Executive Summary: A company that terminates an employee — even if it offers the employee the chance to apply for a position with the company’s successor — cannot enforce restrictive covenants over that employee, a New York appeals court recently held. In Buchanan Capital Markets, LLC v. DeLucca, 144 A.D.3d 508 (2016), the First Department affirmed a lower court’s denial of a preliminary injunction seeking to enforce non-compete and non-solicitation agreements against four employees. The lower court found the employees were terminated without cause prior to a corporate merger. The appeals court held that allowing the employees the chance to apply to the successor entity, with no guarantee of future employment, was insufficient to show a continued willingness to employ the employees that merited the protection of injunctive relief.
Factual Background
Three employees and their Managing Director, Michael Callahan (Callahan) signed employment agreements to work for Marcum Buchanan Associates (MBA). The agreements contained covenants by which the employees agreed not to solicit MBA clients for two years after ceasing employment with MBA. They also acknowledged that MBA client information was proprietary and confidential.
In 2015, MBA’s sole manager, Vincent Buchanan, bought MBA and assumed all rights and interests. MBA then became Buchanan Capital Markets (BCM). Prior to closing, however, Buchanan told MBA employees they must go through an “official hiring process” to seek employment with the new company, BCM.
Fired Employees Not Bound by Employee Choice Doctrine
Shortly after the closing, BCM allegedly discovered the employee defendants solicited MBA clients and removed client information from MBA’s shared drive. BCM (formerly MBA) promptly filed a complaint against Callahan and the others, and sought a preliminary injunction to enforce the non-compete and non-solicitation covenants in their employment agreements.
In rejecting the injunction application, the appeals court affirmed that BCM could not rely upon the “employee choice doctrine”— an otherwise strong tool in the employer’s arsenal. Under the employee choice doctrine, the employer is not required to show the restrictive covenant is reasonable if the employee makes the choice between not competing (and receiving contractual benefits) or competing (and forfeiting those benefits). The doctrine does not apply where, as here, the employees are fired without cause. BCM was not entitled to the benefit of the doctrine because those employees were forced to leave the company. Accordingly, the court held that since the employees had no choice to make and BCM was unwilling to continue their employment, BCM had little likelihood of success on the merits of its lawsuit.
The First Department also affirmed that lost profits caused by lost customers “are clearly compensable with monetary damages.” Finally, the panel noted there were no contracts requiring BCM clients to use BCM for a set period of time; thus, clients “should be free to pick the firm they want, be it [BCM] or defendants’ new firm.” 144 A.D.3d at 509.
The Bottom Line: New York employers should be aware of the risks involved in enforcing post-employment restraints against employees who are fired, with or without cause. Corporate mergers or acquisitions that require current employees to undergo a “new” hiring process may allow some employees to slip away unrestrained, absent a guaranteed offer of employment with the successor company.
Mark Saloman is Co-Chair of FordHarrison’s Non-Compete & Trade Secrets practice group. If you have any questions regarding this decision, please feel free to contact Mark at msaloman@fordharrison.com. You may also contact any member of the practice group or the FordHarrison attorney with whom you usually work.