Back in June, I talked about a new district court case on restrictive covenants. My law partner, Joshua Hawks-Ladds, follows up today with results of the appeal. For employers who have a non-compete agreement, this decision emphasizes the need to seek an injunction quickly to protect the employer’s interests.
Let’s say that you, as an owner or chief executive of a company, had your company’s key employees sign restrictive covenants limiting, for one year after separation of employment, the employees’ ability to compete with your business or solicit your company’s customers or employees.
Let’s assume that an employee violates one or more of the restrictions (by competing or soliciting in violation of the covenants). Suppose the restrictive covenant expired before you were able get an injunction from a court enjoining the former employee’s anti-competitive behavior.
Do you still have the right to seek an injunction enforcing the restrictive covenant after the restrictive period ended?
The Second Circuit Court of Appeals recently opined on that question stating that a request for injunctive relief, and specifically a request for a temporary and/or permanent injunction, based upon an expired noncompetition covenant is moot and such injunctive relief will not be granted. Aladdin Capital Holdings, LLC v. Donoyan, 11-2363-CV, 2011 WL 4063012 (2d Cir., Sept. 14, 2011) .
The Second Circuit decision affirmed a Connecticut District Court decision that follows dicta from the Connecticut Supreme Court, in which the court stated that the expiration of a restrictive employment covenant renders an employer’s later request for injunctive relief moot. But the Supreme Court did not provide a clear holding on the issue after the Superior Court in Van Dyck Printing concluded that the employer’s request for an injunction prohibiting a former employee from competing with the company was moot, since by the time the request came before the Court, the period specified in the former employee’s restrictive covenant had already passed. The Supreme Court had merely agreed with the Superior Court’s decision stating “the plaintiff’s claim for injunctive relief had become moot by the time of trial.”
But the Aladdin court affirmatively held that when restrictive covenants have “expired by their own terms; their restrictions on (a former employee’s) activities are now lifted. As a result, (any) alleged “continued violations of (the restrictive) … covenants are no longer continuing: they have already occurred.”
Thus, as a matter of law, a request for injunctive relief based on a restrictive covenant is moot upon the expiration of the period specified in the parties’ restrictive covenant.
How then does a company protect itself when a former employee violates a restrictive covenant, but an injunction has not been issued before the restrictive period ends?
The company must include language that expressly permits extension of the restrictive covenant during the period of breach or threatened breach of the covenant. In that way, a court can hold that a breach of the restrictive covenant will result in an extension of the restrictive period.
If your company’s agreement with its employees restricting post-employment competition does not contain language that expressly permits extension of the restrictive covenant during any period of breach or threatened breach of the agreement, the agreements need to be modified (something we can obviously assist on) because unless the agreement explicitly states otherwise, the restrictive covenant ends when the restrictive period terminates.