A recent court case throws into question the per se rule that covenants not to compete are unenforceable in New York when an employee is terminated without cause.
A number of decisions by the New York State Court of Appeals and the United States Court of Appeals for the Second Circuit had established a per se rule that employers who terminate an employee without cause would not be able to enforce any provisions of a covenant not to compete.
A recent decision by the Second Circuit, in the case of Hyde v. KLS Prof’l Advisors Grp., has thrown that rule into question. In Hyde, the plaintiff sought an injunction against his former employer to prevent the company from enforcing an agreement that prohibited him from contacting clients for three years after his termination. In granting a preliminary injunction, the U.S. District Court for the Southern District of New York relied on the per se rule that such agreements are unenforceable when an employee is terminated without cause.
However, the Second Circuit vacated the decision, stating that the plaintiff had failed to show irreparable harm – a requirement of a preliminary injunction – because if Hyde were prevented from competing with his former employer and then prevailed at trial, he would be adequately compensated by money damages. In remanding the case to the Southern District, the Second Circuit also expressed “reservations” about the per se rule that such agreements are necessarily unenforceable in such a context, and suggested that the court should instead apply a reasonableness test to analyze a covenant not to compete, even when an employee is terminated without cause.