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Parting Is Such Sweet Sorrow: Covenants Not to Compete Between Auction Houses

June 3, 2016

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By Elizabeth Weber, Esq.

Covenants not to compete (CNCs), also called non-compete clauses or simply non-competes, are commonplace in employment contracts. Generally, CNCs seek to prevent an employee from leaving his or her current employer to work for a direct competitor. CNCs typically last for a set period of time and only pertain to a specific geographic area. In specialized fields like the art market, these restrictive covenants prevent employees from moving between similar companies with the ease they would prefer. Specifically, CNCs entered into by auction house employees present unique issues to those who work in the field and seek career developments due to the limited number of major auction houses, especially within a particular geographic area.

Covenants Not to Compete

A covenant not to compete is a contractual provision in which one party, the employee, affirms that he or she will not work for a market competitor within a specified geographic area for a particular period of time after the employment period ends. CNCs are a part of  contract law and, as such, are dictated by state law. In New York,

[t]he modern, prevailing common-law standard of reasonableness for employee agreements not to compete applies a three-pronged test. A restraint is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public.

BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 388-89 (1999) (emphasis omitted). A violation of any of the three prongs may invalidate the CNC completely unless the suit arises in a state that follows the blue pencil rule. When a particular CNC provision is overbroad, courts in blue pencil states may reform or strike the offending provisions from the contract while the rest of the CNC remains intact and partially enforceable. For example, New York allows courts to reform overbroad CNCs; Florida courts follow a mandatory CNC reformation regime; and California law does not permit the use of CNCs, although the use of CNCs to protect trade secrets in California is unsettled. Beck Reed Riven LLP’s extensive state-by-state chart provides a more in-depth view of CNC law by state.

Additionally, in Reed, Roberts Assocs. v. Strauman, a 1976 case involving the enforceability of CNCs, the New York State Court of Appeals specifically focused on the fact that “our economy is premised on the competition engendered by the uninhibited flow of services, talent and ideas. Therefore, no restrictions should fetter an employee’s right to apply to his own best advantage the skills and knowledge acquired by the overall experience of his previous employment.” Reed, Roberts Assocs. v. Strauman, 40 N.Y.2d 303, 307 (1976). Despite the Court of Appeals’ focus on an employee’s right to participate in the market economy, this right is not limitless. CNCs may be used to prevent a former employee from disclosing a company’s trade secrets or confidential client information or, alternatively, CNCs may be enforced if the former employee performed unique or extraordinary services for the former employer. Id. at 308.

Auction House CNC Case Study: Heritage Auctioneers v. Christie’s

Despite the prevalence of CNCs, few cases that involve breached covenants within the auction house world arise. One case in particular illustrates the importance of CNCs: the ongoing matter between Heritage Auctioneers & Galleries and Christie’s. Heritage Auctioneers & Galleries v. Christie’s, Sup Ct, New York County, 2014, Oing, J., index No. 651806/2014.

Heritage involves three former Heritage employees who specialized in the pre-owned luxury accessories sector (think vintage Hermès Birkin bags): Matthew Rubinger, Rachel Koffsky, and Caitlin Donovan, who worked in Heritage’s Luxury Accessories department with Rubinger serving as both Director and department head while Koffsky and Donovan held positions as Director of Operations and Director of Consignments, respectively.

According to Heritage’s complaint, Heritage hired Rubinger in 2010 to head the company’s Luxury Accessories business right out of college. The company alleges that it “invested in Rubinger’s identity” to elevate Rubinger within the auction world and brand him as the face of Heritage’s Luxury Accessories department worldwide. Complaint, Heritage Auctioneers & Galleries v. Christie’s, Sup Ct, New York County, 2014, Oing, J., index No. 651806/2014. As their Luxury Accessories business grew, Heritage hired Koffsky and Donovan in that department as well.

Four years later, in 2014, Rubinger renewed his written contract with Heritage through December 31, 2014. Rubinger’s employment contract included both CNC and non-solicitation clauses and an additional non-disclosure clause in which he affirmed that he would not disclose any of Heritage’s trade secrets. Specifically, the CNC provision in Rubinger’s contract stated that Rubinger would not work for a Heritage competitor anywhere in North America for twenty-four months after ending his employment with Heritage. Koffsky and Donovan’s employment contracts included a nondisclosure agreement only. The text of Rubinger’s CNC as shown in Heritage’s complaint is included below.

Images found in Complaint, Heritage Auctioneers & Galleries v. Christie’s, Sup Ct, New York County, 2014, Oing, J., index No. 651806/2014.

During the week of May 12, 2014, Christie’s extended offers of employment to Rubinger, Koffsky, and Donovan. On May 16th, Rubinger accepted the offer from Christie’s Hong Kong, Ltd., which is based and conducts business in Hong Kong, China. Koffsky and Donovan accepted offers from Christie’s, Inc., which is based in the United States. The three resigned from Heritage the following Monday, May 19th.

Heritage subsequently filed suit against Christie’s, Rubinger, Koffsky, and Donovan on June 13, 2014. The complaint alleges that Christie’s engaged in unfair business practices; tortiously interfered with Heritage contracts; induced, aided, and abetted Heritage employees to violate their fiduciary duties; and misappropriated trade secrets and other proprietary information. The complaint further alleges that Rubinger, Koffsky, and Donovan all breached their fiduciary duty of loyalty to Heritage in addition to breaching their Heritage employment contracts.

In response, the defendants asserted that Christie’s Hong Kong and Rubinger specifically structured their employment arrangement to avoid breaching Rubinger’s CNC with Heritage. Defendants’ Memorandum of Law in Opposition to Plaintiff’s Motion for a Preliminary Injunction, Heritage Auctioneers & Galleries v. Christie’s, Sup Ct, New York County, 2014, Oing, J., index No. 651806/2014. By working in Hong Kong, not the United States, Christie’s and Rubinger argued that Rubinger complied with the territorial terms of his CNC. Christie’s further stated that Rubinger, Koffsky, and Donovan were instructed not to use or disclose to Christie’s or use for Christie’s benefit any information derived from their time with Heritage. The defendants also noted that Heritage failed to provide any evidence that Rubinger, Koffsky, or Donovan utilized any confidential information thus far during their employ with Christie’s.

Heritage is currently pending in the New York Supreme Court before Justice Jeffrey K. Oing, and updates regarding this case will follow.

What Does the Future Hold for Auction House CNCs?

In addition to Heritage, recent shakeups at Christie’s and Sotheby’s have reinforced how important CNCs are for auction houses. For example, after the former chairman of Christie’s Americas, Marc Porter, resigned his position with Christie’s in December 2015, The New York Times reported that “after a noncompete period of about a year, [Porter] will join Sotheby’s in a high-ranking position that has yet to be announced but is expected to involve international client development.” The fact that Porter must wait about a year before joining Sotheby’s puts both Sotheby’s and Porter at a distinct disadvantage: the company must hold Porter’s future position open during this time period while Porter awaits the expiration of the CNC period before joining Sotheby’s.

Interestingly, it appears that Sotheby’s attempted to renegotiate Porter’s CNC with Christie’s by offering to waive the CNC of a former Sotheby’s employee who planned to join Christie’s. The New York Times reported in February 2016 that Sotheby’s offered to release Guillaume Cerutti, former Sotheby’s deputy chairman in Europe and chief executive in France, from a CNC if Christie’s would respond in kind and release Marc Porter from his CNC obligation before the contracted duration of the CNC. Reportedly, Christie’s declined this offer.

CNCs in the auction house world may be an attempt by top houses to avoid any semblance of collusion. In 2000, both Christie’s and Sotheby’s settled a $512,000,000 price-fixing lawsuit “amid allegations that the two auction houses had colluded on fixing the commissions paid by buyers and sellers of art.” Accordingly, strong CNCs in auction house employment contracts may serve as preventative measures to demonstrate a complete lack of collusion on the part of either house. What is more likely, however, is that the competing businesses wish to avoid client poaching and using valuable insights learned at their former place of employment in unfair business practices that may result from well-informed individuals using the information for the benefit of a new employer.

Conclusion

While there are thousands of auction houses worldwide, the number of leading international houses is much smaller and, as such, employment opportunities at top-tier houses are limited. Either due to the corporate culture or the CNCs, changing allegiances between these top houses incite great interest in both clients and the media. The widespread use of CNCs in auction house employment contracts serves to encourage institutional loyalty and decrease lateral movement between the top houses, but the question remains–who really wins when CNCs are strictly enforced in the auction house world?

Sources:

*About the Author: Elizabeth Weber is a lawyer living in Brooklyn, NY. Elizabeth graduated from the University of Florida Levin College of Law where she received her certificate in Intellectual Property Law and served as an active member of the Art Law Society and the Journal of Technology Law and Policy. Elizabeth is the Spring/Summer 2016 Postgraduate Fellow with the Center for Art Law.

Disclaimer: This article is for educational purposes only and is not meant to provide legal advice. Readers should not construe or rely on any comment or statement in this article as legal advice. Instead, readers should seek an attorney with any legal questions.

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