New York Appellate Decision Questions Enforceability of Employee Non-Compete Agreements, Demonstrates Need for Employers to Carefully Consult Counsel When Drafting or Enforcing Them
For more than a century, New York courts have been enforcing employee non-compete agreements, despite expressing their disfavor of these agreements and related enforcement challenges. In New York, as in many states, non-compete agreements will be enforced so long as the employer has a “legitimate business interest” in doing so, and the restrictions on the former employee’s ability to compete are narrowly drawn in terms of both geographic scope and the amount of time the restriction will remain in place. Courts will carefully scrutinize these agreements and will look at a number of other factors, including the type of employee with the non-compete restrictions and his or her access to the company’s “trade secrets” or “proprietary” information. The Appellate Division’s recent decision in Buchanan Capital Mkts., LLC v. Delucca further limited the tools at an employer’s disposal to restrict competition by its former employees.
Buchanan Capital Markets, LLC (the Company), a financial services firm, required that several of its operations and financial principals enter into two-year post-employment non-compete agreements. The employment of these individuals was terminated as the result of a sale of the firm, but they were given the opportunity to reapply for their jobs with its successor. Following the termination of their employment, they left the Company to work for a competitor, allegedly taking many of the Company’s clients with them. In response, the Company filed a lawsuit seeking the imposition of a preliminary injunction that enforced the terms of the non-competition and non-solicitation agreements.
The trial court declined to enforce the agreements through a preliminary injunction. The Company appealed and the First Department affirmed. The Court found that the Company had not demonstrated a likelihood of success on the merits of its claim as required for the issuance of a preliminary injunction. The Court affirmed that the Company’s success rested on the enforceability of the covenants, requiring a demonstration of a “continued willingness to employ the party covenanting not to compete” that was absent in this case. In addition, the Court concluded that the motion court did not improvidently exercise its discretion in denying the motion for the preliminary injunction since “conflicting affidavits raised sharp issues of fact.”
The Court stated further that the Company was unlikely to satisfy the presumption of irreparable injury, the second requirement for issuance of a preliminary injunction. After characterizing the Company’s damages as “[complaints] that it [had] lost customers to defendants’ new firm,” the Court stated that “lost profits are clearly compensable with money damages.” Finally, in determining whether the balance of the equities favored the Company, the Court found that because the injunction would alter the status quo, unless its “predecessor’s clients signed agreements to use plaintiff’s predecessor for a set period of time … the clients should be free to pick the firm they want, be it [the Company] or defendants’ new firm.”
The decision is significant for several reasons. First and most notably, courts appear to be more circumspect in allowing employers to make use of injunctions to protect their relationships with clients from competition by former employees. While injunctions historically have been appropriate when damages were difficult to prove, courts were somewhat deferential to the notion that business losses stemming from ongoing relationships with clients were difficult to calculate. The decision in Buchanan may signal this theory’s impending demise.
Second, the Court’s focus on the lack of a contract between the Company and its clients and reliance on the clients’ ability to choose to follow a former employee irrespective of the non-compete agreement hint at a further narrowing of enforceability.
Third, the decision makes clear that employers seeking to terminate an employee for its convenience, i.e., without cause, cannot rely on courts to issue injunctions to enforce restrictive covenants to protect them from that employee’s competition.
While the Court’s decision in Buchanan might make one question the enforceability of post-employment restrictive covenants, the decision does not stand as their death knell. The law is clear that reasonable non-compete agreements will be enforced to the extent necessary to protect an employer’s legitimate business interests. Buchanan does, however, indicate that in this era of erosion of the enforceability of non-compete agreements, consultation with counsel is key to avoiding the potential harm that may result from failing to adequately implement protocols to help strengthen the likelihood of enforcement through a preliminary injunction.