Employer's actions may exempt ex-employee
Published 06/08/99

When an employee has signed a covenant not to compete in an employment contract and later leaves her job, she may not be obligated under the covenant if the employer has materially breached its employment contract with her. This is so even if the covenant not to compete is otherwise found to be enforceable and reasonable, that is, no greater than necessary to protect the employer’s legitimate interests.

In the 1979 case of Laconia Clinic vs. Cullen, the New Hampshire Supreme Court ruled that a covenant not to compete in an employment contract may not be enforced against a former employee where there has been a breach by the employer of his own obligations under the employment contract. In that case, the Supreme Court affirmed the Trial Court’s ruling that in the employment contract between employee, a doctor, and his employer, a medical clinic, there was an implied obligation on the part of the clinic to afford a certain degree of financial security to the doctor. The Trial Court found that the clinic had breached its contract by mismanaging its business affairs and that the breach was so material to the doctor’s interest so as to discharge the doctor from his legal duty under his restrictive covenant not to compete.

This defense could likewise be successfully raised as to the express terms of an employment contract providing for certain job responsibilities, salary, and/or commission percentages, for example, which the employer then breaches by restricting those job responsibilities and/or reducing the employee’s salary and/or commissions. If such were the case and those actions caused the employee to leave her employment and the employer attempted to enforce the restrictive covenant not to compete, the employer may find that a court may determine that the restrictive covenant is unenforceable against the employee. Such an analysis probably would not be utilized by a court regarding claims of a breach of a confidentiality covenant by the employee because it is difficult to rationalize that any employer’s breach of the employment contract would justify taking and using company secrets by the employee.

In summary, in disputes over the enforceability of covenants not to compete, employers and employees should both be aware of the potential defense of the employer’s material breach of the employment agreement. Consultation with legal counsel about the possibility of a negotiated, post-termination agreement may save the parties from the expense and uncertainty of litigation.

J. Daniel Marr is a director and shareholder at Hamblett & Kerrigan, PA whose legal practice includes counseling businesses and business persons on a variety of legal issues and advocating on their behalf. Attorney Marr is also an adjunct professor at Daniel Webster College where he teaches business law. You can reach Attorney Marr by e-mail at: dmarr@hamker.com

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