Posts tagged with "unenforceable"

Constructive Discharge Does Not Invalidate Connecticut Non-Compete Agreements

Constructive Discharge Does Not Invalidate Connecticut Non-Compete Agreements
Drummond American LLC v. Share Corporation, 2009 U.S. Dist. LEXIS 105965

Ms. Martha Mahoney worked for Drummond American LLC, a company that sold commercial grade chemicals and hardware to governmental and industrial customers, as its Connecticut Sales Agent until August 2008. She was in charge of facilitating contact between the company and its customers. Drummond had her sign a covenant not to compete as a condition of her employment with the company. The non-compete agreement prohibited Ms. Mahoney from soliciting orders from or selling competitive products to any customers she solicited or sold to on Drummond’s behalf in the twelve months prior to termination. The agreement detailed that the restrictions applied for two years following Ms. Mahoney’s termination. Ms. Mahoney began to work for Share Corporation in August 2008. The company was a direct competitor with Drummond and had Ms. Mahoney sign an agreement stating that she would honor her non-compete with Drummond during her employment with Share. She contacted her previous Drummond customers however and sold Share’s products to twelve such customers.
Drummond sued Ms. Mahoney for breach of the restrictive covenant and asked the court to enforce the non-compete clauses. Ms. Mahoney did not deny that she breached the non-compete agreement but argued that she should not be held liable for her breach because the agreement was invalid. Her main contentions were that the agreement was unenforceable under the five-prong test as stated by the Connecticut Supreme Court in Scott v. Gen. Iron & Welding Co., 171 Conn. 132 (1976), and that her constructive discharge invalidated the agreement. The court ultimately rejected these defenses, found in favor of Drummond, and ordered the non-compete agreement enforced.
In Scott, the court held that a non-compete agreement’s reasonableness is evaluated based on five factors: 1) duration of the restrictions, 2) geographic area of the restrictions, 3) degree of protection afforded to the employer, 4) restrictions on employee’s ability to pursue a career, and 5) any interference with the public’s interests. Here, the court held that the agreement between Drummond and Ms. Mahoney did not violate any of these factors. An employer possesses a proprietary right to its customers and is entitled to protect this right for a reasonable period. The court held that a two-year period was reasonable and enforceable. Furthermore, the court found that the provisions of the agreement were not overly broad and did not unnecessarily restrict her ability to earn a living. The covenant only prevents her from soliciting and transacting with twenty-six customers, meaning that there were still thousands of potential clients not excluded under the agreement’s provisions.
The court likewise rejected Ms. Mahoney’s argument that Drummond constructively discharged her and this action invalidated the non-compete agreement. A constructive discharge is when the employer creates an intolerable work atmosphere that forces the employee to quit involuntarily instead of the employer directly terminating the individual’s employment. The court held that the nature of an employee’s termination is irrelevant in this respect and does not affect the validity of the agreement and its legally binding nature upon the parties.
All of Ms. Mahoney’s defenses failed under the court’s scrutiny and analysis of the case, rending her liable for her breach of 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.

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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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Continued Employment is Inadequate Consideration in Absence of At-Will Employment

Continued Employment is Inadequate Consideration in Absence of At-Will Employment
Cost Management Incentives, Inc. v. London-Osborne, 2002 Conn. Super. LEXIS 3967

Cost Management Incentives, Inc. was a company that specialized in the placement of employees in the pharmaceutical industry. This case addressed covenants signed by the company and two former employees, Ms. Yolanda London-Osborne and Ms. Kristen Herman. The company presented the two employees with non-compete agreements in May 1996 after several years of employment. The restrictive covenant contained a one-year non-compete clause and a two-year non-solicitation clause. Neither woman was afforded the opportunity to consult with a lawyer to go over the agreement and both felt they were in jeopardy of termination should they refuse to sign. The agreement did not offer anything in addition to their current salary and benefits. Mr. David Hallen, the president and Chief Executive Officer of the company, gave them approximately five minutes to skim and sign the agreements, preventing the women from gaining a firm grasp on what their obligations were under the agreement. The employees continued in their employment in same manner and with the same benefits until the company terminated them.
Cost Management sued the two former employees and asked the court to issue an order preventing any violations of the covenant. Ms. London-Osborne and Ms. Herman both sought an order declaring that the agreement was unenforceable on the grounds of inadequate consideration and the inappropriate and egregious conduct of the company’s management. Both former employees further contended that they did not breach the agreement and there was no indication that they were likely to do so. The court found in favor of the former employees and held that the restrictive covenants were unenforceable because they lacked consideration and their provisions were so broad that they unnecessarily restricted their ability to procure future employment.
The restrictions in the agreement prohibited employment with any business enterprise engaged in facilitating temporary and/or permanent placement in the pharmaceutical industry for one year after termination. The court found this specific nation-wide restriction to be reasonable since the company maintained national operations. The court however found that the two-year non-solicitation clause was unreasonable and rendered the covenant unenforceable. This was overly broad and restrictive since 70-75% of Cost Management’s business came from a mere six pharmaceutical companies. The court commented that Cost Management should have tailored this clause to protect its legitimate business interests without placing such an extensive hardship on former employees. Analysis of the covenants also led the court to hold that the provisions provided the employer with much more protection than was deemed necessary or permissible.
While the finding of unreasonable provisions is sufficient to invalid a restrictive covenant, the court went on to discuss the lack of consideration, a factor that also renders a non-compete agreement unenforceable. Connecticut law indicates that continued employment is not adequate consideration for a non-compete agreement for employees that are not working on an at-will basis. Continued employment is sufficient for employees working on an at-will basis but this was not the case with Ms. London-Osborne and Ms. Herman.
For these reasons, the court denied Cost Management’s request for injunctive relief and declared that the agreements were unenforceable and void 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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Continued Employment is Inadequate Consideration in Absence of At-Will Employment

Continued Employment is Inadequate Consideration in Absence of At-Will Employment
Cost Management Incentives, Inc. v. London-Osborne, 2002 Conn. Super. LEXIS 3967

Cost Management Incentives, Inc. was a company that specialized in the placement of employees in the pharmaceutical industry. This case addressed covenants signed by the company and two former employees, Ms. Yolanda London-Osborne and Ms. Kristen Herman. The company presented the two employees with non-compete agreements in May 1996 after several years of employment. The restrictive covenant contained a one-year non-compete clause and a two-year non-solicitation clause. Neither woman was afforded the opportunity to consult with a lawyer to go over the agreement and both felt they were in jeopardy of termination should they refuse to sign. The agreement did not offer anything in addition to their current salary and benefits. Mr. David Hallen, the president and Chief Executive Officer of the company, gave them approximately five minutes to skim and sign the agreements, preventing the women from gaining a firm grasp on what their obligations were under the agreement. The employees continued in their employment in same manner and with the same benefits until the company terminated them.
Cost Management sued the two former employees and asked the court to issue an order preventing any violations of the covenant. Ms. London-Osborne and Ms. Herman both sought an order declaring that the agreement was unenforceable on the grounds of inadequate consideration and the inappropriate and egregious conduct of the company’s management. Both former employees further contended that they did not breach the agreement and there was no indication that they were likely to do so. The court found in favor of the former employees and held that the restrictive covenants were unenforceable because they lacked consideration and their provisions were so broad that they unnecessarily restricted their ability to procure future employment.
The restrictions in the agreement prohibited employment with any business enterprise engaged in facilitating temporary and/or permanent placement in the pharmaceutical industry for one year after termination. The court found this specific nation-wide restriction to be reasonable since the company maintained national operations. The court however found that the two-year non-solicitation clause was unreasonable and rendered the covenant unenforceable. This was overly broad and restrictive since 70-75% of Cost Management’s business came from a mere six pharmaceutical companies. The court commented that Cost Management should have tailored this clause to protect its legitimate business interests without placing such an extensive hardship on former employees. Analysis of the covenants also led the court to hold that the provisions provided the employer with much more protection than was deemed necessary or permissible.
While the finding of unreasonable provisions is sufficient to invalid a restrictive covenant, the court went on to discuss the lack of consideration, a factor that also renders a non-compete agreement unenforceable. Connecticut law indicates that continued employment is not adequate consideration for a non-compete agreement for employees that are not working on an at-will basis. Continued employment is sufficient for employees working on an at-will basis but this was not the case with Ms. London-Osborne and Ms. Herman.
For these reasons, the court denied Cost Management’s request for injunctive relief and declared that the agreements were unenforceable and void 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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Technology Company’s Non-Compete Found Enforceable on Grounds of Protecting Employer’s Interest and Commercial Operations

Technology Company’s Non-Compete Found Enforceable on Grounds of Protecting Employer’s Interest and Commercial Operations
Xplore Techs. Corp. v. Killion, 2010 Conn. Super. LEXIS 2401

Xplore Technologies Corporation was a company engaged in the engineering, developing, and marketing of rugged computer tablets. Mr. Timothy Killion worked as a Senior Sales Representative with the company from December 8, 2003 to June 2010. As part of his employment contract with Xplore, Mr. Killion signed a non-compete and non-disclosure agreement that stated, “By accepting this offer, you agree not to exercise or participate in any activity directly or indirectly competing with that of Xplore Technologies, Corp.” for a period of one year. In June 2010, Mr. Killion announced that he would be leaving Xplore to work for another company, later identified as DRS Technologies, Inc., a direct competitor. In the years leading up to Mr. Killion’s resignation he was intimately involved in the development of a new product and a deal with AT&T valued at $20-23 million. Xplore commenced a suit seeking an injunction to prevent DRS’s further employment of Mr. Killion and prevent the disclosure/utilization of any classified information regarding Xplore’s business operations. Mr. Killion claimed that the non-compete agreement was unenforceable because it was too broad in scope.
The Superior Court held in favor of Xplore Technologies, finding the non-compete to be valid and issued an injunction prohibiting DRS from employing Mr. Killion until a year after his resignation from Xplore. The court found that the strongest factor that made the agreement enforceable was the employer’s interest to protect its commercial operations. Non-compete agreements protect employers in the specific area in which they do business by restricting the disclosure of trade secrets, technical marketing, and financial information. The court held that the non-compete agreement was a reasonable and binding way for Xplore to protect itself given the uniqueness of the industry, its products, and business activities. The court struck down Mr. Killion’s assertion that the agreement was too broad with regard to time and space. It held that the one-year period was appropriate and reasonable provided the length of Mr. Killion’s employment with Xplore and the nature of the company. The lack of geographical limitations does not invalidate the agreement in this case. The nature of Xplore’s business is heavily internet-based and its employees’ work is not confined to a specific office within a specific geographical area. Instead, the geographical limitations become Xplore’s three direct competitors that conduct business in the same manner and that are involved in the development of similar products.
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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Technology Company’s Non-Compete Found Enforceable on Grounds of Protecting Employer’s Interest and Commercial Operations

Technology Company’s Non-Compete Found Enforceable on Grounds of Protecting Employer’s Interest and Commercial Operations
Xplore Techs. Corp. v. Killion, 2010 Conn. Super. LEXIS 2401

Xplore Technologies Corporation was a company engaged in the engineering, developing, and marketing of rugged computer tablets. Mr. Timothy Killion worked as a Senior Sales Representative with the company from December 8, 2003 to June 2010. As part of his employment contract with Xplore, Mr. Killion signed a non-compete and non-disclosure agreement that stated, “By accepting this offer, you agree not to exercise or participate in any activity directly or indirectly competing with that of Xplore Technologies, Corp.” for a period of one year. In June 2010, Mr. Killion announced that he would be leaving Xplore to work for another company, later identified as DRS Technologies, Inc., a direct competitor. In the years leading up to Mr. Killion’s resignation he was intimately involved in the development of a new product and a deal with AT&T valued at $20-23 million. Xplore commenced a suit seeking an injunction to prevent DRS’s further employment of Mr. Killion and prevent the disclosure/utilization of any classified information regarding Xplore’s business operations. Mr. Killion claimed that the non-compete agreement was unenforceable because it was too broad in scope.
The Superior Court held in favor of Xplore Technologies, finding the non-compete to be valid and issued an injunction prohibiting DRS from employing Mr. Killion until a year after his resignation from Xplore. The court found that the strongest factor that made the agreement enforceable was the employer’s interest to protect its commercial operations. Non-compete agreements protect employers in the specific area in which they do business by restricting the disclosure of trade secrets, technical marketing, and financial information. The court held that the non-compete agreement was a reasonable and binding way for Xplore to protect itself given the uniqueness of the industry, its products, and business activities. The court struck down Mr. Killion’s assertion that the agreement was too broad with regard to time and space. It held that the one-year period was appropriate and reasonable provided the length of Mr. Killion’s employment with Xplore and the nature of the company. The lack of geographical limitations does not invalidate the agreement in this case. The nature of Xplore’s business is heavily internet-based and its employees’ work is not confined to a specific office within a specific geographical area. Instead, the geographical limitations become Xplore’s three direct competitors that conduct business in the same manner and that are involved in the development of similar products.
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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Mere Inclusion of a Restrictive Covenant Does Not Invalidate Entire Contract

Mere Inclusion of a Restrictive Covenant Does Not Invalidate Entire Contract
Wes-Garde Components Group, Inc. v. Carling Technologies, Inc., 2012 Conn. Super. LEXIS 899
Wes-Garde Components Group, Inc. (“Wes-Garde”) and Carling Technologies, Inc. (“Carling”) executed an agreement on December 31, 1979 wherein Wes-Garde would receive “permanent favorable pricing” on certain electrical components manufactured by Carling, contingent upon maintaining annual threshold purchasing levels. The contract was amended on January 1, 1988 and it stayed in effect until 2008. The agreement between the two companies contained a covenant not to compete where Carling specifically agreed to refrain from entering the distribution market for certain electrical components.
Carling informed Wes-Garde on June 19, 2008 that is considered the agreement unenforceable and as such the company was under no contractual obligation to provide favorable pricing or abide by the non-compete provisions. December 1, 2008 marked the first date that Carling actually failed to provide favorable pricing, per the contract, while transacting with Wes-Garde. Wes-Garde ultimately sued Carling and requested that the court enforce the agreement. Carling moved for summary judgment on the grounds that the whole contract was unenforceable because it contained an “unreasonable restraint of trade” in the form of a mutual covenant not to compete. The Superior Court in the Judicial District of Hartford denied Carling’s motion for summary judgment and unequivocally rejected the argument that the mere inclusion of the mutual non-compete agreement necessitated the invalidation of an entire contract willingly executed by the parties. The details of a specific non-compete agreement may render that portion of the contract unenforceable but there is not a principle under Connecticut law espousing the idea that the mere presence of a restrictive covenant invalidates an entire agreement.
Wes-Garde opposed the motion for summary judgment on procedural grounds due to Carling’s failure to specify the ground on which it moved or make a specific reference to the covenant not to compete. Carling’s pleading did not establish specific facts or allegations regarding the non-compete agreement nor did they identify it as the grounds for moving for summary judgment. Carling failed to provide the court with the necessary information and the opportunity to evaluate the non-compete agreement based on its particular provisions. The court could have ruled on the enforceability of the non-compete agreement had Carling introduced specific facts or pleadings regarding those contractual provisions.
Carling’s defense, where a party alleges that the inclusion of a covenant not to compete invalidates a whole agreement, is universally rejected by courts in Connecticut and cannot be successfully argued as an avenue to render an entire agreement unenforceable.
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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Applying Basic Contract Principles to the Enforcement of Non-Compete Agreements

Applying Basic Contract Principles to the Enforcement of Non-Compete Agreements

North American Outdoor Products, Inc. v. Dawson, 2004 Conn. Super. LEXIS 2677

North American Outdoor Products, Inc. (NAOP) was a company created to facilitate sales of outdoor goods to mass retail merchants. The company marketed products such as instant garages, sporting goods, shelters, and canopies. Mr. Curt Dawson worked for NAOP in its sales and marketing department from February 1999 to April 2, 2004. He worked as the National Sales Manager for a period of time in Florida but returned to work in Connecticut when NAOP agreed in a January 2003 meeting to an annual raise of $25,000.00 and related moving expenses.
In March 2003, management requested that Mr. Dawson sign an Employee Agreement that contained and explained several restrictive covenants that would become effective upon termination. The agreement prohibited him from competing with NAOP for twelve months following termination as well as soliciting any entity that NAOP had transacted with in the three-year period prior to termination. Mr. Dawson signed and returned the employment and non-compete agreement on March 26, 2003 but a representative for the company did not sign the document at that time. A representative for NAOP only signed the document on March 20, 2004 when the company learned of Mr. Dawson’s intent to voluntarily terminate his employment.
NAOP brought legal action against Mr. Dawson and sought an injunctive order from the court to enforce the provisions of the non-compete agreement. Mr. Dawson however presented multiple defenses as to why the restrictive covenants were unenforceable: 1) lack of consideration, 2) unreasonable time and geographical restrictions, 3) unclean hands on the part of NAOP, and 4) lack of necessary signatures. The court found in favor of Mr. Dawson, held that the non-compete agreement was unenforceable, and denied NAOP’s request for injunctive relief.
Under Connecticut law, a non-compete agreement must have sufficient consideration to make the document legally binding upon the parties. For enforcement of a restrictive covenant, the employee must receive something in exchange for his or her covenant. The agreement at hand did not bestow any new benefit upon Mr. Dawson and stated that his continued employment was the consideration for the agreement. Connecticut courts have concluded however that “continued employment is not [sufficient] consideration for a covenant not to compete entered into after the beginning of the employment”. NAOP claimed that the raise and moving expenses promised in January 2003 demonstrated adequate consideration but the court rejected this notion because those promises bore no substantial connection to the written agreement from March 2003.
Furthermore, the court concluded that the covenant not to complete was unenforceable because of inherent ambiguities in its language. Courts cannot create a binding contract in the absence of a meeting of the minds between the parties. The plaintiff, in this case NAOP, bears the burden of proof with respect to demonstrating a meeting of the minds in order to prove its version/interpretation of the alleged contract. The court looked to the plain language of the agreement to ascertain whether it articulated clear and concise provisions that led to a meeting of the minds between Mr. Dawson and NAOP. The court concluded that the agreement was unclear about material details, namely the effective date of the provisions and the identification of the specific parties. The agreement was a bilateral document that required signatures of both parties in order to be complete and become legally binding. The absence of NAOP’s signature at the same time as Mr. Dawson’s thus rendered the agreement unenforceable.
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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Change in Business Services/Products Doesn’t Invalidate a Non-Compete Agreement

Change in Business Services/Products Doesn’t Invalidate a Non-Compete Agreement

DiscoveryTel SPC, Inc. v. Pinho, 2010 Conn. Super. LEXIS 2683

In 2002, DiscoveryTel SPC hired Mr. Ismael Pinho as its chief financial officer (CFO) as an at will employee. The parties later executed an employment agreement on December 27, 2004 that would go into effect January 1, 2005. The employment contract modified Mr. Pinho’s employment from at will to a one-year automatic renewable basis and outlined his salary, incentive bonuses, vacation, personal days, insurances, severance package, and several restrictive covenants. Mr. Pinho was prohibited from directly or indirectly competing with DiscoveryTel by being involved in the purchase and/or sale of international voice and traffic data systems during the term of the employment agreement or during any period for which he was receiving severance pay. Additionally, the agreement stated that he was bound by an indefinite non-disclosure clause pertaining to DiscoveryTel’s confidential and proprietary information. In between 2004 and 2010, DiscoveryTel experienced a corporate reorganization and shifted its focus and the services it provided. By 2010, it was no longer engaged in the purchase and/or sale of international voice and data traffic but instead facilitated the sale of telephone traffic.
Mr. Pinho informed the president of DiscoveryTel in a May 21, 2010 letter that he had accepted a position with World Telecom Exchange Communications, LLC (WTEC) and would be starting at the new company on June 1, 2010. DiscoveryTel brought suit and requested that the court grant its request for an injunction to prevent any violations of the restrictive covenants in connection to Mr. Pinho’s new employment. Mr. Pinho did not have an issue with the non-disclosure clause in the employment contract but asserted that his mere employment with WTEC was not a violation of the non-compete agreement. He contended that the agreement did not prohibit working for a competitor but rather specifically from “being involved in ‘any business relating to the purchase and sale of international voice and data traffic’”. He went on to argue that engaging in this sector of the industry should not violate a non-compete agreement because DiscoveryTel was no longer engaged in that specific industry activity. Additionally, he argued that the agreement had inadequate consideration and was therefore unenforceable.
The court found these arguments unconvincing however and granted DiscoveryTel’s request for injunctive relief and restrained Mr. Pinho from working for WTEC until December 31, 2010 (the end of the current employment term) in order to prevent further violations of the non-compete agreement. It looked to the modification in the nature of Mr. Pinho’s employment (from at will to a contract renewable on an annual basis) and enhanced benefits (mainly the introduction of a severance package) in the employment agreement to conclude that there was sufficient consideration. Finally, the court analyzed whether Mr. Pinho’s activities as an employee of WTEC violated the covenant, taking into account DiscoveryTel’s reorganization and shift in focus. The court ultimately held that Mr. Pinho had indeed violated the non-compete agreement by working at WTEC and that a mere change in business services/products did not render the non-compete agreement invalid or release Mr. Pinho from its obligations.
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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