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  • Southern District Reaffirms New York State Rule That Non-Compete Covenants Are Unenforceable Against Employees Terminated Without Cause

    Arakelian v. Omnicare, Inc., 2010 U.S. Dist. LEXIS 84828 (S.D.N.Y. Aug. 18, 2010).

    In Arakelian v. Omnicare, Inc., the Southern District of New York reinforced a rule long followed by New York State courts when it held that an employee terminated without cause is not bound by non-competition and non-solicitation provisions of a restrictive covenant in the State of New York.

    Under the rule, a New York court will “not enforce a non-competition provision in an employment agreement where the former employee was involuntarily terminated.” SIFCO Indus., Inc. v. Advanced Plating Techs., Inc., 867 F. Supp. 155, 158 (S.D.N.Y. 1994).

    In Arakelian, the plaintiff brought suit against her former employer, OmniCare, Inc., after she was fired from her position as Vice-President of Business Development.  The plaintiff sought, among other forms of relief, a declaration that the non-compete and non-solicit provisions of the Restrictive Covenant Agreement she had signed were void and unenforceable.

    In a lengthy 30-page opinion, Judge Paul Crotty described the rationale behind refusing to enforce non-compete and non-solicit agreements in situations where an employee has been terminated without cause:

    Enforcing a non-competition provision when the employee has been discharged without cause “would be ‘unconscionable’ because it would destroy the mutuality of obligation on which a covenant not to compete is based.”[1]  This rationale applies with equal force to covenants not to solicit a former employer’s clients and employees; solicitation is simply a form of competition.

    Judge Crotty concluded that the non-compete and non-solicit provisions of the Restrictive Covenant Agreement were void and unenforceable, and then granted plaintiff’s motion for summary judgment on the declaratory judgment claim.

    Employers should be aware that New York sets itself apart from other jurisdictions in refusing to enforce non-compete and non-solicit provisions against employees terminated without cause.  Most other jurisdictions only refuse to enforce a restrictive covenant if the restrictions are unreasonable in time or scope. New York Courts will not even reach the question of unreasonableness if an employee was terminated without cause.

    It is also important to remember that in this day and age of large multi-state corporations, choice of venue is important.  The Restrictive Covenant Agreement in Arakelian explicitly stated – perhaps to the detriment of OmniCare – that the agreement was governed by New York law.

    In addition, where the provisions of non-compete and non-solicitation agreements themselves span multiple states and regions, “these agreements will not apply for competition or solicitation within New Yorkstate, regardless of the residency or other status of the competing or soliciting worker.”

    A special thanks to Margaret Corchado for helping with this post.  Margaret is a third-year law student at Brooklyn Law School.

    [1] Morris v. Schroder Capital Management International, 445 F.2d 525, 529-530 (2d Cir. 2006).