Wednesday, October 7, 2009

Anti-Raiding Clause Narrowly Interpreted Following Stock Sale (Cenveo Corp. v. Diversapack, LLC)

In 2007, Cenveo purchased the outstanding stock of Commercial Envelope Manufacturing from the Kristel family for roughly $230 million. As is customary in business sale transactions, the sellers had to agree to certain restrictions on competitive activity. The agreements signed by the Kristel shareholders restricted them from recruiting or hiring away employees for a period of five years.

About a year later, the Kristels purchased an equity interest in Diversapack and hired at least 12 Cenveo employees. Cenveo sued, seeking to enjoin Diversapack from hiring its employees given the anti-raiding provisions contained in the stock sale documents.

But the court noted a basic problem with Cenveo's case: Diversapack is not a competitor of Cenveo. The anti-raiding provisions provided the selling shareholders could not recruit away employees to work for a competing business. Cenveo appeared to make a half-hearted attempt to bring Diversapack within the agreements' definition of competing business by alleging that Diversapack planned to install some specialized equipment that was similar to that used by the Kristel family in the business it sold to Cenveo. In addition to being vague, this allegation was hardly convincing.

Cenveo also had another problem: New York courts construe anti-raiding (also called "no-hire") clauses under the same standards as a non-compete agreement, meaning they are considered restraints of trade and are examined under a reasonableness test. The court found that, not only did the sale agreements not prohibit the hiring at all, but also that no legitimate business interest could support the anti-raiding covenants. Hiring ex-Cenveo employees did not threaten the disclosure of confidential information since Diversapack was not a competitor. And nothing indicated that the employees offered "unique services" to Cenveo, an interest recognized by New York courts.

In view of all that, the court had little trouble concluding that Cenveo was unlikely to succeed on enforcing the anti-raiding provisions. Aside from the rather obvious question of why Cenveo filed suit in the first place, the case demonstrates that no-hire provisions must be drafted and examined carefully. Not all states treat them as classic restraints of trade (probably because they aren't). But some states like New York will look at them under the same test - meaning counsel must tailor them narrowly to protect an employer's business interest.


Court: United States District Court for the Southern District of New York
Opinion Date: 10/1/09
Cite: Cenveo Corp. v. Diversapack, LLC, 2009 U.S. Dist. LEXIS 91535 (S.D.N.Y. Oct. 1, 2009)
Favors: Employee
Law: New York

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