It is well-established that an injunction to enforce a non-compete provision should not extend beyond the period set forth in the non-compete agreement. Whether based on the belief that a contract should be enforced as written or because restrictive covenants are generally not favored by law, the majority of courts have declined to enforce a non-compete provision beyond the expiration of the period set forth in the agreement. In its March 1, 2012 decision in Finkel v. Cashman Prof. [pdf], the Nevada Supreme Court reinforced this rule. The New Jersey Supreme Court has reached the same conclusion. See Community Hospital Group v. More, 183 N.J. 36, 63 (2005). But have the courts considered whether this solution is sufficient? In an effort to enforce the plain terms of the contract, are courts depriving employers of the benefit of their bargain? Some argue that in limiting a non-competition injunction to the period provided for in the non-compete agreement, courts have largely failed to award the relief necessary to fully compensate employers for the injuries incurred by a breached non-compete provision.
In New Jersey, courts follow the rule that non-competes should not extend beyond the period set forth in the non-compete agreement with one catch: a non-compete provision may be enforced beyond the expiration of the term in the agreement if no other relief (i.e. monetary damages) is available. In Jackson Hewitt, Inc. v. Childress, 2008 U.S. Dist. LEXIS 4640 (D.N.J. 2008), the district court issued a twenty-four month injunction, prohibiting the defendant from competing with the company, but only because it was evident monetary damages were not available. In Childress, the defendant, who had “openly refused to comply” with his non-compete obligations, filed for bankruptcy two days after the company brought suit seeking a preliminary injunction. By the time the district court addressed the issue, the twenty-four month non-compete period had expired. At that point, because the defendant filed for bankruptcy (discharging the plaintiff’s claim), issuing a new twenty-four month injunction, based on the non-compete period in the contract, was the only remedy for the plaintiff’s injury.
The question is whether a non-compete provision should be enforced as written, and expire at the end of the period specified by the contract, as in More and Finkel, or whether the injured party is entitled to an injunction prohibiting the breaching party from competing for the full period set forth in the agreement, as done in Childress. While the Childress court prohibited the defendant’s competitive behavior for an extended twenty-four month period, the court explained that this remedy was issued only because a monetary remedy was not available. To remedy wrongful competitive behavior, an injunction should issue prohibiting competitive behavior for the full non-compete period set forth in the contract. This is not to say that the injured party should not be entitled to damages; rather, an injunction reflecting the duration anticipated by the non-compete provision should issue separate and apart from a monetary award to compensate the injured party for damages incurred.
Some argue that to enforce the full non-compete period (for example, 12 months), in addition to providing monetary damages, would amount to a double recovery for the injured party. This is not the case. For example, if an employee subject to a 12-month non-compete provision separated from his employer on January 1, 2012 and abided by the non-compete term, which would expire on December 31, 2012, he would have engaged in no competitive activities during the non-compete period and the company would have suffered no injury.
If, however, the former employee began to engage in competitive activities shortly after he separated from employment on January 1, 2012, and the company discovered the breach on April 1, filed a lawsuit on April 15, and obtained a preliminary injunction on July 1, according to the decisions in More and Finkel, the non-compete would only remain in effect until January 1, 2013, the date the non-compete period would have ended pursuant to the contract. In this case, the employer would suffer two separate injuries: (1) the loss of the 12-month non-compete period it bargained for; and (2) the damages incurred by the former employee’s nefarious activities in breach of the agreement.
Employers should be aware that the current rule generally enforces a non-compete provision only through the contractual expiration of the term, which only partially addresses the employer’s injury. To make the injured party whole, a 12-month injunction (to address the first injury), in addition to monetary damages (to address the second injury) would be necessary to provide the company a complete recovery from a former employee’s breach of a non-compete agreement.
An Alternative Solution
Because courts may continue to issue preliminary injunctions focusing on the non-compete period provided in the agreement, employers may want to consider adding language to the non-compete agreements to ensure they will receive the benefit of the full non-compete period in the event of the employee’s breach. In a recent New York Appellate Division case, the court supported this creative solution.
In Delta Enterprise v. Cohen [pdf], a New York appellate court held that, in issuing a preliminary injunction, the trial court should have enforced the tolling provision set forth in a confidentiality agreement. In Cohen, the agreement contained language that provided for the tolling of various restrictive periods “during any period in which the Employee is in violation” of the restrictive covenants, and that “all restrictions shall automatically be extended by the period Employee was in violation of any such restrictions.” In determining that the company was entitled to the restrictive period contained in the agreement, the court rejected the employee’s arguments that the tolling provision was, as a matter of law, unenforceable or in violation of public policy, particularly in light of the consideration the employee received.
In light of Cohen, companies should consider adding tolling language to their non-compete agreements to ensure they will receive the benefit of the full non-compete period anticipated by the agreement. Without such language, a company can expect to receive only partial recovery for the injuries incurred due to a former employee’s failure to abide by his non-compete obligations.