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Deals & Dealmakers

Verdict creates changes in non-competition agreements

By Howard M. Rubin

As many of you use non-competition agreements (NCA) with employees, I thought it might be important to point out an important development in the law regarding the enforceability of such agreements.

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.”

One way an employer can address the limitations placed on NCAs by the Court is to expand the definition of cause so that if an employee is terminated, the reason for that termination can fall under that expanded definition.  For instance, non-performance that is detailed in the NCA can be a ground for a termination for cause.

Though non-solicitation provisions are not mentioned in the Buchanan decision, it does, by implication, take aim at them too.  A non-solicitation provision does nothing to prevent employees from working for a competitor, but restricts their ability to solicit and accept business from customers or clients for a specific period of time.  In reality, where business relationships (rather than trade secrets or confidential information) are paramount, a non-solicit is often more valuable than a non-compete.

After all, it is less about where the person is working and more about what they are doing there.  In Buchanan, however, the Court opined that since the customers did not appear to have agreed to use the former employer exclusively “for a set period of time”, the customers “should be free to pick the firm they want, be it plaintiff or defendants’ new firm.”  The broad implication here is that even if the former employee did not solicit the business, if the customers learned where the former employee was now employed the covenant would not preclude the former employee from accepting business from them.  Doing so without overtly asking clients or customers to move their business to the new employer does not amount to “solicitation” in New York.

NCAs can still play a critical role in protecting a company’s trade secrets and confidential information.  They can also be useful in preventing unfair competition.  However, they must be carefully drawn or they will not be enforceable under the current state of law in New York.

I would highly recommend that if you use an NCA, you review it to make sure it addresses recent changes in the law.

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