The Second Circuit in Hyde v. KLS Prof’ Advisors Grp recently called into question the long-standing practice of holding restrictive covenants unenforceable if the employee was terminated without cause.  The Second Circuit’s challenge as to whether a restrictive covenant must, by definition, be unenforceable, was discussed in the New York Law Journal article Are Restrictive Covenants Enforceable Against Employees Terminated Without Cause?.

As the article points out, the court’s practice of holding restrictive covenants as unenforceable when an employee is terminated without cause is based upon the New York Court of Appeals decision in Post v. Merrill Lynch, Pierce, Fenner & Smith.  In Post, two employees of Merrill Lynch, who were terminated without cause, accepted positions at a competing company.  It was Merrill Lynch’s position that because these employees were terminated, under their non-compete provisions that they had forfeited their rights under the company-funded pension plan because they had accepted competitive employment.  The Court of Appeals ruled in favor of the Plaintiffs, holding that the restrictive covenant was not enforceable because these two employees were terminated without cause.

The article points out how subsequent cases expanded the Court of Appeals decision in Post to provide additional limitations for restrictive covenants.  For example, in Morris v. Schroder Capital Mgmt. Int’l, the Court of Appeals ruled that restrictive covenants were unenforceable when an employee was only “constructively discharged.”  Based upon the Court of Appeals’ ruling in Morris, restrictive covenants may still be deemed unenforceable if an employee can show that the terms of the restrictive covenant are unreasonable.

Hyde, however, marks a potential turning point.  In vacating the District Court’s decision, it warned against “extending Post beyond its holding.”  Hyde may be a prelude to future decisions where courts will be less reluctant to automatically rule restrictive covenants invalid when an employee is terminated without cause.   Rather, there will be a renewed focus as to the “reasonableness” of the restrictive covenant.

While the average New Yorker won’t feel the impact of Post, this decision by the Second Circuit gives companies more staying power.  It will be interesting to see how the courts will approach future cases pertaining to the scope of restrictive covenants.  We will stay abridged of future decisions with respect to this issue and provide corresponding updates.

Edits and additions by Jacob Aronauer, Esq.