Opinion
Docket No. A-2573-02T5
Argued telephonically March 30, 2004
Decided April 20, 2004
Before Judges King, Lintner and Lisa.
On appeal from the Superior Court of New Jersey, Law Division, Camden County, L-2327-01.
Larry J. Rappoport of the Pennsylvania bar, admitted pro hac vice, argued the cause for appellants (Stevens Lee, attorneys; Mr. Rappoport, of counsel and on the brief; Michael J. Fagan, on the brief).
Jeffrey S. Craig, argued the cause for respondent (Kelley, Wardell Craig, attorneys; Mr. Craig, on the brief).
Plaintiff, Flow Control Incorporated (Flow Control), a company in the business of selling industrial valves, filed suit against defendants, Herron Valve and James M. McCreary, alleging breach of contract, tortious interference with a contractual relationship, and prospective economic advantage. Following an adverse jury verdict in the amount of $212,000 plus costs, and the subsequent denial of their motion for new trial or remittitur, defendants appeal. We now reverse and remand for new trial.
The dispute arose when McCreary, a commission sales representative under contract with Flow Control, resigned his position after eleven years and went to work for a competitor, Herron Valve (Herron). The agreement that is the subject matter of this appeal was executed in December 1995 and contained an attachment entitled "Conditional Statement," which Flow Control contended amounted to a restrictive covenant breached by McCreary, giving rise to its various claims for damages. It provided in pertinent part:
In consideration for the afore stated Compensation Outline [McCreary] . . . agree[s] to . . . sell products as represented by or brokered by Flow Control exclusively and . . . restrain from any arrangement, contractual or otherwise, to represent, assist or solicit sales for present or former [Flow Control] principals/vendors without first obtaining written approval from [Flow Control].
At the time of McCreary's resignation, Flow Control was the exclusive sales agent for Homestead Valve Division of Olson Technologies (Homestead), the manufacturer of industrial valves for a territory covering New Jersey, eastern Pennsylvania, Maryland, and Washington D.C. Flow Control's relationship with Homestead spanned a period of eight years. The agreement between Flow Control and Homestead required Flow Control to maintain the confidentiality of Homestead's "proprietary technical and commercial information . . . and customer, marketing and pricing information." During the time McCreary was working for Flow Control, he handled, among other accounts, the Homestead account in his region.
In late November 2000, McCreary became frustrated with a visit to one of Flow Control's principals and called Herron's president, Shannon Wood, and asked Wood to inform him if any Herron sales territories became available. After a meeting in which McCreary and Wood discussed the availability of two territories, Wood offered McCreary a job to begin the first business day of 2001. McCreary testified that he used Flow Control's confidential information, which consisted of the gross profits generated and time commitment data, at his meeting with Wood.
McCreary resigned from Flow Control on December 21, 2000. After McCreary began working for Herron, Scott Warmkessel, Homestead's national sales manager, called McCreary and advised him that Homestead had decided to terminate Flow Control and asked if Herron wanted to be considered. McCreary acknowledged that Warmkessel would not have contacted Herron if McCreary was not working for Herron and that Homestead had not had a relationship with Herron. McCreary also conceded that at a subsequent meeting on January 10, 2001, attended by Wood and Warmkessel, he relied upon Homestead's pricing information, target markets, vendors, and customers, information that he acquired from his relationship with Flow Control. Following the January 10 meeting, Homestead offered Herron the exclusive representation of Flow Control's region. On January 26, 2001, Homestead advised Flow Control in writing that it was giving the required thirty-day written notice of cancellation pursuant to its agreement.
During the trial, conflicting testimony was given concerning the purported restrictive covenant. Rory Thomas, president and co-founder of Flow Control, testified that he and McCreary discussed every aspect of the agreement, including the restrictive covenant, at length. He indicated that he explained to McCreary that the covenant was intended to protect Flow Control's relationship with its manufacturers, prevent them from leaving, being taken or stolen, and that McCreary understood it was to apply to post-employment. He noted that McCreary initialed the attachment to the agreement, which contained the covenant.
McCreary, on the other hand, testified that his discussions with Thomas prior to entering into the agreement did not include any mention of the restrictive covenant. He had doubts before signing the agreement when he saw the covenant because he believed it was "largely unenforceable" but Thomas told him that he was going to put them in all future agreements and it was "not negotiable." According to McCreary, there was no discussion of how long the restrictions would last nor whether they would apply after he left Flow Control. He claimed he signed it because Thomas told him "don't let this language stand in the way of us moving forward" and he felt, based on his past experience, that Thomas's "word is as permanent as any document."
Thomas testified that Flow Control earned commissions from Homestead between 1993 and 2000, averaging $29,500 per year, which he characterized as Flow Control's gross profit. He could not provide, when asked on cross-examination, a net profit figure. He testified that they had represented Homestead for eight years and there was "absolutely no reason to believe that had McCreary not disregarded his restrictive agreement and . . . Herron not tortiously interfered . . . we could not have enjoyed that business for another eight years." Thomas set his company loss as continuing at $29,500 "year to year."
Prior to the commencement of trial, Flow Control moved to preclude McCreary and Herron from introducing evidence of other Flow Control sales representatives whose contracts contained restrictive covenants limited to one and two years. Flow Control argued that such evidence was inadmissible under the parole evidence rule. Flow Control also argued that McCreary was free to testify what time limit he believed applied to the restrictive covenant, that the case was not before a Chancery Division judge, and it was essentially up to the jury to determine the intent.
In response, McCreary and Herron argued that the other agreements had probative value because the failure to include a time limitation in McCreary's agreement was indicative of an intention not to bind or restrict McCreary after he left Flow Control. They also argued that the evidence was necessary in order to determine what would be a reasonable time limit under the circumstances. The judge granted Flow Control's motion, finding that the other contracts were not probative and it was up to the jury to determine what if any time restriction should apply.
On appeal, McCreary and Herron essentially contend that the judge erred in excluding the other agreements, all of which involved employees, rather than independent contractors like McCreary, and all but one of which had a limit of one year. They argue that these other agreements were relevant to the determination of whether McCreary was indeed restricted in any way post-employment and, if he was, the length of time that would be deemed reasonable. They also argue that the judge, not the jury, should have determined the enforceability of the restrictive covenant, including what time limitation would be reasonable under the circumstances. Flow Control counters that the judge properly precluded the extrinsic evidence concerning other employees' restrictive covenants and the enforceability of the restrictive covenant, including its time limitation, was properly before the jury.
These agreements were not made part of the trial record nor have they been provided in the record on appeal.
In Solari Industries v. Malady, 55 N.J. 571 (1970), the seminal case dealing with restrictive covenants not to compete, the Court reexamined earlier decisions which "flatly outlawed" noncompetitive agreements, holding that it was time to abandon our State's void per se rule in favor of a "rule which permits the total or partial enforcement of noncompetitive agreements to the extent reasonable under the circumstances."Id. at 576, 585. The determination of what is reasonable under the circumstances embodies equitable considerations to ascertain whether the purpose of a given restraint is "violative of public policy" or "`deliberately unreasonable and oppressive.'" Id. at 578 (quoting 5 Williston on Contracts § 1569 (Rev. ed. 1937)). Thus, Solari established a three-prong test to determine the reasonableness. Specifically, the covenant must (1) protect the legitimate interests of the employer, (2) impose no undue hardship on the employee, and (3) not impair the public interest.Id. at 585.
It is the court's role, using equitable considerations, to balance the legitimate interests of the employer against the extent of undue hardship on the employee, as well as the public interest implications. Ingersoll-Rand Co. v. Ciavatta, 110 N.J. 609 , 638-39 (1988); Maw v. Advanced Clinical Communications Inc., 359 N.J. Super. 420 , 433-34 (App.Div. 2003). Likewise, balancing the public interest implications is within the province of the court. In applying the three-prong test of Solari, the
resolution of each case will depend on its own facts and circumstances. Courts must not go too far in construing holdover agreements to insulate employers from competition from former employees. That courts should not be overly zealous in protecting employers should not, however, dissuade a court from analyzing the reasonableness of a holdover covenant or from enforcing it where it is reasonable.
[Ingersoll-Rand, supra, 110 N.J. at 640 .]
Generally, noncompetition agreements are looked upon unfavorably by the courts as potential restraints on trade.Whitmyer Bros., Inc. v. Doyle, 58 N.J. 25 , 33-34 (1971) (citing to New Jersey's Antitrust Act, N.J.S.A. 56:9-1 to -19);Laidlaw, Inc. v. Student Transp. of Am., Inc., 20 F. Supp. 2d 727 , 757 (D.N.J. 1998). Although an employer has a legitimate interest in protecting confidential information, an employee will not be precluded from using non-confidential information simply to prevent competition. Whitmyer Bros., supra, 58 N.J. at 34 . Therefore, the court must analyze the nature of the confidential information possessed by the employee and balance it against the legitimacy of the employer's interest in keeping the information secret. Maw, supra, 359 N.J. Super. at 434-35 .
Thus, to subject an employee to a noncompete covenant in the first instance, the employer must demonstrate that it has legitimate interests which require protection through such an agreement. This requires an analysis of the employee's job, to determine whether the employee has access to information worthy of protection through a noncompetition agreement, such as highly confidential or proprietary business information, trade secrets, or customer relations information. On the other hand, matters of general knowledge within an industry, the skills or experience an employee learned or developed during an employee's tenure with the employer, or the knowledge, skills, or abilities an employee brought with him to the employer, are not worthy of protection through a noncompetition agreement.
If the employee does not have access to trade secrets or other confidential or proprietary information, then a noncompetition agreement may not be enforced against the employee, regardless of its terms. Such an agreement will be viewed as serving no legitimate purpose, and as an unlawful and unenforceable restraint on trade. If, on the other hand, the employee does have access to trade secrets, or other confidential or proprietary information, warranting imposition of a noncompetition agreement, then consideration moves to the second and third.
[Ibid. (citations omitted).]
Finally, as "`a broad proposition, contracts that are unreasonable are unenforceable, that is, if the restraints imposed are unlimited as to time, space, or subject matter.'"Ingersoll-Rand, supra, 110 N.J. at 626 (quoting Harold M. Knoth, Assignment of Future Inventions, 27 Chi.-Kent L.Rev. 295, 296 (1949)); see e.g. A.T. Hudson Co. v. Donovan, 216 N.J. Super. 426 (App.Div. 1987) (enforcing two-year restriction because employer has legitimate interest in protecting his customer relationships); Hudson Foam Latex Prods., Inc. v. Aiken, 82 N.J. Super. 508 (App.Div. 1964) (holding contract provision prohibiting employee from working for employer engaged in similar business unenforceable without geographic limitation).
A restrictive covenant can cause undue hardship to an employee if it places substantial limitations on where an employee may work or if it prevents an employee from engaging in his or her livelihood. To determine whether the hardship is undue, consideration is given to the nature of the profession, the duration of the restriction, the geographic area of the restriction and the type of restriction. Factors include, but are not limited to, (1) the agreement's geographic and temporal scope; (2) whether the types of activities restrained are those which would place the employee in actual competition with the former employer; and (3) whether the covenant will unduly burden the employee in finding work in his or her field.
[Maw, supra, 359 N.J. Super. at 436-37 (citations omitted).]
Here, the trial court mistakenly let the jury determine the reasonableness of the restrictions and the post-employment period for which the restrictive covenant should be enforced. On remand, the judge should apply the Solari three-part test and determine whether the restrictive covenant was reasonable under the circumstances including whether it was unduly burdensome and, if so, for what, if any, period would be reasonable for its enforcement. Any limitation on time would necessarily impact on the measure of damages. In arriving at a determination, the court should ascertain the meaning and intent of the restrictive covenant by examining the specific language used, as well as the circumstances under which it was entered, and the existence of any similar agreements between Flow Control and its other employees. Consideration should also be given to testimony of the principals and a determination made as to whether McCreary possessed and used confidential information exclusive to Flow Control or whether it was information also shared by Homestead.
Lastly, we address defendants' contention that the measure of damages considered by the jury was inappropriate. During oral argument on appeal, Flow Control conceded that the evidence that it presented respecting damages was limited to lost profits. Lost profits are made up of "the difference between gross income and the costs or expenses which had to be expended to produce the income." Cromartie v. Carteret Sav. Loan, 277 N.J. Super. 88 , 103 (App.Div. 1994). "Proof of the relevant costs or expenses" is an essential "part of the damage case of the party seeking recovery of lost profits." Ibid. Here, the proofs were limited to Flow Control's gross profits. On retrial, evidence of costs and expenses, which may be based upon estimates to a reasonable degree of certainty, should be included in order to establish any lost profits claimed to have been sustained by Flow Control. V.A.L. Floors, Inc. v. Westminster Cmtys. Inc., 355 N.J. Super. 416 , 424-25 (App.Div. 2002).
Reversed and remanded for new trial.