New York Court Upholds Validity of Unlimited Non-Disclosure Clause (Ashland Management v. Altair Investments)

Investment management firms - much like other professional service organizations - are highly dependent on the goodwill and personal contacts developed by managing directors and portfolio managers. In a recent case decided by the Appellate Division in New York, the court upheld broad application of a standard non-disclosure clause to limit two ex-employees' ability to solicit and service certain clients seeking investment advice.

In Ashland Management v. Altair Investments, a managing director and a vice-president formed a competing investment management firm just prior to their departure from Ashland. Before they had resigned, the two upper-level employees sent an unauthorized commentary on investment performance for the second quarter of 2003 to plaintiff's clients, along with a third quarter forecast. The letter was a breach of company policy. The record also listed other improper pre-termination conduct.

The defendants appealed the trial court's order denying them summary judgment on the breach of contract claims arising out of the non-disclosure covenant. They contended it was unenforceable due to its overbreadth and lack of a durational limit. The court, over a dissent, affirmed the trial court's order and held that the defendants were not entitled to summary judgment on the reasonableness of the non-disclosure covenant.

The decision is somewhat significant in that the court appeared to sanction the use of a non-disclosure covenant as a de facto client non-solicitation clause. Indeed, the underlying injunction barred the defendants from soliciting or working with a select group of plaintiff's wealth management contacts. No non-compete was at issue, and the record is unclear whether the trial court upheld injunctive relief based on a breach of fiduciary duty theory.

This case serves a somewhat cautionary note for employees who are bound only by a non-disclosure agreement and seek to use customer lists or proprietary contact management software following their departure. Frequently, employees do this, reasoning that since no non-compete exists, any restraint would be limited to turnover of their ex-employer's data. However, courts have broad discretion to fashion injunctive relief to achieve an equitable result; in certain instances, the only way to remedy a breach of a non-disclosure agreement, particularly if the breach touches directly upon client information, may be to order an employee to stay away from those clients.

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Court: Supreme Court of New York, Appellate Division, First Department
Opinion Date: 12/23/08
Cite: Ashland Mgmt. Inc. v. Altair Investments NA, LLC, 2008 N.Y. App. Div. LEXIS 9787 (N.Y. App. Div. 1st Dep't Dec. 23, 2008)
Favors: Employer
Law: New York