Posts tagged with "covenant"

Non-Compete Invalidated Due to Unnecessary Restrictions on Future Employment

Non-Compete Invalidated Due to Unnecessary Restrictions on Future Employment
Connecticut Bathworks Corp. v. Palmer, 2003 Conn. Super. LEXIS 2193

Connecticut Bathworks Corporation was a company servicing New Haven, Fairfield, and Litchfield counties that remodeled bathrooms via the installation of prefabricated acrylic bathtub liners and wall systems. The company employed Mr. Palmer from approximately the beginning of April 2001 to February 28, 2003 at which point Mr. Palmer voluntarily terminated his employment. He began to work for Re-Bath of Connecticut, a company in direct competition with Bathworks, the next day. The issue in this case is that Mr. Palmer signed a “Company Confidentiality Agreement” when he began to work for Bathworks that contained a covenant not to compete that prohibited him from “being employed by any business in competition with the plaintiff [Bathworks] within any county in which the plaintiff is doing business for a period of three years from the termination of his employment with the plaintiff”. This created a three-year prohibition on working for a competitor with the tri-county area of New Haven, Fairfield, and Litchfield.
Bathworks sued Mr. Palmer in Connecticut state court and requested an injunction to enjoin him from further violations of the non-compete agreement. The court analyzed the facts of the case, held in favor of Mr. Palmer, and denied Bathworks’s request for injunctive relief. The court’s decision ultimately came down to the issue of whether Mr. Palmer’s employment with Re-Bath would negatively affect Bathworks’s interests and business operations. Bathworks carried the burden of establishing the probability of success on the merits of the case and the court held that it failed to present sufficient evidence to indicate it would be directly and immediately harmed due to breach of the restrictive covenant.
Bathworks argued that Mr. Palmer acquired valuable trade secrets and information during his employment with the company and that his continued employment with Re-Bath would harm its operations. The court however found that Mr. Palmer, as an installer, did not have access to Bathworks’s confidential information or any trade secrets that would put the company at a competitive disadvantage. The court further noted that while Mr. Palmer was a skilled laborer, he was not a high-level executive, nor did he provide “special, extraordinary, or unique” services. Bathworks also failed to present any evidence to show that Mr. Palmer knew of or took part in the company’s sales/marketing activities or the development of a business strategy.
The court stated that its role in deciding the case was to balance the parties’ interest to fairly protect Bathworks’s business while not unreasonably restricting Mr. Palmer’s right to seek employment elsewhere. This agreement however, according to court, unnecessarily restricted Mr. Palmer’s right to work at another company because there was nothing about that employment which would disadvantage Bathworks in the industry. The non-compete agreement went beyond what was reasonably necessary to protect the company’s interests and as such, the court denied Bathworks’s request for an injunction.
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.

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Enforceability of Non-Solicitation Agreement for Potential Clients of Former Employer

Webster Financial Corporation v. McDonald, 2009 Conn. Super. LEXIS 169

USI Insurance Services of Connecticut, Inc., formerly Webster Insurance, Inc., employed Mr. William McDonald as a senior vice president at its Westport, CT office. The company had Mr. McDonald sign an employment agreement dated February 11, 2003 that contained non-compete and non-solicitation clauses in the event of his termination. The agreement prohibited Mr. McDonald from soliciting any of USI’s contacts that had been clients or potential clients in the twelve months prior to his termination and established a geographical limit of twenty-five miles within USI’s Westport office. As for the time limitation, the covenant was applicable for the great period of two years following Mr. McDonald’s termination or as long as he received benefits from a deferred compensation plan. Mr. McDonald resigned on September 21, 2007 and began to work at Shoff Darby, Inc., an industry competitor well within the prohibited twenty-five radius of USI’s Westport office. At his new firm, Mr. McDonald proceeded to solicit and sell insurance products to USI’s former and current clients. Additionally, he contacted several USI employees and urged them to leave the company to seek employment with Shoff Darby.
USI sued Mr. McDonald and asked the court to enforce the provisions of the restrictive covenant. Mr. McDonald presented two defenses to the court, arguing that the agreement was overly broad and therefore unenforceable. He claimed that the prohibition of potential clients and the potential unlimited duration made the non-compete agreement unreasonable and unenforceable. USI asserted the validity of the agreement and emphasized to the court that it contained a “blue pencil” provision that authorized the court to amend the time and/or geographical limitation in order to comply with Connecticut law. Mr. McDonald countered this argument stating that this legal procedure would require the court to essentially rewrite the non-compete contract, an act forbidden under Connecticut law.
The court found in favor of USI with regard to the issue of the agreement’s enforceability with its holding stating, “taking the covenant as whole, nothing on the face of the contract renders the covenant unenforceable as a matter of law”. While deliberating about the claim that the prohibition on potential clients was unreasonable, the court stated that there is no direction or precedent from the Connecticut Appellate Courts and that the Superior Courts throughout the state were divided on the issue. This court took the approach used in Cuna Mutual Life Ins. Co. v. Butler (2007 Conn. Super. LEXIS 1623) that such limitations on potential clients are reasonable so long as they are “readily identifiable and narrowly defined”. The court concluded that the potentially unlimited applicable duration of the agreement was not “per se unreasonable” because the agreement as a whole contained several other definitive restrictions such as the twenty-five radius from the Westport office and the limited group of clients for the anti-solicitation clause.

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Differences in the Enforcement of Non-Disclosure and Non-Compete Covenants

Differences in the Enforcement of Non-Disclosure and Non-Compete Covenants
Newinno, Inc. v. Peregrim Development, Inc., 2004 Conn. Super. LEXIS 1160

Mr. Russell Koch worked for Newinno, Inc., a consulting firm, where his employment was contingent upon several restrictive covenants contained in his employment contract. The main agreement between the parties was a non-disclosure covenant designed to protect Newinno’s confidential information and business interests upon Mr. Koch’s termination. The agreement had four main provisions such that Mr. Koch was: 1) prohibited from disclosing information about the company that “is not generally known in the industry which the company is or may become engaged”, 2) prohibited disclosing any information relating to actual or potential clients’ products, business plans, designs, or trade secrets, 3) prohibited disclosing information from the company’s “BrainBank”, and lastly 4) prohibited disclosing information relating to the company’s “lead/prospect and customer lists”. The agreement did not articulate any time or geographical restrictions, which became the main issue in the case and how Mr. Koch asserted that the covenant was not binding or enforceable. These provisions went into effect when Mr. Koch voluntarily terminated his employment at Newinno and began to work for one of its competitors, Peregrim Development, Inc..
Newinno sought to enforce the provisions and requested an injunction from the court to prevent Mr. Koch’s further employment at its direct competitor in order to prevent any breaches of the covenant by him disclosing confidential information. The court held in favor of Newinno and stated that the company had met the burden of proof to demonstrate that the facts of the case warranted injunctive relief. In its decision, the court explained that the issue at the heart of the case was not “whether a reasonableness standard should govern the enforceability of the parties’ confidentiality agreements, but rather concerns [regarding] the exact manner in which the test should be defined or applied”.
Connecticut courts are divided on whether to apply the same criteria and test used to assess non-compete agreements’ enforceability or resort to a more relaxed version of the reasonableness test. Non-disclosure/confidentiality agreements have traditionally enjoyed treatment that is more favorable under Connecticut laws in the courts than non-compete agreements. There are not any Connecticut cases, state or federal, that have held that the enforceability of confidentiality agreements hinges on the same standards and test that governs the enforceability of non-compete agreements. Overall, the courts have concluded that time and geographical restrictions are not necessary in order to enforce a non-disclosure agreement. This is very divergent from how the courts address the enforceability of non-compete agreements where they generally insist that those provisions are in the text of the agreement. This trend has led Connecticut courts to apply a modified version of the non-compete enforceability test where the legal analysis takes into account the “purpose of the confidentiality covenants and the specific information sought to be protected.
It is beneficial for an employee to know the difference in the enforcement trends and policies with regard to non-disclosure and non-compete agreements under Connecticut law. This is especially true when an employment contract contains both covenants and ensuing legal disputes question the validity of each. A party may succeed on the merits of the case with regard to the enforcement of one covenant and then fail on the merits for the other.
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.

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Differences in the Enforcement of Non-Disclosure and Non-Compete Covenants

Differences in the Enforcement of Non-Disclosure and Non-Compete Covenants
Newinno, Inc. v. Peregrim Development, Inc., 2004 Conn. Super. LEXIS 1160

Mr. Russell Koch worked for Newinno, Inc., a consulting firm, where his employment was contingent upon several restrictive covenants contained in his employment contract. The main agreement between the parties was a non-disclosure covenant designed to protect Newinno’s confidential information and business interests upon Mr. Koch’s termination. The agreement had four main provisions such that Mr. Koch was: 1) prohibited from disclosing information about the company that “is not generally known in the industry which the company is or may become engaged”, 2) prohibited disclosing any information relating to actual or potential clients’ products, business plans, designs, or trade secrets, 3) prohibited disclosing information from the company’s “BrainBank”, and lastly 4) prohibited disclosing information relating to the company’s “lead/prospect and customer lists”. The agreement did not articulate any time or geographical restrictions, which became the main issue in the case and how Mr. Koch asserted that the covenant was not binding or enforceable. These provisions went into effect when Mr. Koch voluntarily terminated his employment at Newinno and began to work for one of its competitors, Peregrim Development, Inc..
Newinno sought to enforce the provisions and requested an injunction from the court to prevent Mr. Koch’s further employment at its direct competitor in order to prevent any breaches of the covenant by him disclosing confidential information. The court held in favor of Newinno and stated that the company had met the burden of proof to demonstrate that the facts of the case warranted injunctive relief. In its decision, the court explained that the issue at the heart of the case was not “whether a reasonableness standard should govern the enforceability of the parties’ confidentiality agreements, but rather concerns [regarding] the exact manner in which the test should be defined or applied”.
Connecticut courts are divided on whether to apply the same criteria and test used to assess non-compete agreements’ enforceability or resort to a more relaxed version of the reasonableness test. Non-disclosure/confidentiality agreements have traditionally enjoyed treatment that is more favorable under Connecticut laws in the courts than non-compete agreements. There are not any Connecticut cases, state or federal, that have held that the enforceability of confidentiality agreements hinges on the same standards and test that governs the enforceability of non-compete agreements. Overall, the courts have concluded that time and geographical restrictions are not necessary in order to enforce a non-disclosure agreement. This is very divergent from how the courts address the enforceability of non-compete agreements where they generally insist that those provisions are in the text of the agreement. This trend has led Connecticut courts to apply a modified version of the non-compete enforceability test where the legal analysis takes into account the “purpose of the confidentiality covenants and the specific information sought to be protected.
It is beneficial for an employee to know the difference in the enforcement trends and policies with regard to non-disclosure and non-compete agreements under Connecticut law. This is especially true when an employment contract contains both covenants and ensuing legal disputes question the validity of each. A party may succeed on the merits of the case with regard to the enforcement of one covenant and then fail on the merits for the other.
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.

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Covenants Not To Compete in Franchise Agreements

Covenants Not To Compete in Franchise Agreements
Pirtek USA, LLC v. Zaetz, 408 F.Supp.2d 81

Pirtek USA, LLC was a franchise company that operated as a business system “consisting of the sale, assembly and installation of industrial and hydraulic hoses, fixed tube assemblies and related components and services”. Pirtek entered into a Franchise Agreement with Mr. Irwin Zaetz in September 1999 to license him to operate a Pirtek business. The agreement contained a non-compete clause that prohibited Mr. Zaetz from operating or working for a competing business within a limited geographical area for a two-year period after the termination of the franchise agreement. Pirtek and Mr. Zaetz terminated their franchise agreement on April 22, 2005 and the parties went their separate ways. Pirtek was able to sell that particular franchise to another party, Ms. Ashely Geddes, while Mr. Zaetz and his son proceeded to operate their own business, Hose Medic. This new company provided many of the same services as Pirtek franchises and covered the same general geographical area. Additionally, the registered address for Hose Medic was the same one Mr. Zaetz used to register his franchise with Pirtek.
Pirtek alleged that Mr. Zaetz used his son’s company as a front to avoid the enforcement of the covenant not to compete. More specifically, the company alleged that Mr. Zaetz used Pirtek’s proprietary information to help his son base the new company on the Pirtek business model. Pirtek sued Mr. Zaetz in federal court and requested that the court issue a temporary injunction to prevent further contractual violations while the court tried the case. The court denied its request and refused to issue a temporary injunction.
Pirtek sued on three accounts, claiming that Mr. Zaetz breached the non-compete by 1) operating a competing hose installation and repair business, 2) infringing on its intellectual property rights, and 3) violating several post-termination provisions of the franchise agreement. The court found that Pirtek did not meet the burden of proof necessary to show that Mr. Zaetz was in breach of the non-compete. Pirtek asserted that their business interests were threatened by Mr. Zaetz’s use of the words “hose”, “assembly”, and a graphic of a cog when advertising and discussing the new company. This, according to this court, was an unfounded assertion because the words were too general to create confusion among consumers and negatively affect Pirtek’s business operations. Pirtek was not able to establish that it had suffered any hardship or was likely to do so in the future if an injunction was not issued. Imminent harm, according to the courts, is a requisite factor for granting a temporary injunction, and a court is not obligated to grant one if this crucial factor is missing.
The court pointed out however that the denial of the temporary injunction did not necessary mean that Pirtek would not be able to obtain a permanent injunction later. It counseled Pirtek that later stages of litigation could result in the enforcement of the covenant. It noted that Pirtek had some strong evidence to present and use in subsequent stages of the case but that its current request must be denied because it “failed to demonstrate irreparable harm”.
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.

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Covenants Not To Compete in Franchise Agreements

Covenants Not To Compete in Franchise Agreements
Pirtek USA, LLC v. Zaetz, 408 F.Supp.2d 81

Pirtek USA, LLC was a franchise company that operated as a business system “consisting of the sale, assembly and installation of industrial and hydraulic hoses, fixed tube assemblies and related components and services”. Pirtek entered into a Franchise Agreement with Mr. Irwin Zaetz in September 1999 to license him to operate a Pirtek business. The agreement contained a non-compete clause that prohibited Mr. Zaetz from operating or working for a competing business within a limited geographical area for a two-year period after the termination of the franchise agreement. Pirtek and Mr. Zaetz terminated their franchise agreement on April 22, 2005 and the parties went their separate ways. Pirtek was able to sell that particular franchise to another party, Ms. Ashely Geddes, while Mr. Zaetz and his son proceeded to operate their own business, Hose Medic. This new company provided many of the same services as Pirtek franchises and covered the same general geographical area. Additionally, the registered address for Hose Medic was the same one Mr. Zaetz used to register his franchise with Pirtek.
Pirtek alleged that Mr. Zaetz used his son’s company as a front to avoid the enforcement of the covenant not to compete. More specifically, the company alleged that Mr. Zaetz used Pirtek’s proprietary information to help his son base the new company on the Pirtek business model. Pirtek sued Mr. Zaetz in federal court and requested that the court issue a temporary injunction to prevent further contractual violations while the court tried the case. The court denied its request and refused to issue a temporary injunction.
Pirtek sued on three accounts, claiming that Mr. Zaetz breached the non-compete by 1) operating a competing hose installation and repair business, 2) infringing on its intellectual property rights, and 3) violating several post-termination provisions of the franchise agreement. The court found that Pirtek did not meet the burden of proof necessary to show that Mr. Zaetz was in breach of the non-compete. Pirtek asserted that their business interests were threatened by Mr. Zaetz’s use of the words “hose”, “assembly”, and a graphic of a cog when advertising and discussing the new company. This, according to this court, was an unfounded assertion because the words were too general to create confusion among consumers and negatively affect Pirtek’s business operations. Pirtek was not able to establish that it had suffered any hardship or was likely to do so in the future if an injunction was not issued. Imminent harm, according to the courts, is a requisite factor for granting a temporary injunction, and a court is not obligated to grant one if this crucial factor is missing.
The court pointed out however that the denial of the temporary injunction did not necessary mean that Pirtek would not be able to obtain a permanent injunction later. It counseled Pirtek that later stages of litigation could result in the enforcement of the covenant. It noted that Pirtek had some strong evidence to present and use in subsequent stages of the case but that its current request must be denied because it “failed to demonstrate irreparable harm”.
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.

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Enforcing a Non-Compete Agreement to Protect Software Company’s Confidential Information

Enforcing a Non-Compete Agreement to Protect Software Company’s Confidential Information

Weseley Software Development Corporation v. Burdette, 977 F. Supp. 137

Mr. Wesley Burdette worked for Weseley Development Corporation first as a Logistics Analyst and then as a Senior Logistics Analyst from May 1993 to September 16, 1996. Weseley was a software development company based in Shelton, Connecticut whose focus product was a transportation and logistics management program referred to as TRACS (Tactical Routing and Consolidation System). Mr. Burdette played a significant role in the development and testing of TRACS versions 3.0 and 3.1. He worked with “customers and potential customers to evaluate, develop, tailor, and implement Weseley’s products” during his approximately three years of employment. He gave Weseley his two weeks notice on August 29, 1996 and planned to switch companies to work for Manugistics for the marketing and sales of its product titled MTP. Management reminded Mr. Burdette of the non-compete clause in his employment agreement that he had signed.
The most important covenants that he signed in conjunction with his employment contract were those not to compete or disclose confidential information. The agreement was signed on January 14, 1995 after Mr. Burdette was allowed time to consult with an attorney regarding any and all of the agreement’s provisions. The non-compete clause stipulated that he could not work for a competitor for a period of six months following his termination with Weseley or disclose confidential information for an indefinite period of time. The company sued Mr. Burdette to enforce the non-compete and asked the court to enjoin him from further employment with Manugistics. Mr. Burdette countered that the agreement was unenforceable because its provisions were unreasonable and that Weseley had only signed the agreement once litigation began.
The court found in favor of Weseley and enforced the non-compete covenant, enjoining Mr. Burdette from working for Manugistics for a period of six months as stated in the language of the agreement. It validated the agreement because there was adequate consideration in the form of “continued employment, an articulated paid vacation entitlement, a new entitlement to severance benefits, and stock options”. Furthermore, it found the limitations to be reasonable such that they fairly balanced Weseley’s desire to protect its business and Mr. Burdette’s desire to still be able to pursue his career. It was paramount that the court protected the company’s interests since Mr. Burdette had a great deal of access to proprietary research & development information that could have severely disadvantaged Weseley should Mr. Burdette have shared the information with Manugistics. Although the court stated that there was no evidence that he had already disclosed confidential information, it held that he would inadvertently draw upon his knowledge gained while employed at Weseley and eventually disclose some amount, however small it may be in, in the course of his new employment with Manugistics.
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.

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Assignability of Non-Compete Agreements Under Connecticut Law in the Event of a Merger

Assignability of Non-Compete Agreements Under Connecticut Law in the Event of a Merger

Neopost USA, Inc. v. McCabe, 2011 U.S. Dist. LEXIS 105850

Neopost USA, Inc. and Pitney Bowes, Inc. are two companies that essentially hold a duopoly on the national “mailing equipment” market, an industry that includes postage meters, mailing machines, addressing machines, folders, inserters, and relevant software. Neopost, Inc. employed Mr. John McCabe from 2002 to August 1, 2011 but did not have him sign a non-compete agreement until February 2005, at which time he received a pay raise in connection with a corporate reorganization. The parties executed a subsequent restrictive covenant in March 2006. The agreements prohibited Mr. McCabe from engaging in competitive business activities for one year following termination within fifty miles of any Neopost office where he had worked during his employment with the company. Additionally, he could not solicit Neopost’s customers or employees during the specified one-year period. Neopost,, Inc. merged with Hasler, Inc. and the transaction became official in November 2009 with the creation of a new company, Neopost USA that assumed title to Neopost, Inc.’s assets and liabilities. Mr. McCabe’s last day with Neopost was August 1, 2011 and he began to work for Pitney Bowes, its direct and main competitor, only a few days later. There was a dispute between the parties regarding whether Mr. McCabe voluntarily terminated (resigned) his employment with Neopost or the company fired him.
Neopost sued Mr. McCabe in federal court for violation of the non-compete agreement and requested that the court enforce the provisions of the covenant in order to prevent further breaches of the agreements executed by the parties. Mr. McCabe argued that his non-compete agreement with Neopost, Inc. were not assignable to Neopost USA, Inc. after the merger with Hasler, Inc. and thus, he was not bound by the provisions contained therein. The court rejected Mr. McCabe’s defense and granted Neopost’s request for injunctive relief and the enforcement of the non-compete agreements. The court did not bother deciding the question of fact regarding the classification of Mr. McCabe’s termination. Provisions of a non-compete are automatically trigger upon termination, regardless of whether it is voluntary or involuntary in nature. The issue at hand and the focus of the court was the validity and enforceability of the non-compete agreements between Neopost and Mr. McCabe.
The court held that the non-compete agreements were assignable to Neopost USA following the merger, citing Connecticut law that “all property owned by, and every contract right possessed by, each corporation or other entity that merges into the survivor is vested in the survivor without reversion or impairment”. Conn. Gen. Stat. § 33-820(a)(4). In the event of a corporate merger, the surviving company holds title to all contracts and employment agreements of the predecessor companies and their provisions are valid and enforceable 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.

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Court Modifies Geographical Restriction in order to Enforce a Non-Compete Contract

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.

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Three-Year Restriction Found Unreasonable in CPA Non-Compete Agreement

Haims, Buzzeo & Co. v. Wikstrom, 2003 Conn. Super. LEXIS 2539

Ms. Nancy Wikstrom owned a certified public accounting firm, Wikstrom & Company, which she sold to Haims, Buzzeo & Co. (HBC) on January 1, 2001. The purchase agreement outlined the obligations of the respective parties and contained a covenant not to compete. Ms. Wikstrom was to stay on as an employee of HBC, continuing to work as a certified public accountant (CPA) and she agreed to bring her clients’ business to the firm. The non-compete agreement prohibited her, for a period of three years following termination, from soliciting clients and engaging in competing business activities within the city of Stamford, Connecticut. In exchange for these covenants, Ms. Wikstrom was to receive employment, $30,000 monthly payments to begin on January 1, 2010, and compensation for the sale of her former company’s good will and stock.
The merger of the two accounting firms did not go very well and Ms. Wikstrom left HBC in March 2002 due to dramatic differences in business personality and management style. She proceeded to start her own accounting firm, the Wikstrom Group, located in Stamford that provided the same accounting services as HBC. HBC interpreted these actions as clear violations of the non-compete agreement and sued Ms. Wikstrom in Connecticut state court for breach of the restrictive covenant. The company specifically claimed that she had “actively and purposefully tried to induce her former clients to come with her to the new accounting practice she created, and otherwise attempted to hinder and damage the plaintiffs in their practice”. Ms. Wikstrom however claimed that the agreement was unenforceable and that she did not violated any legally binding clauses contained in the purchase and employment agreements.
The court ultimately denied HBC’s request for an injunction preventing further violations of the non-compete agreement and concluded that the agreement was in fact unenforceable. It reached this decision based on several factors: 1) HBS had failed to demonstrate it was likely to succeed on the merits of the case and 2) the company failed to prove that it had incurred irreparable harm because of Ms. Wikstrom’s actions. After examining the facts of the case and the provisions of the non-compete agreement, the court held that injunctive relief was inappropriate and HBC was not entitled to an injunction restraining Ms. Wikstrom’s business actions.
The company was not able to meet the burden of proof required to demonstrate to the court that it was likely to succeed on the merits of the case. Most notably, the court addressed the reasonability and enforceability of the restrictions contained in the restrictive covenant. The geographical limitation was reasonable in scope but this was not true for the three-year time restriction. This, according to the court, was unreasonable because Ms. Wikstrom had been practicing as a CPA for over thirty years, had many long-standing loyal clients, and needed income from her chosen profession to sustain herself. The three-year period was too long, in the opinion of the court, and unnecessarily restricted her business actions and ability to pursue her occupation.
Furthermore, HBC did not demonstrate that it had incurred irreparable harm or that it was likely to do so in the future. The only clients that left HBC where those that were clients of Wikstrom & Company prior to the merger of the two accounting firms. The court noted that those clients would actually be harmed if an injunction was granted and held that its denial was the only way to maintain the status quo between the parties. By denying the request for an injunction, the court permitted HBC and Ms. Wikstrom’s new company to carrying on their business activities as they had been doing the previous eighteen months (since Ms. Wikstrom voluntarily terminated her employment with HBC).
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.

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