As is often true in fashion, what once was old is now new again. But for famed wedding dress designer, Hayley Paige Gutman, she certainly is ruing the Second Circuit’s recent decision to revive its 1999 holding of Ticor Title Ins. Co. v. Cohen, 173 F.3d 63 (2d Cir. 1999). In JLM Couture, Inc. v. Gutman, 24 F.4th 785 (2d Cir. 2022), the Second Circuit held that JLM Couture’s non-compete was enforceable through New York’s oft-overlooked “uniqueness” exception. But the real question to me as a litigator is whether this doctrine should become part of the tool bag going forward. Upon analysis, the answer is somewhat mixed and going to be exceedingly fact dependent.
Background of Case
In 2011, Hayley Paige Gutman[1] entered into an employment agreement with JLM Couture, Inc. (“JLM”), to serve as a wedding, bridesmaid, and evening gown dress designer for JLM. JLM Couture, Inc. v. Gutman, 24 F.4th 785, 788 (2d Cir. 2022). Included within the JLM contract were certain restrictive covenants, including a non-competition agreement, as well as various intellectual property assignment provisions. While the contract was originally to run through 2016, the parties extended the agreement through August 1, 2022. Id.
As part of Hayley Paige’s responsibilities for JLM, she was tasked with growing the “Hayley Paige” brand for the company, including “assisting with advertising programs.” Id. at 790. In so growing that business, Hayley Paige used a series of social media accounts that she curated, but on which she posted a number of JLM-related content, including numerous posts dedicated to JLM dresses Hayley Paige designed. While Hayley Paige argued that the accounts were personal in nature, the trial court found that JLM was heavily involved in the content and messaging of at least one of those accounts, and Hayley Paige shared access at one point with another JLM employee, who “shared responsibility for managing the account.” JLM Couture, Inc. v. Gutman, No. 20 CV 10575-LTS-SLC, 2021 WL 827749, at *4 (S.D.N.Y. Mar. 4, 2021). These accounts became exceedingly well-followed, with the court noting that at least one had over a million followers as of January 2022. JLM Couture, 24 F.4th at 789. Because of this, control over the accounts was also a hotly contested issue, with one expert opining that a single post on the Hayley Paige account was worth “nearly $30,000.” JLM
In 2019, JLM and Hayley Paige engaged in negotiations over the terms of her employment agreement, with JLM proposing additional responsibilities relating to monetizing the Hayley Paige social media accounts. Hayley Paige rejected the proposal and, in response, changed the login credentials to the accounts. Id. at 791. Following this breakdown in negotiations, on two separate occasions over the following year, Hayley Paige “entered into agreements with third-party companies to promote their products” on one of her social media accounts “without JLM’s permission.” Id. On November 23, 2020, Hayley Paige informed JLM that would “not be posting any JLM related business” to her social media accounts. 2021 WL 827749, at *6. More concerning to JLM, Hayley Paige also announced an “upcoming appearance at a virtual bridal expo promoting her as a ‘wedding gown designer.’” 24 F.4th at 789.
As a result of this, on December 15, 2020, JLM sued Hayley Paige in the Southern District of New York, bringing claims sounding in breach of contract, trademark dilution, unfair competition, conversion and trespass to chattels on the disputed social media accounts. Following JLM filing suit but prior to the court issuing its injunctions, Hayley Paige “resigned” her employment with JLM, despite the contract not permitting Hayley Paige to unilaterally resign. 2021 WL 827749, at *6. Based on the above, JLM sought and received a temporary restraining order and then a preliminary injunction. Important for this article, the SDNY court enjoined Hayley Paige from competing against JLM through the end of her contract (August 1, 2022), ordered that she turn over the social media accounts to JLM, and enjoined her from using her name likeness “in trade or commerce without the express written permission of” JLM. 24 F.4th at 792.[2]
New York’s Legitimate Interest Test
Like most states that permit use of post-employment restrictive covenants, New York employs a “legitimate business interest” test to determine whether a restrictive covenant is enforceable. At its core, this test is the secondary part of the restrictive covenant reasonableness test. Through the first part of the test, a court evaluates whether the temporal and scope restrictions of the covenant are “reasonable.” See, e.g., Ticor Title Ins. Co., 173 F.3d at 69 (citing Reed, Roberts Assocs. v. Strauman, 40 N.Y.2d 303, 307 (1976)). Essentially, if the temporal scope is too broad, the court may hold the restriction is overly broad. Similarly, if the scope (whether it be activity-based or based on a geographic restriction) is too broad, the court may also find the restriction is overly broad.
Once the court finds that the restriction is reasonable in scope, the court then evaluates whether the party seeking to enforce the restrictive covenant satisfies a “legitimate business interest.” As is the case in most states, New York recognizes a legitimate interest in: (a) protecting trade secrets or confidential information; and (b) protecting the employer’s goodwill in customer relationships to which the employer introduced the employee. See, e.g., BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 389, 391 (N.Y. Ct. App. 1999). But New York has taken this test one step further, finding that an employer may also have a legitimate business interest where the employee’s services to the employer are “special, unique or extraordinary.” Ticor, 173 F.3d at 70. In other words, even where an employer cannot show that the restrictive covenant is necessary to protect either confidential information, trade secrets, or the goodwill of preexisting customers, an employer may still demonstrate it possesses a legitimate business interest in enforcing a non-compete where the employee’s skills are deemed “unique.”
What It Means to be “Unique” in New York
Here, JLM and Hayley Paige agreed that “during the period of her employment with” JLM, she would not “compete with [JLM] directly or indirectly”, with competition including “engag[ing] in, or … associat[ing] with (whether as an officer, director, shareholder, partner, employee, independent contractor, agent or otherwise), any person, organization or enterprise which engages in the design, manufacture or sale” of goods similar to those offered by JLM. JLM Couture, 24 F.4th at 790.
A cursory view of JLM’s and Hayley Paige’s preliminary injunction briefing, along with the trial court’s preliminary injunction order, show that the question of the enforceability of the non-compete provision was a bit of an afterthought. In fact, nowhere within that briefing or the preliminary injunction order was the legitimate business interest test or the reasonableness of the restrictive covenants considered or discussed. It was only in the trial court’s order denying Hayley Paige’s motion for reconsideration that the trial court even identified the “uniqueness” test. See JLM Couture, Inc. v. Gutman, 2021 WL 2227205 (S.D.N.Y. June 2, 2021).
This left the heavy lifting for the Second Circuit to decide that Hayley Paige constituted a “unique” employee, but with the Second Circuit offering no further real analysis. See 24 F.4th at 795. So, practically, where does that leave a company or practitioner when evaluating the likely enforceability of a non-compete agreement using the “uniqueness” test? Realistically speaking, Gutman does not move the needle much on this theory.
Instead, Ticor probably provides the best analysis still. There, the Second Circuit explained:
Unique services have been found in various categories of employment where the services are dependent on an employee’s special talents; such categories include musicians, professional athletes, actors and the like. In those kinds of cases injunctive relief has been available to prevent the breach of an employment contract where the individual performer has such ability and reputation that his or her place may not easily be filled.
It has always been the rule, however, that to fall within this category of employees against whom equity will enforce a negative covenant, it is not necessary that the employee should be the only “star” of his employer, or that the business grind to a halt if the employee leaves. [Citation omitted.] Hence, as noted earlier, in determining uniqueness the inquiry now focuses more on the employee’s relationship to the employer’s business than on the individual person of the employee.
173 F.3d at 70-71. But looking forward, it seems that, despite the Second Circuit’s reliance on the “uniqueness” doctrine to enforce this non-compete, it appears to be a doctrine of last resort. Indeed, in those limited instances in which the doctrine was applied, it was truly for employees that provided unique skill sets. For example, in Ticor, while the case involved a salesperson, the individual was selling a product whose costs and terms were fixed by New York law, and retaining and winning clients had more to do with the relationships that the sales person made utilizing a six-figure entertainment budget than anything else. 173 F.3d at 71. Similarly, in those situations where the court upheld a non-compete on uniqueness grounds, the employee really did have a unique skill set; i.e., Hayley Paige, as wedding dress designer and social media personality (JLM Couture, Inc. v. Gutman, 24 F.4th 785 (2d Cir. 2022), or fly-fishing instructor and world-renowned fishing innovator (Cortland Line Holdings LLC v. Lieverst, 5:18-cv-307 (TJM/DEP), 2018 WL 8278554 (N.D.N.Y. Apr. 6, 2018). And, where the employee really did not have such unique skill sets, the post-Ticor courts dealing with the issue have rejected such argument. See, e.g., DS Parent, Inc. v. Teich, No. 5:13-cv-1489 (LEK/DEP), 2014 WL 546358, at *11 (N.D.N.Y. Feb. 10, 2014) (rejecting argument where, while plaintiff noted defendant’s “impressive knowledge and abilities”, such argument was insufficient to “render and employee sufficiently unique”); Poller v. BioScrip, Inc., 974 F. Supp. 2d 204, 218 (S.D.N.Y. 2013) (rejecting uniqueness argument, noting, “while Poller is clearly a highly successful salesperson, her services are not unique or extraordinary in the way in which an artisan’s or performer’s services may be; instead, they are merely of ‘high value’ to her employer.”).
Takeaway
As was always probably the case when it came to the “uniqueness” doctrine, it is of limited overarching value to a party seeking to enforce a non-compete agreement. Rather, it is and probably should be viewed as an avenue of last resort, where the “product” being offered does not rely on the use of confidential or trade secret information or the customer-base is fungible or one-off, and a company’s success is almost entirely based on the unique set of skills that the employee possesses. Much like one of Hayley Paige’s dresses, the “uniqueness” doctrine is couture, and should not be the primary focus of practitioners seeking to argue for enforceability of an agreement. Rather, the best avenues moving forward remain a well-crafted agreement that is narrow in scope, seeking to protect either confidential/trade secret information or customer goodwill, based on long-standing employer customers.
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