In Light of All the Recent Employment-Related News: A Look at Non-Compete Clauses

As you may have picked up on, there are a lot of employment-related issues going on in fashion, both in and out of court. There’s Nicolas Ghesquière’s battle with Balenciaga involving an employment contract and a possible violation of said contract because of Ghesquière’s statements during an interview with System magazine. Apple has been poaching fashion executives left and right. And then there is the case we recently told you about involving Heritage Auctions, Christie’s, and three former Heritage employees who left the former for the latter. All of these cases bring to mind questions related to employment contracts, and more specifically, non-compete clauses that are more often than not signed by employees.

We’re going to focus on the Heritage v. Christie’s lawsuit because that one specially deals with a non-compete agreement. That said, because non-compete language is in most employment contracts these days, the issue is a contentious one at the center of many employee/employer conflicts.

In case you forgot, here’s a recap of what’s going on in the Heritage lawsuit: Heritage sued Christie’s for $60 million in connection with three former Heritage employees. Heritage alleges that Christie’s poached Matthew Rubinger, 26, its key Hermès expert, and two other former-Heritage employees. Rubinger, and the two other high-level associates, Rachel Koffsky and Caitlin Donovan, made up Heritage’s entire luxury accessories team, which Heritage launched in 2010. They announced their immediate resignation from the company on May 19th, after secretly accepting positions with Christie’s.

According to the Texas-based company’s complaint, which was filed in Manhattan’s Supreme Court, Rubinger, Koffsky, and Donovan breached their contracts – including non-compete clauses – as well as their duty and duty of loyalty, and stole the company’s trade secrets. Moreover, Heritage claims that as the head of Heritage’s luxury accessories business, Rubinger was provided with training and introduction to sources in Hong Kong and Japan; he was also given access to all of Heritage’s corporate plans for expansion and branding, even beyond luxury accessories.

Heritage claims that the flourishing designer handbag market has resulted in record sales, and is a category in which rival Christie’s is seeking to expand. Gregory Rohan, the president of Heritage, said: “While other auction companies, including Christie’s, have held estate sales that might have a [Hermès] Kelly bag in it or had an online auction that sold a modest amount of handbags, we elevated the collection of handbags to a place nobody had done it before. We created a dynamic worldwide market that everyone would like to own.”

Non-compete clauses, in terms of employment, typically specify that one party cannot enter into a profession or trade in competition with a specified party. The laws regulating non-compete clauses vary from state to state. Because this lawsuit was filed in New York, we’re going to look at New York’s law here (and let’s be honest, many of the fashion-related suits dealing with an employment issue could, if so desired, bring suit in our jurisdiction).

Because it can easily be argued that non-compete agreements restrain trade, many states attempt to limit use of them. And NY is no exception. NY courts don’t typically like non-compete clauses, but they will be enforced if they are found to be reasonable and necessary to protect an employer’s interests. Factors that are typically considered to determine whether or not a non-compete agreement is reasonable include: the agreement is no greater than required to protect an employer’s legitimate protectable interests; the agreement does not impose undue hardship on the employee or cause injury to the public; and the agreement is reasonable in duration and geographic scope.

For the most part, duration and geographic scope are where problems arise. When determining whether a non-compete agreement is reasonable in duration, New York courts focus on the particular facts and circumstances of each case.  That said, Courts have repeatedly held time restrictions of six months or less are reasonable Restriction longer than six months have been found to be both reasonable and unreasonable, depending on the particulars of a case.

Similarly, the reasonableness of a non-compete agreement’s geographic reach is largely judged on a case-by-case basis. Some case examples: In Karpinski v. Ingrasci, it was determined that five counties specified in a non-compete were reasonable in light of the employee’s profession (which was dentistry). And in Genesis II Hair Replacement Studio, Ltd. v. Vallar, a 50-mile radius was found to be unreasonable. In general, a court considers how restrictive the geographic limitation will be on an employee. If it’s too broad, and the employee’s ability to make a living is unreasonably impacted, a court will not enforce the non-compete.

So, let’s look at Heritage’s non-compete. According to the suit, Rubinger signed an agreement prohibiting him from competing with Heritage in North America for a period of 24 months after his contract would have ended (at the end of 2014). In our minds, this is an extremely broad non-compete. Two years is a long time to go without competing and North America is obviously a huge geographic region. In essence, Rubinger could not involve himself with a competitor in the auction business for two years on an entire continent.

It doesn’t really look too good for Heritage. Though there is a very strong argument that the employees’ duty of loyalty was breached, as there was likely some disloyal scheming going on while Rubinger, Koffsky, and Donovan were still employees with Heritage. It’ll definitely be interesting to see how this case turns out.

JENNIFER WILLIAMS is a recent law school graduate who writes about fashion, the legal avenues available for protecting it, and the ways in which the laws are falling short. She is currently awaiting admission to the NY State Bar. For more from Jennifer, follow her on Twitter.