Court outlines scope of restrictive covenants
Published 04/05/07

Employment restrictive covenants are only enforceable against employees to the extent necessary to protect the legitimate business interests of the employer. On March 16, 2007, the New Hampshire Supreme Court clarified that the legitimate interests an employer may protect with a restrictive covenant must be direct and concrete rather than attenuated and speculative.

In the case of Syncom Industries, Inc., d/b/a Syncom Services v. Eldon Wood and William Hogan, the appellate court remanded back to the trial court litigation in regards to employment restrictive covenants where the trial court granted the employer $1,145,700 in compensatory damages, $250,000 in enhanced compensatory damages, and $100,000 in attorney's fees.

The employer Syncom provides cleaning and maintenance services for movie theaters. Eldon Wood was Syncom's Vice President of Sales and William Hogan was an area manager and then later as the regional manager. Each had a contract which had a three-year non-compete which prohibited direct or indirect soliciting of business from any of the companies' customers located in any territory serviced by the company while they were still employed with the company.

While still employed by Syncom, Wood and Hogan began plans to establish a new movie theater cleaning company, which they envisioned as a competitor to Syncom. Wood negotiated with three of Syncom's customers (Regal Brandywine, Regal Burlington, and Regal Cumberland) to line them up as customers for himself upon his departure from Syncom in establishment of his new company.

Within two weeks of Wood's resignation of Syncom, he created the new company Big E Theater Cleaning, LLC and began performing cleaning and maintenance at the Regal Theaters Wood had solicited for Big E while he was still employed at Syncom. Soon thereafter Big E had also displaced Syncom at Regal Ronkonkoma. Within six weeks of resignation, Wood also secured as a Big E client an AMC theater complex in New York City (Empire 25) that he had previously spent six months soliciting for Syncom. Subsequently, Big E entered into cleaning contracts with six other Regal Theaters and displaced Syncom from four additional theaters, Imax, Movies 10, Neshaminy 24, and Tinseltown.

The appellate court did not overturn the trial court's findings that Wood and Hogan acted wrongfully, but focused on the extent of damages based upon a narrow construction of the employment restrictive covenant. The Court noted that the law does not favor contracts in restraint of trade or competition and such contracts are narrowly construed. Employment restrictive covenants are valid and enforceable only if the restraint is reasonable given the particular circumstances of the case.

By way of example, if an employer has provided weekly or daily services to a customer who can terminate those services at any time, the Court may determine that an employment restrictive covenant prohibiting the former sales person of that employer from soliciting that customer he previously worked with should only be for a few months in order to permit the employer to get a new sales person in front of the customer. However, if the employer's employee is an insurance agent providing group health insurance to various companies, a two-year non-compete prohibiting the soliciting of those former customers may be reasonable in order to allow for at least for one annual renewal insurance period without the former agent's competitive solicitation.

To determine the reasonableness of an employment restrictive covenant, the court employs a three-pronged test: (a) whether the restriction is greater than necessary to protect the legitimate interest of the employer; (b) whether the restriction imposes an undue hardship upon the employee; and (c) whether the restriction is injurious to the public interest. If any of these questions are answered in the affirmative, the restriction is unreasonable and unenforceable. In determining whether the restrictive covenant is reasonable, the Court will look only to the time when the contract was entered into.

In the above case, the court found that the employment restrictive covenant was broader than necessary to protect Syncom's legitimate interest in its good will or confidential information that Wood and Hogan may have acquired about Syncom's customers during the course of their employment. The court also noted that Wood and Hogan had challenged both geographical and temporal scope of the restrictive covenants and both of those aspects of the covenants are also open to possible reformation depending on the trial court's factual determinations.

The appellate court ruled that issue of possible reformation of the restrictive covenant, rather than voiding it as wholly unenforceable, was remanded to the trial court to rule upon based upon the trial court's factual determinations. There will likely be a damage award assessed against these employees based upon the court's appellate decision, and it is probable that the amount of those damages will be reduced.

J. Daniel Marr is a director and shareholder of Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and business persons on a variety of legal issues, including employment, and advocating on their behalf. You can reach Attorney Marr by e-mail at: dmarr@hamker.com

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