Jaspan Wins Key Case Invalidating Restrictive Covenants Under the Employee-Choice Doctrine
Jaspan Schlesinger, LLP Partner Linda S. Agnew, Of Counsel Ryan E. Cronin and Associate Sarah D. Ragusa, successfully defended former employees of NBTY, Inc., a wholly owned subsidiary of the Carlyle Group, in connection with certain restrictive covenants NBTY was seeking to enforce against them in NBTY, Inc. v. O'Connell et. al. (Suffolk County Supreme Court Index Number 606984-2015). The case appeared in the November 27, 2015 edition of the New York Law Journal.
The case involved NBTY's efforts to enforce restrictive covenants that were imposed upon longstanding NBTY employees after the Carlyle Group's acquisition of NBTY in 2010. Specifically, NBTY offered employees, including the Defendants, what it characterized as a Stock Option Agreement allegedly entitling these employees to certain stock of the privately held company which value was unknown to the Defendants at the time of the agreements. The employees had a choice to exercise or not, the option within ninety days after separation from the company. If the employees chose to exercise the option, he/she would be then restricted from working in the vitamin and nutritional supplement industry for one year. If the employees chose not to exercise the option, then the restrictive covenant would be rendered null and void and he/she would be free to compete in the marketplace. By its terms the restrictive covenant would prevent the employee from working in the vitamin and nutritional supplement industry in North America, Europe and China.
All individual defendants decided not to exercise their stock options which left them free to compete in the industry. After their separation from NBTY, and after the ninety day period within which they could exercise their respective options had expired, the individual defendants accepted positions with Piping Rock Health Products, LLC, a startup vitamin and nutritional supplement company located in Ronkonkoma, New York. NBTY, Inc. commenced an action against the individual defendants seeking to enforce the restrictive covenants, as well as, against Piping Rock, alleging tortious interference with the individual defendants restrictive covenants and unfair competition based upon alleged theft of unspecified confidential information of NBTY.
In response to the complaint, the Defendants filed a motion to dismiss on the grounds that the restrictive covenants were unenforceable as a matter of law. The Suffolk County Supreme Court (J. Emerson) granted the Motion to Dismiss the Complaint in its entirety and dismissed the Complaint. The Court specifically found that, under the employee-choice doctrine, the agreement NBTY sought to enforce had already expired by virtue of the fact that the individual defendants decided not to exercise the option.
The Court also found that the stock option agreements themselves lacked consideration because the employees received no actual value in return for the restrictive covenant. The agreements at issue specifically provided that continued employment was not an inducement to enter into the stock option agreements and the record reflected that these defendants did not receive any actual benefit which would serve as consideration for the restrictive covenants contained in the stock option agreements. The Court also stated that the geographic scope of the restrictive covenants was unreasonable and would impose an undue hardship on the individual defendants. Finally, the Court dismissed the fifth cause of action alleging unfair competition against defendant Piping Rock in that it was not plead with sufficient particularity as to give the Court and the parties notice of the basis for the claim.