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Bar News - August 12, 2005 Supreme Court Limits Permissible Scope of Non-Compete Clause in Employment Agreements By: Attorneys Julie Moore and Karen Aframe
Fast-forward two years: relations between the company and the employee have soured. The employee has located a terrific opportunity with one of the company’s competitors. The employee resigns, accepts the new position, and begins to solicit business from the former company’s clients. The company seeks an injunction to enforce the non-solicitation agreement against its former employee. This sort of litigation, while common, presents the court with the task of weighing competing interests. Solid arguments exist on both sides. The employee claims that competition and mobility of the workforce are essential to a successful market economy and to each employee’s ability to maximize professional potential. The company responds that its customers are its most prized asset and that permitting a former employee to raid its customer base is tantamount to stealing. The company asks the court to intervene because the company’s viability is doubtful if former employees can capitalize on the company’s goodwill to springboard their individual career opportunities with competitors. Merrimack Valley Wood v. Near The New Hampshire Supreme Court recently decided an important case that, among other issues, attempts to locate the equilibrium between these interests. The case establishes a relatively clear principle for defining the legitimate scope of non-solicitation agreements. See Merrimack Valley Wood Prods. v. Near, —A.2d—, 2005 WL 1074295 (N.H. May 9, 2005). The facts are straightforward. Glen Near was a salesman for Merrimack Valley Wood Products (Merrimack Valley), selling doors, window units, and moldings. When he was hired, Merrimack Valley did not ask him to sign a non-solicitation agreement. Nor did it mention that one would be forthcoming down the road. Six months later, the company presented him with a non-solicitation agreement designed to prevent him from dealing directly or indirectly with any of its clients for a year after his separation from employment. The agreement also contained nondisclosure provisions and a covenant not to compete. The company told Near that his continued employment was contingent on his accepting the agreement, without offering additional consideration. Near signed the agreement. Several years later, Near quit Merrimack Valley and was hired by one of Merrimack Valley’s competitors. Shortly after starting his new position, in direct contravention of the express terms of his contract, Near began soliciting business from the clients that he knew from working for Merrimack Valley. Merrimack Valley sued to enjoin Near from continuing to engage in this conduct. Supreme Court Analysis The Supreme Court began its analysis by recognizing that non-competition agreements are generally disfavored and that they are to be narrowly construed. The court repeated its familiar three-part test for determining whether an agreement is enforceable. For a court to enforce a non-solicitation or non-competition agreement, the agreement must (1) be limited to the extent necessary to protect the former employer’s legitimate business interest, (2) not impose an undue hardship on the employee, and (3) not injure the public interest. The court will protect assets that legitimately belong to employers These general principles of non-competition law are firmly established. Indeed, they have led to the ad hoc balancing of employer and employee interests that has made this area of law so unpredictable. But, from these general principles, the court in Merrimack Valley proceeded to announce a rule for defining the nature of the employer’s protectable interest that could go far in reducing this uncertainty. The court ruled that an employee does not have a legitimate interest in protecting all of its customers from the solicitations of a former employee. Rather, a non-solicitation agreement is only valid to the extent that it covers the employee’s “actual sphere of influence.” In other words, a non-solicitation agreement can only bar employees from soliciting the clients with whom they actually had contact while working for the former employer. The court reasoned that employees do not have any advantage in soliciting the business of a client of their former employer if the employee had no personal dealings with the client. Applying this principle to the Merrimack Valley agreement, the court ruled that the agreement was too broad because it applied to all of its customers instead of only those with whom Near had interacted, which was only about five percent of the customer base. New Hampshire’s Position More Favorable Than Some States By adopting this limiting principle, New Hampshire has taken a position more favorable to employees than some states that will, in some circumstances, permit an employer to prohibit contact with all of its customers. See, e.g., Acordia Northeast v. Academic Risk Resources & Ins., 19 Mass. L. Rptr. 75 (Mass. Super. Ct. 2005). In light of Merrimack Valley, New Hampshire employers will have to reexamine their non-competition and non-solicitation agreements to ensure that they comply with the “actual sphere of influence” rule. Importantly, this rule will likely have consequences for non-competition as well as non-solicitation agreements. Many non-competition clauses prevent a former employee from competing within a certain geographic distance of the former employer. Under the logic of the “actual sphere of influence” standard, employers will have to limit the distance to the actual location in which the employee operated. In addition to ruling on the scope of a permissible non-solicitation agreement, the court ruled that Merrimack Valley did not propose the non-solicitation agreement in “good faith.” The court found Merrimack Valley’s conduct lacked good faith because it proposed the agreement during, not at the inception of, the employment relationship and made Near’s continued employment contingent on signing the agreement. Prevention of Blue-penciling The court’s lack of good faith conclusion was important because it prevented the “blue penciling” of the agreement. Blue-penciling permits a court to enforce an overbroad agreement to the extent that it is enforceable. The court ruled that blue-penciling is only permissible where the employer acted in “good faith” in proposing the agreement. Because Merrimack Valley did not act in good faith, the court simply declared the agreement void, instead of reforming it. Thus, even though Near was clearly violating the scope of a proper non-solicitation agreement by contacting his former clients, the court declined to place any restrictions on him. In addition to the implication of the lack of good faith ruling for blue penciling, the court’s ruling at least suggests that it may not permit an employer to use an at-will employee’s continued employment as the company’s consideration for a non-competition agreement which is proposed after the employee has begun work. In sum, Merrimack Valley indicates that the Supreme Court will continue to look skeptically at non-competition and non-solicitation agreements and will favor employee mobility over employer interests in close cases. The lessons for employers are two-fold. First, an employer should not use its bargaining power in the employment relationship to extract overly aggressive non-competition concessions from an employee because the resulting agreement will likely be deemed overbroad and could result in the employer receiving no protection at all. Second, an employer should propose the agreement at the outset of the employment relationship and provide the employee with sufficient information about the content of the agreement. And, if the agreement is given to the employee while the employee is already working, it should be supported by consideration separate from continued employment and be fully understood by the employee. By acting in this manner, a court will likely blue-pencil the agreement if necessary, thereby permitting the employer to protect its core interests despite a contract that could be considered overbroad. Julie Moore and Karen Aframe practice at Employment Practices Group in North Andover, Massachusetts. |
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