Court Invalidates Non-Compete Contract for Unreasonable Restrictions
November 29, 2011
Court Invalidates Non-Compete Contract for Unreasonable Restrictions
Trans-Clean Corp. v. Terrell, 1998 Conn. Super. LEXIS 717
Trans-Clean Corp. was a company engaged in the business of restoring exteriors and interiors of commercial buildings. The company began to employ Mr. Alton Terrell as a salesman and manager in December 1990 in connection with the company’s acquisition of Travel Washer, Inc.. The parties executed an employment agreement that created a one-year term of employment, specified the compensation schedule, and contained a non-competition covenant. The non-compete agreement stated that Mr. Terrell was prohibited for two years following the completion of his employment contract or any renewal thereof from competing with Trans-Clean within sixty miles of the company’s main office in Stratford, CT. The parties negotiated a pay increase in 1993 and a new compensation schedule was created. Trans-Clean considered this a renewal of the original employment contract and held the belief that the non-compete agreement was still valid and in effect. Mr. Terrell however did not share the same view and did not treat the pay increase and new compensation schedule as a renewal of the original contract. While the parties had different interpretations of the pay increase, there were no direct discussions to clarify its characteristics.
Mr. Terrell suddenly resigned from Trans-Clean in September 1997 and proceeded to create his own commercial restoration company and solicited business from individuals/businesses on Trans-Clean’s customer list. Trans-Clean sued Mr. Terrell and asked the court to issue an injunction to enforce the non-compete agreement and prevent any further violations. The court had to tackle two central issues to decide the dispute: 1) whether customer lists are protected trade secrets and 2) the nature and reasonableness of the employment contract and non-compete agreement. It held that the lists were not trade secrets that entitled Trans-Clean to an injunction and further concluded that the non-compete agreement was unreasonable and unenforceable.
The court held that the customer lists were not trade secrets or confidential information that required protection. There was never a company policy to designate the lists as confidential information or maintain a degree of secrecy of customers or contact persons. Furthermore, each salesperson maintained his or her own personal contact lists and did not have any direct access to other sales representatives’ lists. Each salesperson had the responsibility of developing his or her list, maintaining business relationships, and collecting accounts. These lists did not amount to a business interest for which Trans-Clean was entitled to protection and injunctive relief.
Next, the court assessed the reasonableness of the covenant not to compete and found that its provisions, specifically the geographical restriction, were unreasonable and unenforceable. The sixty-mile radius restriction covered 75% of Connecticut, including the state’s six major metropolitan areas (Bridgeport, New Haven, Hartford, Waterbury, Stamford, and Danbury), and extended into parts of New York (including four out the five boroughs) and New Jersey. The restriction, according to the court, was overreaching and unnecessarily infringed on Mr. Terrell’s ability to purse his occupation and obtain future employment. He had twenty years of experience in the commercial restoration industry and it was the only field in which he had ever worked.
Lastly, the court analyzed whether the pay increase and modification of the compensation schedule amounted to a renewal of the original agreement. The court stated there was a “question of fact” that it needed to answer in order to decide the case. It noted that the writing drawn up by the company regarding the pay increase did not make any reference to the original employment contract and there was no apparent connection between the two writings. In the absence of any reference or connection, the court concluded that the pay increase was not a renewal or extension of the original employment contract. The court noted however that Mr. Terrell “should be bound by the non-compete agreement if that agreement is found to be reasonable”. The court’s earlier analysis revealed that the covenant was in fact unreasonable, thereby overriding Mr. Terrell’s obligation to abide by its provisions.
If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.
Court Modifies Geographical Restriction in order to Enforce a Non-Compete Contract
November 29, 2011
Court Modifies Geographical Restriction in order to Enforce a Non-Compete Contract
Eastcoast Guitar Center, Inc. v. Tedesco, 2000 Conn. Super. LEXIS 320
Eastcoast Guitar Center, Inc. was a company based in Danbury, CT and employed Mr. Richard Tedesco as a sales/customer service representative from 1997 to 1999. The company had Mr. Tedesco sign a non-compete contract on January 27, 1997 that prohibited him for one year following his termination from competing directly or indirectly with Eastcoast Guitar within a one hundred mile radius of the store’s location at 25 Hayestown Road, Danbury, CT. This provision created a protected/prohibited area that included the entire state of Connecticut and extended into portions of Massachusetts, New York, and Rhode Island. Eastcoast Guitar terminated Mr. Tedesco’s employment on August 16, 1999 and he began to operate his own company known as Guitar Hangar, an internet-based guitar sales company. Eastcoast Guitar sued Mr. Tedesco in Connecticut state court for violation of the non-compete contract and requested that the court issue an injunction to enforce the restrictions and prevent further violations of the covenant.
The court found in favor of Eastcoast Guitar and enforced the non-compete contract on a modified basis. In its analysis, the court applied the five-prong test to assess the enforceability of the non-compete contract as stated in Robert S. Weiss & Associates, Inc. Wiederlight, 208 Conn. 525 (1988). Specifically, the court looked at: 1) the scope of the time restriction, 2) the scope of the geographical restriction, 3) the protection afforded to the employer, 4) the restraint of the employee’s ability to obtain future employment, and lastly 5) the extent the agreement interfered with the public’s interest. All of these factors must be reasonable in order for a plaintiff to be entitled to injunctive relief in a legal dispute.
The court, after reviewing all the evidence and testimony, found that the agreement satisfied the factors with exception of the geographical restriction. It recognized that the company had a valid business interest that deserved protection and as such changed the geographical restriction from one hundred miles to thirty miles and ordered that the agreement be enforced. The one hundred mile radius was too broad and overreaching according to the court and it felt that its modification of the restriction to prohibit only Fairfield, Litchfield, and New Haven counties was reasonable and legally acceptable under Connecticut law.
If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.
Court Enforces Non-Compete Clause Against Real Estate Agent
November 29, 2011
Court Enforces Non-Compete Clause Against Real Estate Agent
Century 21 Access America v. McGregor-Mclean, 2004 Conn. Super. LEXIS 3239
Century 21 Access America is a national real estate company that employed Ms. Tori McGregor-Mclean as a real estate agent in it Bridgeport, CT office from July 2003 to June 16, 2004. Her employment contract, dated July 7, 2003, contained a non-compete clause that prohibited her for a two-year period following termination from engaging in competing business activities within a fifteen-mile radius of 3850 Main Street, Bridgeport, CT. Ms. McGregor-Mclean voluntarily terminated her employment on June 16, 2004 and began to work for Buyer’s Capitol Real Estate, a company located outside of the fifteen-mile radius in Stamford, CT. Century 21 did not have a problem with her new employment because the office was located outside of the prohibited area but issues arose when Ms. McGregor-Mclean began accepting listings within the fifteen-mile radius. Century 21 sued Ms. McGregor-Mclean in Connecticut state court for violation of the non-compete clause and requested that the court issue an injunction to enforce the agreement.
The court found that Ms. McGregor-Mclean’s activities with her new real estate agency were in fact violations of the non-compete agreement and it ordered that the provisions be enforced. The plain language of the non-compete clause stipulated that Ms. McGregor-Mclean was prohibited from carrying out any direct or indirect competing business activities within the defined fifteen-mile radius. She was in breach of the agreement because she accepted five listings within the prohibited area- it is inconsequential as a matter of law that her office was located outside of the fifteen-mile radius. Under the agreement, she was prohibited from having a physical business presence and transacting individual deals within the defined area. The court identified the unlawful breaches of the non-compete clause, concluded that the agreement was valid and reasonable, and issued an injunction to enjoin Ms. McGregor-Mclean from further violations of the covenant not to compete.
If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.
Implied Duty to Not Disclose Trade Secrets and Exceptions to the Rule
November 28, 2011
Implied Duty to Not Disclose Trade Secrets and Exceptions to the Rule
Booth Waltz Enterprises v. Kimlingen, 2004 Conn. Super. LEXIS 2682
Booth Waltz Enterprises was an automotive and industrial lubricant distributor based in Hartford, Connecticut that transacted with auto dealers, fleet owners, and public entities. Mr. Kevin Kimlingen worked for Booth Waltz as a sale representative from April 2000 to October 2003. Booth Waltz’s management was impressed by Mr. Kimlingen’s practice of “rolling”, the art of convincing his customers to follow him to a new employer. He “rolled” forty-five accounts to Booth Waltz within his first month at the company. Booth Waltz took advantage of Mr. Kimlingen’s talents to acquire many new clients when the company hired him but it was very cognizant that it would have to take measures to protect its interests given his history of mobility and “rolling” within the industry. In the summer of 2003, Booth Waltz prepared a non-solicitation agreement for its employees to better regulate the activities of its sales staff. Mr. Kimlingen expressed great reluctance to sign the restrictive covenant when he received it in October 2003 and Booth Waltz assumed he resigned from its employ when he failed sign the agreement or attend a mandatory staff meeting.
Mr. Kimlingen began to work for U.S. Lubes, a direct industry competitor, and he began “rolling” his Booth Waltz accounts to his new employer. Booth Waltz sued Mr. Kimlingen in Connecticut state court and sought injunctive relief to prevent any further solicitations of its customers. Booth Waltz argued that although Mr. Kimlingen may not have breached an actual restrictive covenant, his actions violated the Connecticut Uniform Trade Secrets Act, which by default prohibited certain competitive activities. The company argued that the customer lists Mr. Kimlingen took with him to his new employer was Booth Waltz’s sensitive and proprietary information. Former employees may compete with a former employer in the absence of a non-compete agreement, but her or she is still bound by a duty to not disclose trade secrets or confidential information acquired during his or her employment to the detriment of the former employer.
The court ultimately held that Mr. Kimlingen did not violate a covenant or implied duty by “rolling” clients from Booth Waltz to U.S. Lube. The vast majority of these account had long-standing relationships with Mr. Kimlingen that pre-dated his employment with Booth Waltz. The court concluded that these customer relationships were not property of Booth Waltz and the company had no authority or legal right to label the contact information as its proprietary information. The court noted, “in the absence of a covenant not to compete, an employee who possessed the relevant customer information prior to the former employment is free to use the information in competition with the employer after termination of the employment relationship” (Restatement (Third), Unfair Competition § 42, comment f).
The court denied Booth Waltz’s request for an injunctive in light of no legally binding restrictive covenant or an implied duty.
If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.
Inadequate Evidence to Prove Indirect Solicitation
November 28, 2011
Inadequate Evidence to Prove Indirect Solicitation
PCRE v. Unger, 2010 Conn. Super. LEXIS 1129
Ms. Adele Unger worked for Prudential Reality and signed an employment agreement with the company at the start of her employment that contained a non-compete clause. The restrictive covenant prohibited her for a period of one year following termination from directly or indirectly influencing any Prudential Reality employee to sever his or her employment/association with the company or any of its subsidiaries. Upon termination from Prudential, Ms. Unger began to work as a real estate agent for Paul Breunich and William Pitt Real Estate, LLC. She notified the company’s President and Chief Financial Officer (Mr. Paul Breunich) of the existence of the restrictive covenant with her former employer and that she was legally prohibited from recruiting Prudential agents to work for the company. Mr. Breunich, in connection with his management positions, solicited/recruited agents for offices where the office manager was a signatory to a non-compete agreement with a former employer. Ms. Unger did not solicit any agent from her former employer or furnish her new company with any information but Mr. Breunich did contact several Prudential agents to inquire if they were interested in switching companies. Prudential sued Ms. Unger and her new employer for violation of the restrictive covenant, alleging that Mr. Breunich’s actions constituted an indirect solicitation by Ms. Unger, a business activity expressly prohibited in the employment agreement.
The court denied Prudential’s request for injunctive relief and held that Ms. Unger had not directly or indirectly violated the restrictive covenant contained in the employment agreement. The parties did not dispute that Mr. Breunich contacted and solicited Prudential agents, but the court did find any evidence that Ms. Unger provided him with any information to assist in his solicitations. There was no conscious disregard for the restrictive covenant by Ms. Unger, in either a direct or an indirect manner. It would be an entirely different case if Ms. Unger’s superiors had solicited Prudential agents based on proprietary information she gained while working for her former employee, but this was not at all the circumstances of the case. Prudential was not able to present adequate and convincing evidence that Ms. Unger had in any way violated the restrictive covenant and as such, the court denied the company’s request for an injunction against Ms. Unger.
If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.
Court Grants Motion for Transfer to California District Court in Non-Compete Agreement Dispute
November 28, 2011
Court Grants Motion for Transfer to California District Court in Non-Compete Agreement Dispute
United Rentals, Inc. v. Pruett, 296 F. Supp.2d 220
United Rentals, Inc. was a Delaware corporation with headquarters in Connecticut that employed Mr. Lawrence Pruett from May 2001 until August 2003 in its San Juan Capistrano, CA office. He first worked as a salesperson and then the company promoted him to branch manager. Mr. Pruett signed an Employment Agreement after verbally accepting the branch manager position wherein he agreed to restrictive covenants preventing employment with a competitor, soliciting the company’s customers, or from disclosing trade secrets. The agreement contained a choice of law provision that stated Connecticut law would govern legal disputes arising from the agreement and that courts (federal or state) in Fairfield County had exclusive jurisdiction. Mr. Pruett abruptly resigned in August 2003, began to work for one of United’s competitors, Brookstone Equipment Services, and allegedly solicited United’s customers. United Rentals sued Mr. Pruett in federal court for violation of the non-compete agreement and requested that the United States District Court of Connecticut enforce the provisions of the agreement. Mr. Pruett however submitted motions to dismiss and to transfer the case to a court in California, where he lived and worked.
The court denied Mr. Pruett’s motion to dismiss but granted his motion for transfer, handing the case over to the Central District of California. The central issues of the case were the enforceability of the forum selection clause and the court’s ability to transfer the case to another district court. Mr. Pruett argued that it was unenforceable because he “lacked notice of its existence, because the clause is unreasonable, and because it was the product of United’s overreaching”. The court mentioned two United States Supreme Court cases, M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), and Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991) to establish the federal judicial system’s attitude toward forum selection clauses and their enforceability. In Bremen, the court held that the clauses are valid and enforceable so long as there is no showing that it would be unreasonable or unjust. This case reversed American courts’ “long-standing hostility to forum selection clauses”. In Carnival, the court held that a forum selection clause was enforceable only if both parties were aware of its existence. In the current case, the court denied the motion to dismiss and found that the clause was reasonable and that the written contract had indeed provided Mr. Pruett with adequate notice of its existence.
The court did however grant Mr. Pruett’s motion for transfer under 28 U.S.C. 1404(a) which authorizes district courts to transfer civil action to other districts “for the convenience of parties and witness, [and] in the interest of justice”. In reaching this decision, the court analyzed the convenience of the parties, the existence of the forum selection clause, and factors of systemic integrity and fairness. Mr. Pruett bore the burden of proof to show that the transfer was in the best interest of justice and the court concluded that he meant his burden. All the witnesses for the case lived in California, the actions that led to the suit took place in California, and the vast majority of documentary evidence (sales records, advertising information, customer lists, etc.) was in California. With regard to justice, United Rentals asserted that a transfer to a district court in California would deprive it of uniform treatment of its employment contracts. The court recognized that Connecticut and California law greatly differ on their treatment of non-compete agreements but concluded that California had a materially greater interest in the case “because the impact of this litigation will be felt entirely in California”. Furthermore, the court noted that California had a right to apply its own laws in order to protect its residents from anti-competitive measures by out-of-state employers that are contrary to California’s established public policy.
This case demonstrates that the convenience of the parties and the interests of justice can at times outweigh a contractual forum selection clause. The court analyzed these factors and concluded that the facts surrounding the case favored a transfer of venues to a district court in California.
If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.
Termination Does Not Invalidate a Non-Compete Agreement
November 28, 2011
Termination Does Not Invalidate a Non-Compete Agreement
Built In America, Inc. v. Morris, 2001 Conn. Super. LEXIS 2953
Mr. Michael Morris was the owner of Built In America, Inc. until he sold his entire stock in the company to Mr. Marc Costa in October 2000. The parties executed a Purchase and Sale Agreement that legally transferred the stock and ownership of the company. The transaction included an employment contract for an initial period of two years and a non-compete clause that became effective upon Mr. Morris’s termination from the company. The company terminated Mr. Morris in April 2001 and he proceeded to work in direct competition with his former employer. Mr. Costa and Built In America sued Mr. Morris for violation of the non-compete agreement and asked the court to enforce the agreement’s provisions. Mr. Morris argued that the restrictive covenant was null and void because the company had breached the employment agreement when it unlawfully terminated his employment.
The court found in favor of Built In America, ordered the enforcement of the covenant not to compete, and issued an injunction. There was no dispute over the reasonableness of the covenant, only a dispute over whether it became void when the company allegedly improperly terminated Mr. Morris. Built In America cited previous Connecticut cases, most notably Robert S. Weiss & Associates, Inc. v. Wiederlight (208 Conn. 525 (1988)), where the court held that termination did not invalidate a non-compete agreement. Furthermore, the court concluded that the company was justified with respect to its decision to terminate Mr. Morris’s employment, stating that his “behavior was so outrageous that one is left to believe he was inviting his discharge”. The court ultimately concluded that the covenant was legally binding and ordered its enforcement.
If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.
Court Invalidates Non-Compete Agreement for Excessive Restraint of Trade
November 18, 2011
Court Invalidates Non-Compete Agreement for Excessive Restraint of Trade
CT Cellar Doors, LLC v. Palamar, 2010 Conn. Super. LEXIS 3247
CT Cellar Doors was a Connecticut company owned by Mr. Claude Raffin that designed and installed custom metal basement entry doors, windows, and other accessories. Mr. Raffin hired Mr. Stephen Palamar in January 2006 as an installer and later promoted him to operations foreman on August 21, 2007. The promotion involved a substantial pay raise conditioned on Mr. Palamar signing a “noncompetition-nondisclosure agreement”. The parties executed the restrictive covenant wherein Mr. Palamar agreed to not compete with CT Cellar Doors anywhere within the state of Connecticut for three years following his termination from the company. Mr. Palamar voluntarily terminated his employment on May 24, 2010, registered himself as a home improvement contractor with the Connecticut Department of Consumer Affairs, and began doing business as Custom Cellar Doors. His new company advertised and performed the same services he performed while in CT Cellar Door’s employ.
CT Cellar Doors sued Mr. Palamar in Connecticut court for “irreparable harm to its goodwill, reputation, and name” and requested injunctive relief because there was no adequate remedy at law. Both parties agreed that the central issue of the case was “whether the agreement was enforceable under Connecticut law”. The court and parties likewise recognized that CT Cellar Doors had the burden to show that both parties signed the agreement and that Mr. Palamar had violated its provisions. Once/if those were established, then Mr. Palamar bore the burden to show that the agreement was unenforceable. The parties did not dispute, as a matter of fact, that the agreement was signed and that Mr. Palamar violated its terms. The dispute is over whether, as a matter of law, the agreement is valid and enforceable. The court ultimately found in favor of Mr. Palamar and held that the agreement executed by the parties was unreasonable and unenforceable.
Mr. Palamar presented two arguments to address whether the agreement was reasonable under Connecticut law: 1) the agreement had inadequate consideration and 2) it was an unreasonable restraint of trade. The court rejected the first argument, noted the substantial pay raise Mr. Palamar received, and held that it constituted adequate consideration. Although that defense failed, the court agreed with Mr. Palamar that the agreement was an excessive restraint of trade and the agreement was unreasonable because it denied him the right to earn a living in his chosen profession that he had had for twenty-five years. The court also noted that CT Cellar Doors did not present adequate evidence to demonstrate that they had experienced or were likely to experience irreparable harm. At the time that litigation began, CT Cellar Doors had fifty clients while Mr. Palamar only had two. CT Cellar Doors was not able to articulate a claim and present evidence that Mr. Palamar’s actions had damaged its business operations.
While CT Cellar Doors had a legitimate business interest to protect, the provisions of the non-compete went too far and placed oppressive occupational restraints on Mr. Palamar and excessively restricted his ability to secure future employment in his chose profession. This lack of balance between the interests of the parties ultimately led the court to find the restrictions unreasonable and for it to invalidate the non-compete agreement.
If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.
Court Grants Legal and Equitable Relief in Breach of Non-Compete Agreement
November 18, 2011
Court Grants Legal and Equitable Relief in Breach of Non-Compete Agreement
National Truck Emergency Road Service, Inc. v. Peloquin, 2011 Conn. Super. LEXIS 2393
National Truck Emergency Road Service, Inc. (National Truck) was a Massachusetts corporation that engaged in interstate commerce by providing emergency road service to heavy and medium duty trucks and vans for local and national fleets. The company hired Mr. Barry Peloquin on August 25, 2008 to work as a customer service representative. The next day, the parties executed a non-compete agreement that prohibited Mr. Peloquin, for five years following termination, from working at a competing company within five hundred miles of the company’s headquarters located at 320 Main Street, Southbridge, MA. The agreement also stated that Mr. Peloquin was obligated to return any company property upon termination and contained a non-disclosure provision. Most importantly however, the covenant not to compete stipulated that in the event of a breach, National Truck would be entitled to “remedies allowed by law and equity”, therefore permitting National Truck to receive monetary damages and injunctive relief.
National Truck terminated Mr. Peloquin on October 20, 2009 and he soon found employment with a competing company in Connecticut and began servicing National truck’s customer YRC. The company sued Mr. Peloquin for illegally appropriating company lists and other protected intellectual property in conjunction with violating the non-compete agreement executed by the parties. The company asked the court to enforce the provisions of the non-compete and to order Mr. Peloquin to return all proprietary documents he took home during his employment with National Truck. The court found in favor of National Truck and granted both equitable and legal relief, although the injunction only addressed returning.
The court heard expert witness testimony and concluded that National Truck had $32,493.00 in damages directly attributable to illegal competition from Mr. Peloquin. The company experienced an unusual and dramatic drop off in business from YRC commencing shortly after Mr. Peloquin’s termination. Mr. Peloquin’s action created adverse financial consequences for National Truck, visible in the company’s lost profits and incurred expenses. While damages are not generally awarded in cases involving breach of a non-compete agreement, the agreement itself specifically stipulated that the employer (National Truck) would be entitled to them should the employee (Mr. Peloquin) violate the covenant. The court awarded National Truck the $32,493.00 in damages plus attorney’s fees and court costs.
The court was only willing to grant a portion of the injunctive relief sought by National Truck. It ordered that Mr. Peloquin return all National Truck documents within thirty days and abide by the non-disclosure clause. The court’s ruling however did not prevent his further employment with his current company because the court concluded that National Truck did not present adequate evidence to show that Mr. Peloquin violated the non-compete since litigation began or that he was likely to do so in the future. Without demonstrating the imminent threat of irreparable harm, National Truck was not entitled to injunctive relief with this specific matter.
If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.
Enforcing a Non-Compete Agreement in a Medical Partnership
November 18, 2011
Enforcing a Non-Compete Agreement in a Medical Partnership
Fairfield County Bariatrics and Surgical Associates, P.C. v. Ehrlich, 2010 Conn. Super. LEXIS 568
Doctors Neil and Craig Floch created Floch Surgical Associates in 1999 in Norwalk, Connecticut to provide medical and surgical services to patients. They decided to gear their practice towards bariatric surgery and hired Dr. Timothy Ehrlich, a board certified general surgeon and graduate of Louisiana State University School of Medicine, in 2002. He was granted surgical privileges at Norwalk Hospital and St. Vincent’s Hospital (in Bridgeport, CT) and operated as the only member of the medical group to perform bariatric surgeries exclusively. On January 1, 2006, the two Floch doctors and Dr. Ehrlich formed Fairfield Bariatrics and Surgical Associates, P.C. (FCB). Each doctor became a third shareholder in the professional corporation and signed identical employment agreements that outlined the compensation schedule, termination protocols, and included a non-compete agreement. The non-compete prohibited each doctor, for two years after termination, from practicing general medicine/surgery within fifteen miles of FCB’s main office in Norwalk and barred performing bariatric procedures at hospitals located in Stamford, Norwalk, Greenwich, Danbury, and Bridgeport.
Doctors Neil and Craig Floch voted to terminate Dr. Ehrlich in July 2009 and notified him of the decision in a letter dated July 30, 1999. They justified his termination by claiming that he repeatedly “misrepresented the group” and had lost his surgical privileges at Norwalk Hospital due to non-compliance with the hospital’s Trauma Service requirements. Dr. Ehrlich proceeded to form his own limited liability company, Ehrlich Bariatrics LLC, on October 22, 2009 and opened offices in Waterford and Trumbull. Both of these municipalities are located outside of the prohibited area created by the non-compete agreement but he also continued to perform operations at St. Vincent’s Hospital in Bridgeport, an activity expressly prohibited by the restrictive covenant.
FCB sued Dr. Ehrlich in Connecticut court and requested that the court enforce the provisions outlined in the non-compete agreement dated January 1, 2006. The court found in favor of FCB, determined that Dr. Ehrlich had violated a valid non-compete agreement, and enforced the provisions of the covenant not to compete. The court stated that the challenging party (Dr. Ehrlich for this case) bore the burden of proof to demonstrate that the agreement was unenforceable. He asserted that he had not been properly terminated and that the agreement itself was unreasonable, and therefore unenforceable. The court rejected both of these arguments and concluded that the agreement was valid and enforceable.
Dr. Ehrlich advanced the unconvincing argument that he was the victim of improper termination because the shareholders meeting at which the vote was taken to terminate his employment was not properly noticed pursuant to the corporation’s by-laws. He essentially contended that the “lack of notice renders his termination a nullity”. The court however disagreed with Dr. Ehrlich because a physician whose termination is being voted on is not entitled to cast a vote. The lack of voting power for this matter meant that his presence was not required and he was not entitled to notice of the special shareholders meeting where the vote was taken. The court ultimately concluded that Doctors Neil and Craig Floch had taken the proper and necessary steps in accordance with the corporation’s by-laws to terminate Dr. Ehrlich’s employment with FCB.
Next, Dr. Ehrlich unsuccessfully contended that the agreement contained unreasonable provisions and therefore the court was not obligated or permitted to order its enforcement. Discerning the reasonableness of a non-compete agreement required the court to balance the competing needs of the parties as well as the needs of the public. Furthermore, the challenging party must show that the provisions are unreasonable in scope. First, the court established that FCB did in fact have a legitimate business interest that necessitated protection. The company was entitled to protect potential new patients within a reasonably limited market area. FCB was only concerned with future patients and did not seek to prevent Dr. Ehrlich from providing follow-up services to current or past patients.
Next, the court addressed and cited a variety of case law that showed Connecticut courts’ history of enforcing non-compete agreements when they protect against “something other than mere competition”, including the use of customer lists, impaired of purchased good will, confidential data/trade secrets, use of information concerning potential clients in a limited area, or some other advantage the former employee acquired while working for the plaintiff company. The court found that Dr. Ehrlich had greatly benefitted from his association with FCB and that his continued actions would negatively affect the reputation and business operations of his former employer.
Lastly, the court took time to address the differences between non-compete agreements for an employer-employee relationship and those for partnerships. It held that since there was not unequal bargaining power or impaired ability to earn a living, the provisions were not unreasonable in scope. The court noted that Dr. Ehrlich’s offices in Trumbull and Waterford did not violate the agreement and there were numerous hospitals located outside the prohibited area where he could find employment as a board certified surgeon specializing in bariatrics. He had actually received encouragement from several doctors to apply for privileges at permissible hospitals, including the Hospital of St. Raphael in New Haven.
In light of Dr. Ehrlich violating a legally binding non-compete agreement that protected a legitimate business interest, the court ordered the enforcement of the restrictive covenant.
If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.
