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Friday, March 6, 2015

Employer’s Earlier Breach Prevents Enforcement of Non-Compete Agreement

By: Peter J. Lamont, Esq.

When Donald Fewer went to work for Jersey Securities in 1996, heading up its North American credit derivatives trading operation, he signed an employment agreement specifying his duties and containing non-compete and non-solicitation provisions. These barred him from working for a competing firm in the New York City area for 190 days after leaving the firm, and from soliciting co-workers or firm customers for stated intervals.

Four years later, he had been promoted to president and senior managing director of the company, now known as GFI Group, making him responsible for the firm’s entire North American brokerage operations, with a direct report to the CEO. Soon after taking the promotion, he signed two option agreements with lengthier non-compete terms.

But in a company reorganization in 2007, he was removed from that post, given his old job back, and told to report to his replacement. Fewer handed in his notice in April the next year, and five months later took a job with a competing firm.

Since New York State has no statutes on non-compete agreements, it’s left up to state courts to decide what post-employment restrictions should be upheld. Rather than wait for GFI to try to block his new employment, Fewer went to court, asking it to declare invalid the non-compete and non-solicit agreements he had signed. In response, GFI argued Fewer had breached valid non-compete agreements, and sought to enforce them.

The New York trial court ruled in February 2014 that by demoting him, the company committed a material breach of its employment agreement with Fewer, and thus freed him from the non-compete provisions. The court also noted the non-compete agreement the company was trying to enforce was linked to Fewer’s former job, from which the company had removed him.

In the court’s opinion, the employer’s breach also meant Fewer was not bound by the “employee choice” doctrine, which says an employee may have to forfeit benefits (in Fewer’s case, the options the company had given him) as the price for not following related non-compete provisions. In this case, however, Fewer had already exercised the options and paid for the company shares, so they were not the kind of post-employment benefit the “employee choice” doctrine allows to be forfeited for not observing a related non-compete provision.

Further, although there was extensive discovery in the case, the court found no evidence to back up company claims Fewer had provided “unique and extraordinary” services (the speed with which he was replaced argued against that), or possessed trade secrets or confidential lists of customers that might justify upholding the non-compete agreement.

This January, the New York Appellate Division agreed the non-compete agreement could not be enforced, saying once the company had demoted him, it lacked “a legitimate interest” in preventing Fewer from working for a competing firm. It did permit GFI to continue trying to enforce its non-solicitation provision, if it could show a legitimate business reason for preventing Fewer from soliciting his former co-workers there.
The case holds a few lessons for employers. First, since in New York, court review of the reasonableness of post-employment restrictions will likely involve a detailed examination of the specific language and fact situation, careful, attorney-assisted drafting and negotiation will be very helpful.

In addition, an employer’s earlier breach of an employment agreement is likely to derail chances of enforcing post-employment restrictions tied to the agreement, although the trial court did conduct a detailed look at other possible justifications, such as a “unique” position or access to trade secrets or customer lists, and the appellate court viewed as possible upholding non-solicitation rules even when a non-compete agreement was unenforceable.

If you would like more information about this topic or have general legal questions, please feel free to contact me at (973)949-3770 or via email at plamont@peterlamontesq.com Offices in: New Jersey New York, Colorado & Puerto Rico and affiliated offices throughout the country.

© 2010-2015, Law Offices of Peter J. Lamont & Associates. This Update is provided for informational purposes only. It is not intended as legal advice nor does it create an attorney/client relationship between the firm and any readers or recipients. Readers should consult counsel of their own choosing to discuss how these matters relate to their individual circumstances. This Update may be considered attorney advertising in some states. Furthermore, prior results do not guarantee a similar outcome.

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