A Connecticut state court recently found non-compete/non-solicitation agreements unreasonable and therefore unenforceable because the agreements did not protect any legitimate business interest. Creative Dimensions, Inc. v. Laberge is an unusual case in that the court found the agreements were reasonable in terms of their geographical and temporal restrictions, but nevertheless invalidated the agreements because they were inherently unfair to the employee-defendants. In reaching this conclusion, the court balanced the employee-defendants’ inability to work for 18 months against the employer’s failure to identify a protectable interest justifying the 18-month restriction.
The defendants sold their business to the plaintiff in 2005. As part of the sale, the company hired the defendants as vice presidents and, pursuant to the purchase agreement and an employment agreement, the parties executed non-compete and non-solicitation agreements. The agreements prohibited the defendants from competing with the company, soliciting its business or suppliers, or soliciting its employees for a period of 18 months from termination of employment.
In 2009, the initial employment agreements ended and the parties executed new employment agreements, by which the defendants relinquished their vice president titles and accepted diminished roles with significantly lower salaries. The defendants did not execute new restrictive covenants in connection with their new employment agreements.
Shortly after executing the new employment agreements, the defendants resigned from the company and joined its competitor. When the company sued to enforce the non-compete/non-solicitation agreements, the defendants argued the agreements became unenforceable when they changed positions and executed the new employment agreements.
The court held that the execution of the new employment agreements did not render the original restrictive covenants unenforceable. The court did find, however, that the circumstances of the defendants’ newly diminished positions rendered the agreements unenforceable.
In evaluating the enforceability of the agreements, the court assessed the five factors that Connecticut courts deem important when determining whether to enforce a restrictive covenant, i.e.: (1) the length of the restriction; (2) the geographical area covered; (3) the fairness of the protection afforded to the employer; (4) the extent of the restraint on the employee’s opportunity to pursue an occupation; and (5) the extent of interference with the public’s interest.
Citing the Connecticut Supreme Court, the court noted that a restrictive covenant must seek to protect against something other than mere competition, such as impairment of goodwill the purchaser acquired through sale of a business, the use of customer lists, or trade secrets. The court in Laberge found that the restrictive covenants at issue essentially prohibited the defendants’ competition solely for the sake of prohibiting competition.
Reasoning that the fairness of the protection afforded the company was overly broad and unnecessary to protect its business, the court noted that the company did not require any of its sales employees, other than the defendants, to execute restrictive covenants. Nor did the company require its competitors to whom it regularly outsourced certain business to execute such agreements. The court found these facts to be strong evidence that the company itself did not truly believe that the defendants’ non-compete/non-solicitation agreements were necessary to protect the company.
The important take away from Laberge is to ensure that an employment agreement prohibiting competition or solicitation is necessary to protect some legitimate business interest. To protect against an adverse ruling invalidating a restrictive covenant, a prudent employer should specify the legitimate business interest it seeks to protect in the terms of the restrictive covenant. In addition, the restrictive covenant should apply to all employees in a certain class of employees to ensure that the employer’s interest is fully protected. Employers should avoid blanket prohibitions on competition or solicitation that do not have any practical application. A restrictive covenant that does not seek to protect against something other than mere competition, e.g., the use of trade secret or confidential information, is likely unreasonable and unenforceable.