We have often been asked: if an employer fires an employee, can a non-compete or non-solicitation agreement be enforced? Some federal district courts interpreting New York law had said “no.” A recent decision from the Second Circuit Court of Appeals, Hyde v. KLS Professional Advisors Group, LLC, 2012 U.S. App. LEXIS 21111 (2nd Cir. October 12, 2012), clarifies and narrows the scope of those prior decisions.
The previous line of thinking stemmed from a handful of decisions from the U.S. District Court for the Southern District of New York suggesting that if an employee is fired without cause, his or her restrictive covenant is not enforceable, citing Post v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 48 N.Y.2d 84, 421 N.Y.S.2d 847 (1979). The Post case, however, involved the forfeiture of benefits arising from the breach of a restrictive covenant, and applied New York’s “employee choice doctrine.”
Under the employee choice doctrine, a restrictive covenant can be enforced without regard to its reasonableness, if the employee was given a choice between accepting a benefit (such as deferred compensation or other monetary payment) and relinquishing his or her right to compete on the one hand, and rejecting the benefit and retaining the right to compete on the other hand. See Morris v. Schroder Capital Management International, 7 N.Y.3d 616, 825 N.Y.S.2d 697 (2006). Central to the employee choice doctrine is the freedom of the employee’s choice. Accordingly, New York courts have made it clear that if an employee were fired, the employer could not take advantage of the employee choice doctrine and instead must establish that the agreement satisfies the general rule of reasonableness applicable to restrictive covenants in New York.
In Hyde, the Second Circuit stated (in dicta):
Having concluded that Hyde failed to establish irreparable injury, we need go no further. In the interest of judicial economy, however, we note our reservation about the district court’s preliminary interpretation of New York law. Relying on Post v. Merril Lynch, Pierce, Fenner & Smith, 48 N.Y2d 84, 397 N.E.2d 358, 421 N.Y.S.2d 847 (1979), the district court concluded that restrictive covenants are per se unenforceable in New York against an employee who has been terminated without cause. But in Post, the New York Court of Appeals held only that when an employee was terminated without cause, the employer could not condition the employee’s receipt of a previously earned pension funds on compliance with a restrictive covenant. Id. at 89, 421 N.Y.S.2d at 849. We caution the district court against extending Post beyond its holding, when a traditional overbreadth analysis might be more appropriate.
Indeed, courts in New York routinely have enforced restrictive covenant agreements against employees who were terminated from employment involuntarily. Instead of creating a per se prohibition against restrictive covenants in New York, the fact that the defendant-employee may have been terminated without cause is a factor that will weigh in the usual reasonableness analysis, and the balancing of the equities in cases where a preliminary injunction is sought.