Court: Worker breached non-competitive pact
Published 05/10/07

The New Hampshire Supreme Court on May 3, 2007 issued an opinion that addresses when a breach of a non-competition employment covenant by an employee can result in his loss of severance pay, and perhaps an order that he reimburse the attorney's fees incurred by his former employer for litigation involving his contractual violations.

The case is ACAS Acquisitions (Precitech, Inc.) v. Stephen C. Hobert . In that case, Stephen Hobert signed a non-competition and non-disclosure agreement with ACAS. While still employed by ACAS, Mr. Hobert assisted a company called Accura to set up a competitive business through identification of corporate opportunities, disclosure of confidential information, advice regarding marketing and solicitation of ACAS customers so that Accura would be poised to enter into the market. Thereafter, Hobert was terminated from his employment at ACAS began working for Accura.

Hobert contended that the precision grinding and turning machines that Accura was making were not the same high precision caliber as ACAS, and therefore they were not competitors. The trial court found that although Accura's basic machine did not compete with ACAS machines, a customer could add components touted by Accura to the basic machines that would enable the machine to directly compete with ACAS machines. Furthermore, prior to the litigation Accura promoted its basic machine as having capabilities comparable to those of the ACAS machines.

The trial court ruled that Hobert: (1) violated his non-competition and non-disclosure agreements with ACAS; (2) violated his fiduciary duties to ACAS; (3)  violated the Uniform Trade Secrets Act, RSA 350-B; (4) forfeited his rights to severance benefits and had to return severance payments he had received; and (5) was liable for ACAS' attorney's fees. The Supreme Court affirmed that decision.

For the Court to determine whether or not a restrictive covenant ancillary to employment is reasonable it will engage into a three part inquiry: (1) whether the restriction is greater than necessary to protect the legitimate interests of the employer; (2) whether the restriction imposes an undue hardship upon the employee; and (3) whether the restriction is injurious to the public interest. The legitimate interests that may be protected include trade secrets and other confidential information and the employee's contact with, and special influence over, customers.

Hobert had served as the Vice President of Sales for ACAS, and in a similar capacity for its predecessor Precitech. In those roles he had unfettered access to all of ACAS' trade secrets and confidential company information and substantial contacts with an influence over customers and potential customers. Moreover, he had participated in the production of a strategic memo that outlined much of ACAS' company information, strategies and customers. The Court found that preventing Hobert from using this information and influence to the detriment of ACAS was certainly within its legitimate interests.

The non-competition agreement prohibited his competition for a period of two years after his termination of employment. Under the facts of the case, the Court concluded that allowing two years for the public to disassociate Hobert from ACAS after his many years there and for his replacements to demonstrate their effectiveness was reasonable. The Court also noted that in this case Hobert at the time the contract was made understood that the non-competition agreement would force him to relocate.

For this reason, Hobert negotiated a one year salary severance package in exchange for signing the contract. Where Hobert had negotiated a substantial severance package in exchange for decreasing the sting of the restrictive covenant and with the full understanding that he might need to relocate, the Court could not say that the covenant unnecessarily interfered with his ability to follow a particular trade or from using the skills and knowledge he had obtained. Therefore, it did not impose an undue hardship upon him. Furthermore, preventing Hobert from competing with ACAS in the high precision grinding and turning machine industry would not be injurious to the public interest.

ACAS had first terminated Hobert without cause. Under the agreement, their firing him without cause entitled him to the one year in severance payments. If he had been fired for cause, he would not have been so entitled. Hobert contended that since he had been fired without cause, notwithstanding the fact ACAS did not then know of his breach of the non-competition and non-disclosure agreements, ACAS was obligated to pay the remainder of the severance payments and that he should not have to disgorge the previous severance payments paid to him.

The Supreme Court disagreed. Particularly, the Court found that in a breach of contract action, after acquired evidence of employee misconduct is a defense to the breach of contract action for wages and benefits lost as a result of discharge if the employer can demonstrate that it would have fired that employee had it know of the misconduct. The Court found that had ACAS known of the defendant's violations prior to his termination without cause, it would have terminated him for cause.

Hobert also contended that the provision in contract that permitted a prevailing party in a breach of the contract suit to get its attorney's fees awarded was unreasonable because it imposed a hardship on employees in a close case such as this one, in that Hobert had continually contended that Accura was not in competition with ACAS.

The Court noted, however, that the non-competition agreement provided that Hobert had the right at anytime during the non-competition period to provide written notice to ACAS, containing all details of a proposed business activity he was considering entering into, and that ACAS was require to respond within 15 days of the notice with an opinion as to whether or not the proposed business activity would violate the non-competition agreement. Had Hobert done so prior to entering into a business relationship with Accura, the Court found that he could have avoided the imposition of an award of attorney's fees.

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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