Non-compete agreements are a common way employers seek to prevent key employees from leaving and taking away business. Employees naturally chafe at the restrictions, but courts have stayed on trend in generally enforcing agreements if the terms are clear and the scope and duration are reasonable. So, an employer can relax and not worry about litigation, right? Not so fast. A recent dispute in the fashion industry shows that an employer seeking to enforce even a well-tailored non-compete agreement may find its own conduct subject to scrutiny.
In February 2016, designer Laura Kim and a co-designer joined the Carolina Herrera fashion house following a twelve-year career with Oscar de la Renta (“ODLR”). Herrera and ODLR are fierce rivals, so it must have been a coup for Herrera to have Kim join the team. Kim’s employment contract with Herrera included a six-month non-compete agreement. Here’s the key language:
During your employment, and for six months after leaving the employment of the Company for any reason, you will be required not to engage in, directly or indirectly, any business in competition with the business carried on by the Company. If the Company elects to enforce this provision and you have not received or will not otherwise receive severance payment from the Company, the Company will pay you during the six-month period of this provision a monthly payment at the rate of 50% of your monthly base salary as of the date of your termination.
According to Herrera, Carolina Herrera (the person) specifically told Kim that she was concerned only about Kim’s possible return to ODLR. Kim could work for any other designer, just not ODLR. In August, however, Kim resigned from Herrera and a few weeks later announced her decision to return to ODLR. Naturally, Herrera was not pleased. The non-compete seemed straightforward and Kim was receiving compensation for the time she could not work. After negotiations fell through, Herrera sued Kim in late December 2016 to enforce the non-compete agreement.
Kim and ODLR did not roll over. Their lawyers asked the court to focus on Herrera’s conduct leading up to Kim’s resignation. For example, Kim and ODLR asserted that Herrera’s executives had promised Kim that she would become creative director because Ms. Herrera was being transitioned out of that role. Apparently, this was news to Ms. Herrera. According to Kim, Ms. Herrera continued to assert that she was the creative director of her own fashion house. Kim argued that this “surreptitious transition plan” created such an untenable situation that she had no choice but to resign. But there was more.
Kim also claimed that Herrera’s executives told her that she did not need a lawyer to review her employment agreement. One of the leading cases in New York in the area of non-compete disputes, BDO Seidman v. Hirshberg, 93 N.Y.2d 383, 394 (Ct. of App. 1999), which was cited by Kim, holds that an employer “must demonstrate an absence of overreaching, coercive use of dominant bargaining power or other anti-competitive misconduct.” Kim argued that, without a lawyer, she was unfairly, perhaps fraudulently, induced to sign the employment agreement. ODLR also asserted in correspondence filed as an exhibit with the pleadings that Herrera had a long record of unfairly competing by poaching ODLR’s employees. Thus, Herrera did not have the “clean hands” necessary to enforce the non-compete. The “clean hands” doctrine puts the burden on an employer to show that it acted equitably and in good faith when it seeks to enforce a non-compete agreement.
The court initially granted a Temporary Restraining Order in favor of Herrera, then lifted it pending the trial. The parties settled, however, before the trial date. Under the terms of settlement, Kim was able to work for ODLR subject to certain conditions agreed upon by the parties.
The lesson here is that there are potential defenses to even a seemingly clear violation of a non-compete agreement. The employee might argue that the employer has breached the employment contract, failed to live up to promises that were not explicitly stated in the contract, or engaged in some kind of deceptive, dishonest or unfair behavior. When designing a strategy to enforce a non-compete agreement, employers should understand that their own conduct could play a significant role in determining the outcome of the dispute.