If You Fire Me Without Cause, Can I Ignore My Non-Compete And Steal Your Clients?

In the decades since Post v. Merrill Lynch, Pierce, Fenner & Smith, 48 N.Y.2d 84 (1979), in which the New York Court of Appeals concluded it would be unreasonable to enforce a non-competition agreement requiring forfeiture of compensation against an employee terminated without cause, New York courts have struggled with articulating a clear rule as to whether an employee’s post-employment restrictive covenants are enforceable upon a termination without cause and, if so, when.

Employers had a little more cause for optimism after the Second Circuit issued its non-precedential decision in Hyde v. KLS Prof’l Advisors Group, LLP last fall. In Hyde, the Second Circuit vacated a district court order prohibiting an employer from enforcing a costumer non-solicitation provision, noting its concern that the district court had improperly concluded that restrictive covenants are per se unenforceable against an employee who has been terminated without cause. It also provided that Post was limited to the forfeiture-for-competition context and that other restrictive covenants should be evaluated for reasonableness to determine their enforceability.

Another salvo in this ongoing battle came last month, when Justice Ramos of the New York Supreme Court summarily rejected a mortgage lending company’s attempt to enforce a non-competition and customer non-solicitation agreement against an ex-employee who formed a competing business in Greystone Funding Corp. v. Ephraim Kutner. Relying on Post and making no mention of Hyde, Justice Ramos reasoned that the employer terminated the employee shortly before his contract expired and that, therefore, the restrictive covenants were unenforceable.

Although just one case, Greystone does not auger well for employers hoping for some clarity in this area. Employers should continue to watch this line of cases to see whether Hyde’s limitations gain traction over time.

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Orrick - Global Employment Law Group on:

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