New York Appellate Court Declines to Enforce Noncompetes Against Employees Terminated Without Cause

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A recent decision by the New York Supreme Court, Appellate Division for the First Department, Buchanan Capital Markets, LLC v. DeLucca, 144 A.D.3d 508 (1st Dep’t. 2016), suggests that noncompetition restrictions against employees who have been terminated without cause are unenforceable.  The court stated 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.”

Buchanan Capital Markets, LLC (BCM), a financial services firm, terminated several employees who were financial and operations principals in connection with the sale of the company, but gave the employees the option to reapply to the successor firm. The employees had signed employment agreements with BCM’s predecessor company that contained two-year post-employment noncompetition and customer nonsolicitation restrictions. Following their terminations, the employees went to work for a competitor, and several BCM clients left BCM to do business with the competitor. Subsequently, BCM sought a preliminary injunction to enforce the noncompetition and customer nonsolicitation restrictions and to order the former employees to return to BCM its proprietary business information. To obtain a preliminary injunction under the state laws of New York for a violation of a noncompetition restriction, an employer must demonstrate a likelihood of success on the merits, irreparable injury, and a balance of equities in its favor. The trial court concluded that BCM had not met these factors and denied BCM’s application for a preliminary injunction.

The appellate court affirmed the trial court’s decision. With respect to a likelihood of success on the merits, the court concluded that the restrictive covenants were unenforceable because the employer could not demonstrate a continued willingness to employ the former employees (due to the fact that the employees were terminated without cause) and also noted that the conflicting affidavits “raised sharp issues of fact.” The court also concluded that BCM failed to make a showing of a likelihood of success on the merits as to demand that the former employees return BCM’s proprietary information because BCM had not made clear what the proprietary information consisted of exactly. Next, the court concluded that BCM had not demonstrated irreparable injury because any lost profits that it incurred could be compensable with money damages, obviating the need for injunctive relief. The court also concluded that BCM failed to show that the balance of equities weighed in its favor because, absent an agreement by a client to do business with BCM for a certain period of time, the client should be free to choose the firm with which it does business.

Takeaways for New York Employers:

First, restrictive covenants in employment agreements can be assigned to an employer’s successor company. Employers should ensure that agreements with restrictive covenants contain assignment provisions.

Second, while there are New York State Supreme Court cases holding otherwise, the Appellate Division for the First Department (which covers New York County and Bronx County), through this case, seems to be sending a message to employers that it will not enforce noncompetition restrictions in the context of terminations without cause. Employers in the counties of New York and the Bronx should therefore carefully consider, on a case-by-case basis, whether to enforce such restrictions against particular employees in the first place, and make termination decisions with this case in mind.

Third, when demanding that a former employee return proprietary company information, an employer must make clear to the former employee and court the particular information at issue, and make certain that such information is truly confidential.

Finally, employers should be reminded that a showing of irreparable injury is always undermined where there are lost profits, which can be compensable with money damages.

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