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New York Commercial Division Case Compendium A Searchable Database of Court Decisions Issued by New York’s Commercial Division

Court Finds Stock-Option Agreement Unenforceable, and Covenant-Not-to-Compete Unreasonable

Posted in Breach of Contract, Emerson, Elizabeth, Manufacturing, Motion to Dismiss, Pharmaceutical, Preliminary Injunction, Suffolk

In a November 24, 2015, Commercial Division decision by Justice Emerson, the court granted the defendants’ motion to dismiss the plaintiff’s amended complaint, which contained causes of action against the individual defendants for breach of covenants not to compete, tortious interference with contract and unfair competition. The complaint also sought a preliminary injunction against all of the defendants.

Kimberly O’Connell Vigliante (“Vigliante”), Beth Potere (“Potere”) and James Perry (“Perry,” and with Vigliante and Potere, “Defendants”) were each employed as high-level salespersons for the plaintiff, NBTY, Inc. (“Plaintiff”), a leading global manufacturer and distributor of vitamins and nutritional supplements. Defendants resigned from their employment with Plaintiff and began working for one of Plaintiff’s direct competitors, Piping Rock Health Products, LLC (“Piping Rock”). Prior to their resignation, however, Defendants executed stock-option agreements with Plaintiff. The stock-option agreements contained restrictive covenants prohibiting Defendants from competing with NBTY in North America, Europe, or China for a period of one year following the end of their employment with Plaintiff. Following Defendants’ resignations from Plaintiff, and upon learning that Defendants began working for Piping Rock, Plaintiff commenced an action to enforce the restrictive covenants.

The court granted Defendants’ motion to dismiss. Applying Delaware law, the court found that the stock-option agreements were not supported by new consideration, which was required since Defendants executed the stock-option agreements after their employment with Plaintiff had already begun. The court also found that the agreements containing the restrictive covenants expired 90 days after Defendants left Plaintiff’s employ. Since it was undisputed that Defendants never attempted to exercise their stock-options, the expiration of the 90-day period rendered the stock-options—and by implication, the restrictive covenants—null and void. Nevertheless, the court determined that the restrictive covenants were unenforceable because a geographic limitation covering North America, Europe and China is unreasonable and imposes undue hardship on Defendants. Because the court held that the stock-option agreements and corresponding covenants not to compete were unenforceable, the court dismissed the action against Defendants and denied Plaintiff’s motion for a preliminary injunction.

NBTY, Inc. v O’Connell Vigliante, Suffolk County, November 24, 2015 [Emerson, J.] Index No. 606984-15