It should come as little surprise to employers that the New York courts take a skeptical view of non-compete agreements between employers and employees. Consistent with this view, a New York State appellate court recently confirmed what many, including prior authors of this blog, already understood: in New York, any employer who terminates an employee without cause risks losing the ability to enforce a non-compete agreement against the employee.
The recent decision, Buchanan Capital Mkts., LLC v. DeLucca, et al., 41 N.Y.S.3d 229 (1st Dept. 2016), came on appeal by a financial compliance consultancy (employer) seeking an injunction to enforce non-compete agreements against former employees who solicited business from the employer’s entire client list soon after leaving employment. The employees did so despite non-solicitation provisions within the non-compete agreements prohibiting the client solicitation.
The appellate court affirmed the denial of an injunction against the employees because the employer had failed to show a “continued willingness to employ the party convenanting not to compete.” Underpinning this decision is the court’s belief that employers cannot dismiss an employee without cause while also restricting the terminated employee from future employment opportunities or competition. What’s concerning about this decision for employers is that there was a genuine factual dispute over whether the employees were still employed at the time they solicited the client list. The employer was transitioning ownership, and the entire workforce was subject to rehiring with the new corporate entity, which the employer contended was a continuing offer of employment. The employees alleged that they had been terminated without cause. In considering the injunction, the lower court resolved this factual dispute in favor of the employees because the employer bore the burden of proof for the injunction. In affirming, the appellate court accepted the lower court’s conclusion and indicated that general allegations about the employer’s resulting loss of business would not satisfy its burden to show irreparable harm from the employees’ efforts to take business from the employer.
What this case makes clear is that in New York employers risk forfeiting non-compete restrictions by dismissing an employee without cause. It’s equally clear that a dispute as to whether an employee is dismissed without cause can and will be resolved against an employer seeking an injunction to prohibit competition. As many employers know, time is of the essence when attempting to stop a former employee from soliciting client business or misappropriating trade secrets. Failing to obtain a timely injunction can often equate to “losing” the case, even if the employer ultimately prevails at the end of a lengthy litigation of the merits of the dispute.
So what can employers do to protect themselves in New York? Succinctly stated: draft better non-compete agreements. To avoid the pitfalls identified in Buchanan, employers should take care to define “cause” in their non-compete agreements to cover scenarios other than traditional workplace malfeasance.