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February 20, 1985


The opinion of the court was delivered by: William T. Hart, District Judge.



AHP is a Delaware corporation headquartered in New York and selling AHP sells products in a variety of industries (e.g., drugs, foods, paints, household products, housewares) on a worldwide basis. AHP adopted its Management Incentive Plan in 1967 and since then has administered the Plan from its New York headquarters. The Plan covers present and former AHP employees worldwide.

Plaintiffs Sarnoff and Fletcher became AHP employees during 1979, when AHP acquired their former employer, EZ-Por Corporation ("EZ-Por"). Prior to its acquisition by AHP, EZ-Por produced and sold aluminium cookware items. EZ-Por maintained its sole place of business in Illinois, where it was incorporated. Sarnoff served as Vice-President of EZ-Por and owned shares in the company while Fletcher worked as EZ-Por's plant manager and salesman. After the acquisition both Sarnoff and Fletcher continued to work in Illinois in their former positions for AHP's EZ-Por subsidiary ("AHP-EZ-Por").

On January 29, 1981, AHP sent letters to Sarnoff and Fletcher informing them that AHP's Incentive Compensation Committee had granted them "contingent" stock awards of 600 and 150 shares, respectively, of AHP stock. These letters state that the awards would be paid out at a future date under certain conditions. The letter also requested award recipients to sign and return to AHP a copy of the letter "as acknowledgement of receipt of both this notification and a copy of the Plan, and your acceptance of New York Law as governing Plan interpretations." Both Sarnoff and Fletcher signed and returned copies of the letter as requested.

After resigning from AHP-EZ-Por in January of 1981, Sarnoff formed Ensar Corporation ("Ensar") as an Illinois corporation. Fletcher joined Sarnoff at Ensar after leaving AHP-EZ-Por during February, 1981.

In December of 1981, Sarnoff and Fletcher received questionnaires from AHP, which they completed and returned as requested, attaching Ensar's product list. At its January 27, 1982 meeting, AHP's Committee determined that several of Ensar's products were in competition with products sold by AHP's Ekco Housewares Division. Consequently, the Committee determined that Sarnoff and Fletcher had forfeited their awards.*fn1 By letter dated February 3, 1982, AHP's Treasurer notified Sarnoff and Fletcher of the Committee's decision. This action ensued.


AHP argues that New York law governs this action, that New York law recognizes the validity of the Plan's noncompetition clause and that since the plaintiffs breached the noncompetition clause, the Committee properly declared the forfeiture. Sarnoff and Fletcher contend that Illinois substantive law governs this action, and that under Illinois law the AHP's noncompetition clause is void as overbroad. Alternatively, Sarnoff and Fletcher assert that AHP's noncompetition clause is similarly void under New York law. They also maintain that they have not breached the noncompetition clause and that, in any event, AHP should be estopped from asserting a breach.

Because there is no real conflict between the substantive law of New York and that of Illinois as to the validity of AHP's noncompetition clause, the choice of law issue is not controlling. Even assuming that New York and Illinois differ on this issue, however, Illinois' conflict of law principles indicate that Illinois' substantive law governs this controversy. Thus Illinois law must be applied in any event and its application precludes enforcement of the Plan's noncompetition clause.*fn2

The courts of Illinois disfavor noncompetition clauses, enforcing only such provisions as are "reasonably necessary to protect a legitimate business interest or to prevent improper and unfair competition." Rao v. Rao, 718 F.2d 219, 223 (7th Cir. 1983). See also American Hardware Mutual Insurance Co. v. Moran, 705 F.2d 219, 221 (7th Cir. 1983); Akhter v. Shah, 119 Ill. App.3d 131, 74 Ill.Dec. 730, 733, 456 N.E.2d 232, 235 (1st Dist. 1983); MBL (USA) Corp. v. Diekman, 112 Ill. App.3d 229, 67 Ill.Dec. 938, 944-45, 445 N.E.2d 418, 424-25 (1st Dist. 1983) ("restrictive covenants are closely scrutinized"). These principles have been applied by Illinois courts to a forfeiture of deferred compensation based on breach of a noncompetition clause. Johnson v. Country Life Insurance Co., 12 Ill. App.3d 158, 300 N.E.2d 11 (4th Dist. 1973) (forfeiture of renewal premiums resulting from former insurance agent's breach of noncompetition clause).

AHP does not contest the adherence of the New York courts to this same restrictive view of noncompetition clauses; when found in employment contracts. See American Institute of Chemical Engineers v. Reber-Friel Co., 682 F.2d 382, 386-87 (2nd Cir. 1982). Rather, AHP maintains that New York courts do not evaluate the reasonableness of noncompetition provisions where such clauses operate only to forfeit deferred compensation and such clauses do not actually prohibit competition by a former employee.

In support of its argument AHP cites Kristt v. Whelan, 4 A.D.2d 195, 164 N.Y.S.2d 239 (1st Dept. 1957), aff'd w/o opinion 5 N.Y.2d 807, 181 N.Y.S.2d 205, 155 N.E.2d 116 (1958). In Kristt, the New York Supreme Court, Appellate Division articulated the so-called "employee choice" rule: that a noncompetition clause is enforceable where the former employee has "the choice of preserving his rights [to deferred compensation] by refraining from competition with [his former employer] or risking forfeiture of such rights by exercising his right to compete." 164 N.Y.S.2d at 243. However, in Bradford ...

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