Personal Clients/Firm Clients

In 1999, the New York Court of Appeals decided BDO Seidman v. Hirshberg and said this:

"...it would be unreasonable to extend the covenant to personal clients of defendant who came to the firm solely to avail themselves of his services and only as a result of his own independent recruitment efforts, which BDO neither subsidized nor otherwise financially supported as part of a program of client development."

Which raises the question...

...what's a "personal client" and what's a "firm client"? The particular facts and context of BDO Seidman aren't the point of this post. Rather, the larger issue is the construct of rules in non-compete law that can have unintended consequences for the very parties those rules are intended to aid - employees bound by restrictive covenants.

The difference between a personal client and a firm client is not straightforward. An employer will no doubt contend that an employee's affiliation with it is an extension of its goodwill, branding, reputation in the marketplace, and particular product or service offering. That may be true. Or, as the employee will retort, "I did everything and got no help." That also may be true. The truth may lie somewhere in between.

Rules like that in BDO Seidman are easy to state and hard to apply. Take Marsh USA, Inc. v. Schruhriemen, a New York district court case decided earlier this month. There, Judge Jed Rakoff applied this personal client/firm client rule and entered a limited injunction that basically told the employee "I have no idea, so you're on your own." Of course, Judge Rakoff would never say just that, but he did say that "the Court cannot, without further factual development, provide a definitive ruling on whether [the subject client] falls within the scope of the 'personal clients' exemption" from BDO Seidman so "Mr. Schuhriemen acts at his own peril" if he services the client.

Rules like that announced in BDO Seidman are meant to be objective and place sensible limits on the use of restrictive covenants. But too often, these very rules (expressed objectively) invite further disputes, subject parties to immense litigation risk, and (most noticeably) increase litigation expense on the parties least able to bear them.

The personal clients/firm clients rule from New York is not alone. Disputes about non-compete consideration, the scope of legitimate business interests, and blue-penciling of overbroad agreements all deal with limiting unfair agreements. But only infrequently do these rules solve anything. And in too many cases like Marsh USA, they leave everyone twisting in the wind.