A recent New Hampshire decision serves as a reminder that courts may treat non-compete provisions differently in the context of independent contractor agreements compared to employment agreements.
Summary. The Presiding Justice of the New Hampshire Superior Court held earlier this month that, under the circumstances of the case before him, a non-compete covenant imposed restraints on an independent contractor “greater than necessary to protect the legitimate interests” of the plaintiff.
The covenant. Woodward was a personal trainer. His relationship with Brian’s 1:1 Fitness, a training facility, began as an employee. Subsequently, he executed annual independent contractor agreements. He paid Brian’s a “rental” fee in exchange for use of the employer’s space and equipment for training his clients. He alone determined the training regimen of his clients, he kept 100% of the fees they paid, and he was not subject to any control by Brian’s.
Like each other trainer at Brian’s, Woodward was subject to a non-competition agreement. It provided that for two years after the end of his relationship with Brian’s, he would not compete within 25 miles of places where it conducted business. In addition, he was precluded from providing personal training services to any client who had been served by Brian’s within two years prior to his termination.
The lawsuit. Shortly after he resigned from Brian’s, Woodward opened his own facility. Three trainers and a number of clients left Brian’s and joined him. Brian’s sued him and asked the court to issue a preliminary injunction enforcing the non-compete. The court refused.
Reasons for the ruling in favor of Woodward. There is no New Hampshire Supreme Court precedent regarding the standards to apply in determining the reasonableness of a non-compete covenant in an independent contractor agreement. According to a 2006 Delaware Chancery opinion cited by the New Hampshire Superior Court justice, the subject has not been discussed in many reported rulings, but most jurisdictions addressing it have held that those standards parallel the ones used in analyzing similar clauses in employer-employee contracts. However, both the Delaware Chancery Court judge and the New Hampshire justice rejected those holdings.
According to the New Hampshire justice, as compared with employees, “[I]ndependent contractors have less access to legitimately confidential information of their employers.” Moreover, according to the court, independent contractors are more likely to bring their own strengths and abilities to the enterprise, have a less intimate relationship with the employer (for example, an employee may be expected to perform other reasonable tasks as needed), and traditionally work with less supervision. Also, the court reasoned that the employer typically would not be responsible for torts committed by an independent contractor but would be liable for damages caused to others in the course of an employee’s employment.
In the justice’s view, the covenant Woodward signed exceeded Brian’s legitimate interests. It was “simply a restraint of trade which is not in the public interest.” Brian’s 1:1 Fitness v. Woodward, No. 2012-CV-00838 (Merrimack, SS (NH) Superior Court, 8/8/13).
Takeaways. Not many reported cases deal with the standards to be applied in determining the enforceability of a non-competition clause in an independent contractor agreement. Some judges simply state that the rules should be the same as for an employee and employer.
Other courts analyze the relationship to determine how dissimilar it is to the employer-employee model. In those jurisdictions, if the contractor truly is independent, receiving no salary, wages or benefits from the employer, and not subject to the employer’s control in any respect, a restrictive covenant is more challenging to enforce. Thus, an employer whose agreement with an independent contractor contains a non-compete clause may be able to avoid the costs and risks that would be incurred if the individual were denominated an employee, but the price may be invalidation of the covenant. Accordingly, add non-compete enforcement to the checklist that companies should analyze when deciding between employee or independent contractor classification.