Joshua Bernstein and Vanessa Garcia
Joshua Bernstein and Vanessa Garcia (Courtesy photos)

With the ever-increasing popularity of the Food Network and the more discerning restaurant customers it has generated, the hospitality industry has seen a dramatic shift in the importance of its signature restaurants, especially in urban and resort boutique hotels. As a result, the role of celebrity chefs and signature restaurants has become an essential component of any successful high-end hotel.

Indeed, with the growth of the Internet, food channels, cooking shows, and the expansion of social media, celebrity chefs have become essential to developing the reputation and following for both the new hotel and its signature restaurant.

For boutique hotel and restaurant owners and developers, there are many benefits to co-branding their businesses with a chef that can help develop a customer base for their business. Of course, there are also potential pitfalls to business owners, who incur significant expenses and the risk of tying their brand to a celebrity chef who is not invested in the success of the property and may decide to depart at a moment’s notice.

Though such an investment can result in significant payoffs, to protect their investments, savvy business owners will make sure to include reasonable and enforceable non-compete clauses. Those should be limited in duration and geographical scope but should definitely be among the terms of employment for the chefs with whom they co-brand any of these business ventures. Such clauses can protect the enormous goodwill and brand recognition those partnerships develop through the chef in the co-branding process.

Why Co-Brand?

Co-branding a boutique hotel and its restaurant with a celebrity chef can create significant benefits to the hotel and its signature restaurant, enhancing the reputation of the property, generating a local following and creating financial, managerial and marketing benefits. Financial benefits include reducing the cost of introducing multiple new brands and increasing revenues for both the hotel and the restaurant. For marketing benefits, co-branding has been shown to have a positive impact on how customers perceive quality and value, and ultimately, how satisfied they are with their experience.

When a restaurant builds its brand with a well-known chef, having that recognizable name associated with the hotel brand helps to drive the latter’s customer base to the hotel, which increases traffic, the volume of meals served and profits for the hotel owners. Similarly, a celebrity chef can ensure a steady stream of traffic at a restaurant from local patrons during off seasons. This enables hotels to derive a significant and steady stream of revenue from its restaurant that can account for an outsized and substantial portion of the hotel’s revenues.

Enforceable Non-Competes

While there are clear benefits to co-branding a boutique hotel and its restaurant with a celebrity chef, there can also be significant risks involved. This is particularly true when the business owner invests in building up the chef’s personal brand and celebrity status in the process, which can involve additional resources and higher costs.

Hotel and restaurant owners can easily spend millions of dollars in developing a restaurant concept and space around a celebrity chef and the related marketing and startup costs.

In addition, by co-branding, a hotel owner ties its brand to the continued presence of the celebrity chef at its hotel. To protect that multi-million dollar investment and the enormous goodwill the hotel owner ties to its chef, hotel owners regularly include non-compete clauses in their chefs’ contracts, whether through an employment, lease or license agreement.

In New York, the enforceability of a non-compete clause depends on its reasonableness, which is determined by its duration and geographical area. For a non-compete provision to be enforceable it must be: (1) no greater in time or area than is necessary to protect the legitimate interests of the employer; (2) cannot be “unduly burdensome” to the employee; and (3) cannot be “harmful to the public,” if enforced. See BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 388-89 (1999); Crown IT Services v. Koval-Olsen, 11 A.D.3d 263, 264 (1st Dept. 2004).

New York courts have consistently held that so long as non-compete provisions are narrowly tailored in duration and area to protect the employer’s legitimate interests, such provisions will be enforced. See BDO Seidman, supra at 392-394. This is because an employer has a legitimate interest in protecting, inter alia, its customer base and brand. See e.g. Crown, supra at 265, citing BDO Seidman, supra at 392 (an “employer has a legitimate interest in preventing former employees from exploiting or appropriating the goodwill of a client or customer, which had been created and maintained at the employer’s expense, to the employer’s competitive detriment”).

While courts will look at the particular facts of any case, they have found that non-compete clauses with terms of up to two years and areas including the entire city of New York and surrounding counties are generally reasonable and enforceable. See Michael G. Kessler & Assocs. v. White, 28 A.D.3d 724, 724 (2d Dept. 2006) (employment agreement’s non-compete barring investigator from working for “a similar business” within the city of New York and Nassau and Suffolk counties for period of two years was neither unreasonable in duration nor geographical limitation).

Violation of a Non-Compete

Non-compete agreements have become more important than ever in the ultra-competitive hospitality and restaurant space and, indeed, standard around the country as an essential tool to protect a venture’s owner.

With the proliferation of cooking centered reality shows, chefs have become household names. Restaurants and hotel owners are therefore regularly building brands around these chefs to increase bottom lines. As a result, citywide or even statewide non-compete zones for periods as long as five years are common to prevent chefs from opening competitors with similar concepts.

In the event that a chef were to violate the non-compete agreement and attempt to join or start a competing restaurant, the hotel or restaurant owner could seek to enforce the agreement by enjoining the chef from engaging in activities that violate the agreement, and potentially also seeking damages for the breach of contract. An owner can also seek injunctive and monetary relief against the owner of the restaurant the celebrity chef joins.

Both of those options would require that the owner demonstrate legitimate interests that need to be protected, irreparable harm (typically in the form of the significant damage to the goodwill and brand recognition of the hotel and restaurant the chef departed from) or damages that would be suffered if the agreement were violated. See, e.g., Crown at 265, citing BDO Seidman at 392; Alside Div. Of Associated Materials v. Leclair, 295 A.D.2d 873, 874 (3d Dept. 2002) (finding “a loss of customer good will” constitutes irreparable harm for preliminary injunction purposes); Zomba Recording v. Williams, 15 Misc.3d 1118(A), 2007 N.Y. Slip Op. 50752(U) at *10 (Sup. Ct. N.Y. County 2011) (preliminary injunction warranted to “protect a company’s goodwill and credibility in its industry, … [as] [t]his enhancement is not capable of monetary calculation.”)

Conclusion

Ample research and evidence show the reputation and goodwill created through co-branding a hotel and restaurant with a celebrity chef can have very significant benefits, including increased profits, that could be lost if the chef were to leave and go to a competitor. To ensure they are enforced, hotel and restaurant owners should make certain that non-compete agreements are narrowly tailored in duration and area to protect their interests. Moreover, if a chef leaves and joins or starts a competing restaurant, the hotel or restaurant owner should immediately take steps to ensure the non-compete agreement is properly enforced.