Citation. 28 N.Y.2d 45, 320 N.Y.S.2d 1, 268 N.E.2d 751 (N.Y. 1971)
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Two oral surgeons entered into an employment contract whereby surgeon 1 was to be an employee of surgeon 2. The employment agreement included a covenant not to compete. Surgeon 1 left the employ of surgeon 2, and began to compete.
Synopsis of Rule of Law.
A covenant not to compete is not enforceable if it prevents an individual from working in a field that his employer does not work in.
Facts.
The Plaintiff, Dr. Karpinski (the "Plaintiff"), was an oral surgeon in solo practice in Auburn, Cayuga County until 1953. In 1953, the Plaintiff sought to expand his practice by cultivating connections in four surrounding counties. In other words, obtaining referrals from dentists. By 1962, 20% of the Plaintiff's practice came from referrals. Because certain patients had a problem traveling to the Plaintiff's office, he decided to open a second office in Ithaca. The Plaintiff hired the Defendant, Dr. Ingrasci (the "Defendant"), to staff the second office. The Defendant signed a three-year employment contract in June 1962. The contract included a non-compete clause which stated that the defendant "promises and covenants that while this agreement is in effect and forever thereafter, he will never practice dentistry and/or Oral Surgery in Cayuga, Cortland, Seneca, Tompkins or Ontario counties except: (a) In association with the [Plaintiff] or (b) If the [Plaintiff] terminates the agreement and employs another oral surgeon". Additionally, the Defendant was required to execute a $40,000 promissory note to the Plaintiff that would be become payable if the Defendant violated the non-compete clause. In February 1968, after negotiations of a new contract failed, the Defendant "left the plaintiff's employ" and opened his own practice in Ithaca. After opening the office, dentists in the area began referring patients to the Defendant instead of the Plaintiff. The Plaintiff's Ithaca office closed shortly thereafter. The Plaintiff brought suit alleging that the Defendant violated the non-compete clause. The trial court decided in favor of the Plaintiff and granted him an injunction and $40,000 in damages. The Appellate Division reversed and dismissed the lower courts ruling and found that the non-compete clause was "impermissibly broad."
Issue.
Is a covenant by a professional not to compete enforceable and if so to what extent?
Held.
It depends on the terms of the covenant. The court first observed that based on the facts of the case, "the area restriction" in the covenant not to compete "is manifestly reasonable." Specifically, the "[t]he five small rural counties which it encompasses comprise the very area from which the plaintiff obtained his patients and in which the defendant would be in direct competition with him." Meaning, it encompasses precisely the territory in which the Plaintiff's practice extends. Second, the court also observed that a covenant is not invalid because "it is unlimited as to time, forever restricting the defendant from competing with the plaintiff." However, the court voiced concern over how all or virtually all of the Defendant's patients stemmed from his relationship with the Plaintiff. Third, the court construed whether the provision of the covenant forbidding the practice of "dentistry and/or Oral Surgery" is appropriate. The court observed that the Appellate Division deemed the provision invalid because the Plaintiff only practice oral surgery, but the covenant also forbid the practice dentistry. The court found "the plaintiff was not privileged to prevent the defendant from working in an area of dentistry in which he would not be in competition with him."
• The court then examines whether it has the power to sever the impermissible portions of the covenant. The court concludes it has the power to sever the violative provisions because "the plaintiff gains all the injunctive protection to which he is entitled if effect be given only to that part of the covenant which prohibits the defendant from practicing oral surgery."
• As to damages, the court observed "it would be grossly unfair to grant the plaintiff, in addition to an injunction, the full amount of damages ($40,000) which the parties apparently contemplated for a total breach of the covenant, since the injunction will halt any further violation."
Discussion.
It is interesting to read this case along side [Howard Schultz & Associates v. Broniec], which refuses to sever the violative portions of a covenant not to compete.
