The U.S. Court of Appeals for the Second Circuit has issued an interesting opinion, reversing a preliminary injunction in favor of a departing employee who asked a New York district court to forbid his former employer from enforcing its covenant not to compete against him. In Hyde v. KLS Professional Advisory Group, Inc., 2012 U.S. App. LEXIS 21111 (2d Cir., Oct. 12, 2012), the Second Circuit found that the employee had failed to demonstrate the most important factor in support of an injunction — irreparable injury — because any potential lost income from the absence of employment opportunities was readily compensable by a money damages award against his former employer. I have attached a PDF copy of the opinion below.
Hyde, a senior executive, was terminated by KLS and he brought a preemptive action to enjoin KLS from enforcing its three-year covenant not compete against him. Hyde argued that the covenant inhibited him from finding employment and disrupted his relationships with customers, therefore causing him irreparable harm. The district court agreed and barred KLS from enforcing the non-compete.
The Second Circuit’s Reasoning: The Second Circuit, however, disagreed. As a preliminary matter, the Second Circuit emphasized that a showing of irreparable injury is “the single most important prerequisite for the issuance of a preliminary injunction.” The Second Circuit cited a number of cases where courts had denied requests by government employees who had sought injunctions to extend or keep their jobs. One of those cases, Sampson v. Murray, 415 U.S. 61 (1974), rejected a government employee’s claim that loss of income qualified as irreparable injury and further held that “insufficiency of savings” and difficulty in finding a job were “external factors common to most discharged employees” and only to be considered in extraordinary situations.
Applying that rationale to this case, the Second Circuit found there was no irreparable injury resulting from the loss of a potential job. In fact, the Court reasoned that any lost employment income was readily compensable by a monetary damages award against his former employer. Likewise, the Second Circuit rejected Hyde’s claim that he was irreparably injured by the loss of his client relationships, citing the multiple agreements that Hyde had signed acknowledging that the client base belonged to KLS.
Finally, although it confined its analysis to the absence of irreparable injury, the Second Circuit did take the time to express concern about the district court’s holding that under New York law, non-competes against fired employees are per se unenforceable. The Second Circuit cautioned that this rule might not apply to terminations that were for cause.
Is this good news for New York employers? While the Second Circuit’s opinion benefited this particular employer, it may be a mixed ruling ultimately for employers who seek to enforce non-competes in the future. On the positive side for employers, the Second Circuit rejected the former employee’s effort to preemptively enjoin the former employer and rejected his claims that lost employment was an irreparable injury, which is authority that will benefit employers in the future. In addition, the Second Circuit noted that non-competes may still be enforced against terminated employees if that termination was for cause. Finally, the Second Circuit emphasized that the written agreements determined that KLS, not Hyde, had rights to the customer relationships.
However, the Second Circuit reiterated the importance of irreparable injury in every injunction and its critical analysis may be relied upon in future cases by departing employees. For example, I can readily see a former employee (or perhaps a supplier or consultant in a trade secrets case) arguing that an employer’s damages are readily calculable as lost sales, compensable by money damages, and thus, by definition, outside the definition of irreparable injury. Of course, in the context of non-competes, there are plenty of cases holding that trade secrets and customer relationships are customarily within the definition of irreparable injury, but this opinion could be used to challenge or undermine the reasoning giving rise to those authorities.