The Importance of Understanding The Contractual Limits of Restrictive Covenants (Part II)
July 01, 2021
solicitIn one of my first posts, entitled Restrictive Covenants: The Importance of Understanding Their Contractual Limits, I wrote about a First Department decision upholding a portion of Justice Andrea Masley’s Order enjoining a defendant modeling agent and agency from unfairly competing, disclosing, or misappropriating the plaintiff’s confidential information and interfering with the plaintiff’s contractual relationship with its models but refusing to extend the terms of the employment agreement, which prohibited the agent from contacting and soliciting models throughout the pendency of the litigation.
In a recent decision, Justice Elizabeth Hazlitt Emerson of the Suffolk County Commercial Division was faced with similar non-solicitation and confidentiality issues, although not in the context of an employment agreement. In EVO Merchant Servs. v R.B.C.K. Enters., Inc., Justice Emerson denied the defendants’ request to be released from a preliminary injunction preventing them from soliciting the plaintiff’s customers because the parties expressly agreed to a non-solicitation provision and because the customer information was confidential.
In EVO Merchant Servs., Plaintiffs EVO Payments International, LLC, together with its wholly owned subsidiary EVO Merchant Services, LLC (collectively “EVO”), made up a global credit- and debit-card payment-processing company. In 2018, EVO entered into a Referral Agreement with the defendant R.B.C.K. Enterprises, Inc. (“RBCK”) wherein RBCK agreed to refer customers to EVO (many of which happened to be pool and spa merchants) for payment processing in exchange for a referral fee. The Referral Agreement contained two important provisions: (1) while the Referral Agreement was in effect, and for a period of three years after its termination, RBCK would not solicit EVO’s customers or take any action that would lead EVO’s customers to end their relationships with EVO; and (2) all data belonging to or relating to the business of the other party, including the list of merchants referred to EVO, was confidential. EVO and RBCK simultaneously entered into a Confidentiality Agreement in which they agreed not to use information about customers and business relationships for their own purposes.
By September 2019, approximately 688 pool and spa merchants from RBCK’s portfolio had accounts with EVO. But RBCK and EVO’s symbiotic relationship was short-lived. In October 2019, RBCK entered into an asset-purchase agreement with the defendants RB Retail & Services Software LLC (“RB”) and Fullsteam Operations LLC (“Fullsteam”), a direct competitor of EVO. Shortly thereafter, RBCK terminated the Referral Agreement. In the eight months following the merger, approximately 114 pool merchants closed their accounts with EVO and another 33 ceased all processing activity with EVO.
EVO commenced an action, inter alia, for breach of contract against RBCK, RB, and Fullsteam alleging that the defendants used EVO’s confidential information to solicit pool and spa merchants in violation of the Referral and Confidentiality Agreements, and that the sale of RBCK’s assets to RB was a de facto merger and a fraudulent attempt by RBCK to avoid its obligations under the Referral and Confidentiality Agreements.
EVO succeeded in obtaining a preliminary injunction with a temporary restraining order preventing RBCK, RB, and Fullsteam from soliciting customers of EVO who became customers of EVO or its affiliates under the terms of the Referral Agreement. RB and Fullsteam then moved under CPLR § 6314 to be released from the injunction. RB and Fullsteam argued they were provided a list of customers from EVO in order to comply with the injunction and that the list only contained names and mailing addresses of EVO customers. According to RB and Fullsteam, because the list did not contain confidential or proprietary information, injunctive relief was unnecessary.
The Court first looked to the express terms of the Referral Agreement, which stated: “This Agreement, the list of persons constituting Referred Merchants hereunder, and all payments and reports delivered hereunder constitute the Confidential Information of EVO.” In light of this express provision, the Court found that the list of customers constituted confidential information.
RB and Fullsteam next argued that the non-solicitation provision of the Referral Agreement was unenforceable. Citing cases concerning restrictive covenants in the employment context, RB and Fullsteam argued that non-compete and non-solicit agreements should only be enforced to the extent that they are necessary to protect the legitimate interests of the party, i.e. not simply because a contract defines something like a customer list as confidential.
The Court distinguished the employment cases cited by RB and Fullsteam, stating “Restrictive covenants in employment contracts…are subject to more exacting scrutiny than are those in contracts for the sale of a business or ordinary commercial contracts because public policy favors economic competition and individual liberty and seeks to shield employees from the superior bargaining position of employers.”
The Court found the Referral Agreement to be more similar to a contract for the sale of a business. Just like a buyer of a business, EVO bargained for the good will of the customers referred by RBCK during the term of the Referral Agreement and for a period of three years after its termination. Therefore, the non-solicitation provision was part of the bargain and to permit RB and Fullsteam to solicit EVO customers would deprive EVO of the benefit of its bargain. And so, the Court denied RB and Fullsteam’s request to modify and release them from the injunction.
The enforceability of restrictive covenants—such as non-solicitation or non-compete provision—in the Commercial Division may differ depending on the subject matter of the contract. However, in the general commercial context, a court will enforce a non-solicitation provision when failing to do so would deprive a party the benefit of its bargain.