This article was originally published in Venable's Trade Secrets & Transitions Blog.
When At-Will Employment May Not Be the Employer's Friend
Employers generally embrace the at-will employment doctrine. The right to terminate employees for any or no reason and with or without notice may sound appealing to you if you are an employer. In New York, however, there is an added wrinkle: When terminating an at-will employee without cause, may the employer restrain post-employment competition? The answer: unclear.
In Post v. Merrill Lynch, Pierce, Fenner & Smith, 48 N.Y.2d 84 (1979), the New York Court of Appeals held an employer could not enforce the forfeiture-of-pension provision within a non-competition agreement against an employee terminated without cause. The non-competition agreement required the employee to forfeit pension benefits if he competed against the employer post-employment. Like many employees, he competed. The court still sided with the employee. It reasoned that the termination of employment without cause "destroys the mutuality of obligation on which the covenant rests as well as the employer's ability to impose a forfeiture." Id. at 89.
For decades, New York courts have struggled with how to apply Post to restrictive covenants for employees terminated without cause. Some courts have applied the holding broadly, essentially creating a per se bar against enforcing restrictive covenants against employees terminated without cause. See, e.g., SIFCO Indus., Inc. v. Advanced Plating Techs., Inc., 867 F. Supp. 155, 158 (S.D.N.Y. 1994).
In 2012, the U.S. Court of Appeals for the Second Circuit cautioned, albeit in dicta within a summary order, that Post should not be applied so broadly. See Hyde v. KLS Prof’l Advisors Group, LLC, 500 F. App’x 24 (2d Cir. 2012). Hyde explained that Post should be limited to cases where, as in Post, an employer conditions an employee's receipt of post-termination benefits, such as severance or a pension benefit, on compliance with a restrictive covenant. Id. at 26. The Hyde court suggested "a traditional overbreadth analysis might be more appropriate" for analyzing the enforceability of the restrictive covenant. Id. In other words, where no post-termination benefits are involved, reasonable non-competition agreements should be enforced, but overly broad non-competition agreements should not.
Hyde settled nothing. Confusion still abounds about whether New York courts will enforce a restrictive covenant against an at-will employee terminated without cause. For example, in 2013, a New York Supreme Court Justice relied on Post to hold that an employer could not enforce a non-competition agreement on the sole ground that the employer terminated the employee without cause (i.e., without regard to the forfeiture issue). See Greystone Funding Corp. v. Kutner, No. 651926/13, 2013 WL 5951793, at *2-3 (N.Y. Sup. Ct. Nov. 6, 2013). Interestingly, the Appellate Division, First Department reversed the trial court's decision in Greystone Funding on separate grounds without commenting on the trial court's broad application of Post. See Greystone Funding Corp. v. Kutner, 121 A.D.3d 581, 583-84 (1st Dep’t 2014). Similarly, at least one federal court after Hyde also suggested Post still bars enforcement of restrictive covenants against employees terminated without cause. See Random Ventures, Inc. v. Advanced Armament Corp., LLC, No. 12-CV-6792 (KBF), 2014 WL 113745, at *52 (S.D.N.Y. Jan. 13, 2014) ("New York Courts will not enforce otherwise enforceable covenants where the employer terminates the employee without cause.").
Hyde probably got it right. That is, Post should not apply so broadly as to create an across-the-board ban on non-competition agreements whenever an employer terminates an employee without cause. Otherwise, employers may find themselves stretching to designate a termination "for cause" when in reality cause never existed. This anomaly hurts employers and employees alike.
So what's an employer to do? The day may come when more courts observe Hyde, but employers should not sit idle until then. Employers should consider including "for cause" provisions in their employment agreements, even if the employment is at-will. This may help an employer convince a court to enforce a non-competition agreement even if Post is applied broadly. Another option is to include covenants and acknowledgments in an employment agreement under which the employee agrees the non-competition clause will be enforceable even if he or she is terminated without cause.