Alert April 11, 2008

Court Declines to Issue Preliminary Injunction to Enforce Garden Leave Provision

In its recent decision in Bear, Stearns & Co., Inc. v. Sharon, the U.S. District Court for the District of Massachusetts declined to issue a preliminary injunction to enforce a contractual provision requiring an employee to provide 90-day’s notice of termination of employment (a so-called “garden leave” provision), based in part on public policy concerns.

Bear, Stearns & Co., Inc. v. Sharon

Douglas Sharon was the executive director of Bear Stearns’ private client services group in its Boston office. According to the complaint, he was the Boston office’s top producer, annually generating about $5.2 million in commissions and managing more than $867 million in assets for Bear Stearns clients.

In December 2005, Bear Stearns distributed a memorandum to all of its Senior Managing Directors, including Sharon, called “Terms of Employment at Bear Stearns-United States.” The memorandum provided that the recipients could accept a raise in their base salaries subject to

a notice provision of not less than 90 days—which means that although you remain an employee at will, if you decide to leave Bear Stearns you must give prior written notice of your intention to leave. Once notice is given, for the ensuing 90 days . . . Bear Stearns will pay your base salary, during which time you may be asked to perform all, some or none of your work duties in Bear Stearns’ sole discretion. The notice period is enforceable by a temporary restraining order which Bear Stearns can enforce in court.

Sharon received and executed this memorandum on December 12, 2005.

On March 17, 2008, Sharon submitted notice of his resignation from Bear Stearns, effective immediately. He began working for Morgan Stanley the next day.

Bear Stearns believed Sharon’s actions breached the Terms of Employment because he had not given the company 90-days’ notice before terminating his employment. On March 27, 2008, the court granted Bear Stearns’ request for a temporary restraining order (“TRO”) to enjoin Sharon from working for Morgan Stanley during the 90-day notice period set forth in the Terms of Employment memorandum. Bear Stearns thereafter sought to convert the TRO into a preliminary injunction that would remain in effect until an arbitration panel of the Financial Industry Regulatory Association rendered its decision on the merits of the dispute. Bear Stearns also claimed that Sharon misappropriated confidential information and wrongfully solicited colleagues and clients to follow him to Morgan Stanley. With respect to confidential information, Bear Stearns alleged that Sharon had worked the weekend before his resignation and printed documents that contained client information, but Sharon’s affidavit stated that he took no documents with him to his new employer. With respect to the wrongful recruitment of colleagues and clients, Bear Stearns alleged that Sharon had expressed concern over Bear Stearns’ stability, expressed satisfaction with his situation with Morgan Stanley, and provided contact information for Morgan Stanley’s regional recruiting director. However, there was no evidence that Sharon tried to persuade his clients to take any action other than to protect the security of their assets.

The court denied Bear Stearns’ motion for a preliminary injunction with respect to the misappropriation and solicitation claims, concluding that, since there was no direct evidence of wrongdoing by Sharon, there was no demonstrable likelihood that Bear Stearns would succeed on the merits of those claims. (For a more detailed discussion of what constitutes solicitation, please refer to our November 17, 2005 Alert, “Massachusetts Court Holds That Job Changes Do Not Necessarily Nullify Non-Competition/Non-Solicitation Agreements”.) With respect to the breach of contract claim, the court concluded that there was a “reasonable likelihood that Bear Stearns will prevail on its breach of contract action [for damages] because there was a binding contract between the parties and Sharon’s resignation without 90 days’ prior written notice constitutes a breach of that contract.”

Importantly, however, the court denied the request for preliminary injunction on the breach of contract claim for three reasons. First, it concluded that Bear Stearns could not establish it would suffer irreparable harm because its harm could be recompensed by money damages. Second, it concluded that the hardship to Bear Stearns of permitting Sharon to resume his employment with Morgan Stanley was outweighed by the risk to Sharon’s “professional standing and the inability to advise his clients in times of economic turmoil.” Finally, the court concluded that it could not order specific performance of the 90-day “garden leave” provision because doing so would require Sharon to continue an at-will employment relationship against his will. The court distinguished the garden leave provision from a noncompetition or nonsolicitation provision, indicating that “a different result might be warranted” if the provision were a “simple restrictive covenant against competition or the solicitation of clients.” As it was, giving the garden leave provision full effect “would be to force Sharon to submit to Bear Stearns’ whim regarding his employment activity in the near future.”

Implications

The court’s decision calls into question an employer’s ability to obtain a preliminary injunction to enforce garden leave provisions that require employees to provide a certain period of notice before ceasing their employment. However, the court recognized that Bear Stearns can recover monetary damages for the breach of the garden leave provision. Also, the court clearly distinguished the garden leave provision from noncompetition and nonsolicitation provisions, which the court implied would be enforceable under these circumstances.

In light of this ruling, employers should revisit their employment agreements to ensure they are adequately protected against immediate resignations. A mere mandatory notice requirement may not be sufficient to protect against immediate competition. One approach would be to add noncompetition and nonsolicitation provisions that could run concurrently with (or extend beyond) the notice period. Another alternative would be to consider a reasonable liquidated damages provision for violations of the notice period. In sum, the case underscores the importance of careful drafting of agreements that are tailored to an employer’s legitimate interest in light of the nature of its business and the employee’s particular role at the company.