In a recent decision in Buchanan Capital Markets LLC v. DeLucca, an appellate court in Manhattan placed the enforceability of non-compete agreements in jeopardy for New York employers. Non-competition agreements generally are disfavored in New York, but courts will enforce them if they are reasonable in time, geographic scope and are intended to protect a company's "legitimate protectable interest(s)" as opposed to being simply anti-competitive.
One question that has never been clearly answered is whether an employer's termination of an employee "without cause" will render a non-compete agreement unenforceable. While on one hand the employee has agreed to certain terms in exchange for employment, the other hand questions why an employer who ends the employment relationship "without cause" should gain the benefit of keeping the now unemployed individual off the market. Courts have not answered this question consistently, with differing decisions coming from state and federal courts in the state. This new decision - handed down by the highly influential appellate court that covers Manhattan and the Bronx - states definitively that "covenants not to compete in employment agreements ... are not enforceable if the employer ... does not demonstrate 'continued willingness to employ the party covenanting not to compete.'" In other words, if you terminate the employee "without cause" the non-compete will not be enforced.
It should be noted that this decision does not directly reach agreements involving solicitation or acceptance of business from customers, poaching employees or the use of trade secrets or confidential information. A second aspect of the decision is also troubling. When asking a court to issue an injunction that precludes the former employee from accepting a competing position, the employer must demonstrate that without the injunction it would suffer "irreparable harm." By definition, irreparable harm means that money will not adequately cover the damages. The classic example is someone cutting down a tree. Without an injunction, once the tree is down, money will not restore it. In restrictive covenant cases, employers point out that they have goodwill in their clients or customers. That is, they expect continued business from them. Absent an injunction these relationships, which are not easily quantified with dollars, may be lost. Thus, courts have consistently held that the loss of goodwill constitutes irreparable harm. But the Buchanan court disagreed; stating instead that the loss of business, measured by lost profits, was capable of being quantified.
Absent irreparable harm, there can be no injunction. Absent an injunction the former employee will not be precluded from working for the competitor. While a lawsuit might eventually result in the covenant being enforced (meaning the employer could obtain those money damages) the point of the injunction and the restrictive covenant is lost as the business is immediately placed in jeopardy.
Though non-solicitation provisions are not mentioned in the Buchanan decision, it does, by implication, take aim at them too. A non-solicitation provision does nothing to prevent employees from working for a competitor, but restricts their ability to solicit and accept business from customers or clients for a specific period of time. In reality, where business relationships (rather than trade secrets or confidential information) are paramount, a non-solicit is often more valuable than a non-compete. After all, it is less about where the person is working and more about what they are doing there. In Buchanan, however, the Court opined that since the customers did not appear to have agreed to use the former employer exclusively "for a set period of time", the customers "should be free to pick the firm they want, be it plaintiff or defendants' new firm." The broad implication here is that even if the former employee did not solicit the business, if the customers learned where the former employee was now employed the covenant would not preclude the former employee from accepting business from them. With social media sites such as LinkedIn widely in use, gone are the days where "taking one's Rolodex" or even Outlook contacts matter. Merely identifying a new employer on social media alerts everyone where the employee can now be found. And doing so without overtly asking clients or customers to move their business to the new employer does not amount to "solicitation" in New York.
In all, the decision is a strident rebuke to an attempt to enforce post-employment restrictive covenants. This may not be so surprising, as non-competes and other restrictive covenants have been under increasing scrutiny in recent years.
What can be done? Situations are highly fact specific. In general, restrictive covenants of the types mentioned should be carefully crafted by experienced counsel who can customize them in ways intended to increase the chances of enforcement. One example might be to define "cause" broadly in the agreement, decreasing the employee's ability to claim the termination was without cause. Most of all, seek legal guidance before terminating an employee who has signed a restrictive covenant agreement to steer clear of the hole in the floor the Buchanan court created.
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|Schoenstein, Richard C. Partner, Co-Head of Securities and Financial Services Litigation Group||Partner, Co-Head of Securities and Financial Services Litigation Group||212.216.1120|