Two Judges to Bear Stearns: No Injunction to Enforce “Garden Leave” Provisions

It is not uncommon for employment agreements, particularly those involving senior employees, to contain provisions requiring that the employee give notice of his or her intention to leave. These “mandatory notice” provisions can have a duration of as little as two weeks and as much as six months. Employers explain them as being intended to minimize the disruption to operations (and customers) caused by the abrupt departure of a valued employee. One potential benefit of such provisions — if enforceable — is that they can operate as a kind of short-term non-compete, in that they force employees to sit on the beach (or in the “garden,” to borrow the British usage) while being paid by the employer, rather than immediately joining a competitor. One school of thought is that such provisions are merely aspirational, rather than strictly enforceable, because the general American rule is that individuals cannot be compelled to remain employed at any particular employer. Two recent decisions in Massachusetts, one from the state court and the other from the federal court in Boston, and both involving the brokerage firm Bear Stearns, support that view. [As it happens, Foley Hoag represented the successful defendants in both cases.]

The first decision, Bear Stearns & Company, Inc. v. McCarron, involved Bear Stearns’ attempt to enforce a 90-day mandatory notice provision against three brokers who departed for another brokerage firm. Bear Stearns sought an injunction in the Suffolk Superior Court’s Business Litigation Session to enforce that provision against brokers who had resigned and immediately started at their new firm. Judge Ralph Gants, who regularly hears restrictive covenant cases involving the financial services industry, refused to grant the requested injunction. He had two problems with the restrictive covenants at issue. First, in this case, the defendants had never signed a document that described itself as an employment agreement, or a non-competition or non-solicitation agreement. Instead, the provisions Bear Stearns sought to enforce were “buried” in deferred compensation plan documents. Judge Gants regarded these provisions as “stealth” restrictive covenants and stated that the Bear Stearns should have obtained signed employment agreements in which the employees were “fairly told of the restrictions and knowingly” accepted them. Second, Judge Gants refused to enforce the 90-day notice provision “because it would be fundamentally unfair to the defendants’ private clients at Bear Stearns, who would be left with uncertainty as to whom would actually be servicing their needs.” He noted that if a client wished to remain with Bear Stearns, the client would be in a kind of limbo, as Bear Stearns likely would not have permitted the brokers who had provided notice of resignation to service those clients. He stated that the court would not enforce a contract provision “that may deny clients a choice of financial advisors for up to 90 days.”

Notwithstanding this decision from a Massachusetts state court judge, Bear Stearns tried to enforce a similar provision only a few weeks later, this time bringing its case in federal court in Boston, before Judge Nathaniel Gorton. In Bear, Stearns & Co., Inc. v. Sharon, Bear Stearns sought to enforce what it described as a “garden leave” provision against a senior broker who resigned in the wake of the recent well-publicized turmoil at Bear Stearns. The provision at issue required the individual to provide 90 days’ notice of termination, during which time Bear Stearns reserved the right to decide what duties, if any, the employee would perform and would pay his base salary. The provision specifically stated that it was enforceable by a temporary restraining order in court.

Although Bear Stearns initially obtained a temporary restraining order which lasted several days, Judge Gorton ultimately refused to grant a preliminary injunction enforcing the provision. He found that the 90-notice provision could not be enforced at “equity” — i.e. via an injunction, because the effect of an injunction would be to require the defendant to continue an employment relationship against his will, a concept at odds with longstanding American jurisprudence. The court noted that the “garden leave” provision was not a simple restrictive covenant in that it barred the individual from working at any employer during the so-called notice period, rather than limiting him from working for specific competitors.

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