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Voluntary Quit or Involuntary Discharge? Second Circuit Rules That Jury Must Decide, and Validity of Non-Compete Hangs in the Balance

November 15, 2002

The U.S. Court of Appeals for the Second Circuit recently reversed a lower court decision in favor of a former executive of IBM in a lawsuit involving millions of dollars in stock awards and options. In Lucente v. International Business Machines Corp., 2002 WL 31478458 (2d Cir., November 4, 2002), the Second Circuit ruled that the lower court had improperly decided the "bedrock question" of whether the executive had quit or been fired, and that the issue should instead be decided by a jury at trial.

The plaintiff, Edward Lucente, worked for IBM for 30 years, ultimately rising to the level of President of the Asia-Pacific operation. While at IBM, Lucente participated in an incentive compensation program which awarded him certain restricted stock, and another program which awarded him stock options. Under both programs, Lucente's stock and stock options were subject to non-competition provisions which authorized IBM to cancel all deferred, unpaid or unexpired awards if Lucente ever worked for a competitor of IBM. The non-compete clauses contained no limitations as to time, place or scope.

Lucente's Departure from IBM

During a trip to Tokyo in 1990 the CEO of IBM, John Akers, told Lucente that Lucente was going to be replaced, and that he should expect to be moved to a job of lesser responsibility. Akers never offered Lucente a specific position, but encouraged him to seek the best opportunity that he could find, either with IBM or elsewhere. Shortly thereafter, Lucente retired from IBM and went to work for Northern Telecom Ltd., a job that IBM told Lucente would not violate the non-compete clauses in the incentive programs. As part of his retirement package, Lucente was paid $675,000 and signed a letter agreement which contained a non-competition provision that was unlimited in scope and duration.

Two years later, Lucente left Northern Telecom and went to work for Digital Equipment Corp. IBM advised Lucente that his employment with Digital Equipment violated the non-compete clauses, and that it was therefore canceling his outstanding stock options and restricted stock awards. Lucente then sued IBM for breach of contract, seeking an award of the restricted stock and stock options; IBM filed a counterclaim for breach of contract, seeking to recover the $675,000 severance payment.

The Employee Choice Doctrine

New York courts generally disfavor restrictive covenants in the employment context and will usually only enforce non-competition provisions which are "reasonable" in geographic scope and duration. However, one exception to this rule is the "employee choice doctrine." Pursuant to this doctrine, New York courts will enforce a restrictive covenant without regard to its reasonableness if the employee has been afforded the choice of not competing (and thereby preserving contractual benefits) or competing (and thereby risking forfeiture of benefits). In applying this doctrine, courts have applied the following principles: (1) an employer can rely on the doctrine only of it can demonstrate a continued willingness to employ the person who covenanted not to compete; (2) when an employee is involuntarily terminated without cause the employer cannot invoke the benefit of the doctrine; and (3) the factual determination as to whether an employee was involuntarily terminated is generally not an issue that should be decided by a court on summary judgment but rather is an issue of fact for determination by a jury.

District Court's Ruling In Favor of Lucente

Lucente and IBM both moved for summary judgment on their respective claims for breach of contract. In deciding the motions, the U.S. District Court for the Southern District of New York ruled that IBM had failed to present any evidence that it had been willing to retain Lucente, and that the employee choice doctrine was therefore inapplicable to both Lucente's and IBM's breach of contract claims. Having determined that IBM could not avail itself of this doctrine, the court also ruled that because the non-compete provisions in the incentive programs and the letter agreement were unlimited in scope and duration, they were unreasonable as a matter of law and therefore unenforceable. Based on these findings, the court granted summary judgment for Lucente on his breach of contract claim and dismissed IBM's counterclaim.

Court of Appeals Decision

On appeal, the Second Circuit reversed the district court, ruling that the district judge had improperly decided the factual question of whether Lucente had voluntarily left IBM or been terminated. The Second Circuit stated that the judge had improperly "usurped the jury's province as fact finder," and relied on "selective and incomplete deposition testimony while ignoring substantial evidence that Lucente's departure from IBM was indeed voluntary." Among other things, the Court of Appeals noted that the judge had credited Lucente's testimony that Akers had told him that he would not have a job when he returned from Tokyo, but had ignored Akers's testimony that he had discussed with Lucente various job opportunities that were available to him at IBM, including senior staff jobs. The court also noted that Lucente's initial meeting with Northern Telecom had occurred months before his discussions with Akers in Tokyo and that that the timing of this meeting suggested that Lucente's "leap to Northern Telecom" was a long planned voluntary departure.

Having concluded that the lower court had improperly ruled that Lucente was involuntarily discharged, the Court of Appeals then stated that the factual inquiry into the reasonableness of the non-competition provisions at issue could only be undertaken if a jury determined that Lucente was fired by IBM. (If it were found that Lucente left voluntarily, the employee choice doctrine would have made inquiry into the reasonableness of the provisions irrelevant). The Second Circuit then remanded the case to the lower court for further proceedings.

Concluding Thoughts

The Court of Appeals decision in Lucente is a helpful reminder to New York employers that, in appropriate circumstances, the employee choice doctrine may be a useful tool to ensure the enforceability of non-compete agreements. At the same time, the decision serves to reemphasize the principle that in deciding a motion for summary judgment, a court is not permitted to resolve factual disputes, and that those matters are reserved for the jury at trial; the appellate court's decision may therefore make lower courts more reluctant to grant summary judgment. Because employers often count on avoiding trials of employment-related claims through the use of summary judgment, the Lucente decision is not an entirely positive development for employers.