In Noteworthy Restrictive Covenant Case, Morrison Cohen Obtains Appellate Division Reversal for Greystone Funding Corporation

April 15, 2016 - In a decision that is potentially significant with respect to the treatment of restrictive covenants under New York law, Morrison Cohen successfully obtained the reversal of a summary judgment decision rendered by the Commercial Division of the Supreme Court of the State of New York, New York County in an employment related dispute between Greystone Funding Corporation (“Greystone”) and a former highly compensated employee.

In a unanimous decision dated March 1, 2016, the Appellate Division, First Department reinstated Greystone's claims for breach of the non-competition and non-solicitation provisions in the former employee's employment contract with Greystone as well as Greystone's claim for tortious interference with contract against parties related to the former employee, holding that issues of fact existed as to whether the former employee was terminated without cause and as to the reasonableness and enforceability of the restrictive covenants in the employment contract.

In the decision, the First Department declined to accept the former employee's contention that restrictive covenants binding former employees are rendered unenforceable per se based on Post v. Merrill Lynch, Pierce, Fenner & Smith, 48 N.Y.2d 84 (1979), in the event of a termination of employment without cause. While not directly reaching that issue, the decision instead suggests, as argued by Greystone, that there may be no per se rule in New York under such circumstances and that a factual inquiry is required into, among other things, the reasonableness of the restrictions in order to determine whether they are enforceable.

The First Department cited to the decision of the New York Court of Appeals in Brown & Brown v. Johnson, 25 N.Y.3d 364 (2015), which had been heavily relied upon by Greystone, in holding that issues of fact existed as to the reasonableness of the restrictive covenants. In Brown & Brown, the Court of Appeals remanded an action involving an involuntary termination of employment for further factual development on the issue of the reasonableness of a non-solicitation provision after the Appellate Division, Fourth Department had expressly held in the case that Post did not establish a per se rule that an involuntary termination without cause renders all restrictive covenants unenforceable.

The First Department's ruling is the second appellate reversal that Morrison Cohen has obtained for Greystone in this case. For a copy of the decision, please click here.