Supreme Court granting summary judgment dismissing its complaint against defendant, who was formerly employed as an accountant with the firm. The central issue before us is whether the "reimbursement clause" in an agreement between the parties, requiring defendant to compensate BDO for serving any client of the firm's Buffalo office within 18 months after the termination of his employment, is an invalid and unenforceable restrictive covenant. The courts below so held.

Facts and Procedural History

BDO is a national accounting firm having 40 offices throughout the United States, including four in New York State. Defendant began employment in BDO's Buffalo office in 1984, when the accounting firm he had been working for was merged into BDO, its partners becoming BDO partners. In 1989, defendant was promoted to the position of manager, apparently a step immediately below attaining partner status. As a condition of receiving the promotion, defendant was required to sign a "Manager's Agreement," the provisions of which are at issue. In paragraph "SIXTH" defendant expressly acknowledged that a fiduciary relationship existed between him and the firm by reason of his having received various disclosures which would give him an advantage in attracting BDO clients. Based upon that stated premise, defendant agreed that if, within 18 months following the termination of his employment, he served any former client of BDO's Buffalo office, he would compensate BDO "for the loss and damages suffered" in an amount equal to 1½ times the fees BDO had charged that client over the last fiscal year of the client's patronage. Defendant was to pay such amount in five annual installments.

Defendant resigned from BDO in October 1993. This action was commenced in January 1995. During pretrial discovery, BDO submitted a list of 100 former clients of its Buffalo office, allegedly lost to defendant, who were billed a total of $138,000 in the year defendant left the firm's practice. Defendant denied serving some of the clients, averred that a substantial number of them were personal clients he had brought to the firm through his own outside contacts, and also claimed that with respect to some clients, he had not been the primary BDO representative servicing the account.

Following discovery, the parties exchanged motions for summary judgment. BDO's submissions on the motion did not contain any evidence that defendant actually solicited former clients, and did not rely in any way on claims that defendant used confidential information in acquiring BDO clients. Supreme Court granted summary judgment to defendant, concluding that the reimbursement clause was an overbroad and unenforceable anti-competitive agreement. The Appellate Division agreed, holding that the entire agreement was invalid (247 AD2d 923).

Discussion

Concededly, the Manager's Agreement defendant signed does not prevent him from competing for new clients, nor does it expressly bar him from serving BDO clients. Instead, it requires him to pay "for the loss and damages" sustained by BDO in losing any of its clients to defendant within 18 months after his departure, an amount equivalent to 1½ times the last annual billing for any such client who became the client of defendant. Nonetheless, it is not seriously disputed that the agreement, in its purpose and effect, is a form of ancillary employee anti-competitive agreement that will be carefully scrutinized by the courts (see, Columbia Ribbon & Carbon Mfg. Co. v A-1-A Corp., 42 NY2d 496, 499

). Reported cases adjudicating the validity of post-employment restrictive covenants go back almost 300 years (see, Blake, Employee Agreements Not To Compete, 73 Harv L Rev 625, 629, citing, inter alia, Mitchel v Reynolds, 1 P Wms 181, 24 Eng Rep 347 [QB 1711]). In the 19th century, a standard of reasonableness for judging the validity of such agreements developed in case law here and in England, balancing the need of fair protection for the benefit of the employer against the opposing interests of the former employee and the public (Blake, op. cit., at 639-640).

The modern, prevailing common-law standard of reasonableness for employee agreements not to compete applies 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 (see, e.g., Technical Aid Corp. v Allen, 134 NH 1, 8, 591 A2d 262, 265-266; Blake, op. cit., at 648-649; Restatement [Second] of Contracts § 188). A violation of any prong renders the covenant invalid.

New York has adopted this prevailing standard of reasonableness in determining the validity of employee agreements not to compete. "In this context 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" (Reed, Roberts Assocs. v Strauman, 40 NY2d 303, 307).

In general, we have strictly applied the rule to limit enforcement of broad restraints on competition. Thus, in Reed, Roberts Assocs. (supra), we limited the cognizable employer interests under the first prong of the common-law rule to the protection against misappropriation of the employer's trade secrets or of confidential customer lists, or protection from competition by a former employee whose services are unique or extraordinary (40 NY2d, at 308).

With agreements not to compete between professionals, however, we have given greater weight to the interests of the employer in restricting competition within a confined geographical area. In Gelder Med. Group v Webber (41 NY2d 680) and Karpinski v Ingrasci (28 NY2d 45), we enforced total restraints on competition, in limited rural locales, permanently in Karpinski and for five years in Gelder. The rationale for the differential application of the common-law rule of reasonableness expressed in our decisions was that professionals are deemed to provide "unique or extraordinary" services (see, Reed, Roberts Assocs. v Strauman, supra, 40 NY2d, at 308

).

BDO urges that accountancy is entitled to the status of a learned profession and, as such, the Karpinski and Gelder Medical Group precedents militate in favor of the validity of the restrictive covenant here. We agree that accountancy has all the earmarks of a learned profession. CPAs are required to have extensive formal training and education (Education Law § 7404 [1], [2], [3]; 8 NYCRR 70.1); they must pass a written examination (Education Law § 7404 [1], [4]; 8 NYCRR 70.3); and they are subject to mandatory continuing education requirements (Education Law § 7409; 8 NYCRR 70.6). Their professional conduct is regulated by the Board of Regents under statutory disciplinary procedures (Education Law §§ 6509-6511). Moreover, there is a national code of professional conduct for certified public accountants which provides that "[m]embers should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism" (American Institute of Certified Public Accountants Code of Professional Conduct § 53, art II). The foregoing factors closely correspond to the criteria for a learned profession listed in Matter of Freeman (34 NY2d 1, 7).1

Nonetheless, Gelder Medical Group and Karpinski do not dictate the result here. As we noted in Karpinski, the application of the test of reasonableness of employee restrictive covenants focuses on the particular facts and circumstances giving context to the agreement (28 NY2d, at 49; see also, Reed, Roberts Assocs. v Strauman, supra, 40 NY2d, at 307

). This Court's rationale for giving wider latitude to covenants between members of a learned profession because their services are unique or extraordinary (Reed, Roberts Assocs. v Strauman, supra) does not realistically apply to the actual context of the anti-competitive agreement here. In the instant case, BDO is a national accounting firm seeking to enforce the agreement within a market consisting of the entirety of a major metropolitan area. Moreover, defendant's unchallenged averments indicate that his status in the firm was not based upon the uniqueness or extraordinary nature of the accounting services he generally performed on behalf of the firm, but in major part on his ability to attract a corporate clientele. Nor was there any proof that defendant possessed any unique or extraordinary ability as an accountant that would give him a competitive advantage over BDO. Moreover, the contexts of the agreements not to compete in Karpinski and Gelder Medical Group were entirely different. In each case, the former associate would have been in direct competition with the promisee-practitioner for referrals from a narrow group of primary health...

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