Garden Leave Provisions Not Subject to Preliminary Injunction

The garden leave provision in your employment contract may be unenforceable. In Bear, Stearns & Co., Inc. v. Sharon, the U.S. District Court for the District of Massachusetts refused to issue a preliminary injunction to enforce a contractual provision requiring an employee to provide 90 days before resigning or retiring (aka “garden leave”).

Douglas A. Sharon was a Broker and Managing Director of Bear, Stearns & Co., Inc.’s private client services group in its Boston office. According to Bear Stearns, Sharon was the Boston office’s top producer, generating $5.2 million annually in commissions and managing more than $867 million in assets. In December, 2005, the company distributed a memorandum to all of its Senior Managing Directors, including Sharon, which allowed recipients to accept a raise in their base salary, among other benefits, subject to the acceptance of the above-described garden leave provision. Sharon agreed to the garden leave provision.

On March 17, 2008, Sharon resigned from Bear Stearns, effective immediately. He began work for his new employer, Morgan Stanley, the next day. Following Sharon’s resignation, on March 26, 2008, Bear Stearns filed a Complaint, Motion for a Temporary Restraining Order (“TRO”), and a Preliminary Injunction to enjoin, among other things, Sharon’s continued employment at Morgan Stanley.

As an aside, an important distinction exists between a TRO and Preliminary Injunction. Under Rule 65(a) of the Massachusetts Rules of Civil Procedure, a TRO does not generally exceed 10 days. In sharp contrast, a Preliminary Injunction will last until the case has been decided.

On March 27, 2008, the Court entered Bear Stearns’ request for a TRO. After the TRO expired, Bear Stearns sought injunctive relief. To obtain preliminary injunctive relief, Bear Stearns was required to show: (1) a substantial likelihood of success on the merits, (2) a significant risk of irreparable harm if the injunction is withheld, (3) a favorable balance of hardships, and (4) accord with the public interest.

The Court denied Bear Stearns’ request for Preliminary Injunction for three main reasons. First, the company could not establish that it would suffer irreparable harm because any alleged harm could be recompensed through a monetary award. Second, the harm to Bear Stearns was outweighed by the potential harm to Sharon’s “professional standing and the inability to advise his clients in times of economic turmoil.” Finally, the Court noted an inherent inconsistency in the garden leave provision. Specifically, Sharon’s employment was at-will, which meant that Bear Stearns could terminate his employment at any time, for any reason or no reason. Likewise, because he was an employee-at-will, Sharon should be able to resign at any time. Accordingly, enforcing the garden provision would run afoul of the employee-at-will doctrine:

Because the effect of specific performance in this case would be to require the defendant to continue an at-will employment relationship against his will, it is unenforceable in that manner.

Although the court refused to issue the Preliminary Injunction, it is important to note that Sharon could still be held liable for monetary damages. This case, however, sheds much needed light on “garden leave” provisions.