Systems and Software, Inc. v. Barnes, 886 A.2d 762

Vermont Supreme Court

2005

Chapter

20

Title

Contract Remedies

Page

870

Topic

Specific Performance and Injunctions

Quick Notes

Generally, courts will uphold a contractual ban on an employee's post-employment competition if it would be difficult for an employer to determine when an employee is soliciting its customers

Book Name

Torts Cases, Problems, And Exercises.  Weaver, Third Edition.  ISBN:  978-1-4224-7220-0.

Issue

o         Whether S&Ss non-compete agreement can be upheld?  Yes.

Procedure

Trial

o         Granted injunction

Supreme

o         AFFIRMED

Facts

Reason

Rules

Pl Systems and Software

Df Barnes

What happened?

o         Defendant Randy Barnes appeals the superior court's order enjoining him from working for Utility Solutions, Inc. or any other direct competitor of his former employer, plaintiff Systems & Software, Inc., for a six-month period pursuant to the noncompetition agreement that he signed when he began working for plaintiff.

Argues Four issues

o         He argues that the trial court should not have enforced the agreement because:

o         (1) plaintiff did not have a legitimate protectable interest;

o         (2) the agreement contains unnecessary restrictions and imposes an undue hardship on him;

o         (3) in any event, he did not violate the agreement; and

o         (4) even if he did, plaintiff should be estopped from enforcing it.

Background Information

o         Plaintiff is engaged in the software specific for utilitiy provider organization and management.

o         Pl hired the Df as an at-will employee to become a regional vice-president of sales.

Noncompetition Agreement

o         The Df had to sign a noncompetition agreement that prohibited him-during his employment and for six months thereafter from becoming associated with any business that competes with plaintiff.

Left Position

o         The Df voluntarily left his position.

o         Started a partnership with his wife called Spirit Technologies Consulting Group.

o         Spirit Technologies services utilities software nationwide just like the Pl.

Pl Filed Complain

o         Requested injunction relief that sought enforcement of the parties noncompetition agreement.

Trial Court

o         Granted injunction

Df - Appealed

188 Ancillary Restraints on Competition

o        A restrictive covenant is unreasonably in restraint of trade if

o        (1) the restraint is greater than is needed to protect the promisee's legitimate interest, or

o        (2) the promisee's need is outweighed by the hardship to the promisor and the likely injury to the public.

Public Policy

o        Courts will proceed with caution when asked to enforce covenants against competitive employment because such restraints run counter to public policy favoring the right of individuals to engage in the commercial activity of their choice.

Enforcing Noncompetition Agreements when

o        Courts will enforce such agreements unless the agreement is found to be

o        contrary to public policy,

o        unnecessary for protection of the employer,

o        or unnecessarily restrictive of the rights of the employee, with due regard being given to the subject matter of the contract and the circumstances and conditions under which it is to be performed.

Df Arg does not safeguard a legitimate interest of the employer

o        Because it was not needed to protect trade secrets or confidential customer information.

Courts Response

o        This argument fails because it is based on a faulty premise-that noncompetition agreements may be enforced to protect only trade secrets or confidential customer information.

o        Most jurisdictions do not limit the scope of noncompetition agreements to trade secrets or confidential customer information, which are often protected by other law even in the absence of such agreements.

Restatement (Third) of Employment Law 6.05

o        Expressly states that noncompetition agreements may protect legitimate employer interests such as customer relationships and employee-specific goodwill that are "significantly broader" than proprietary information such as trade secrets and confidential customer information.

o        cmt. b ("[Section] 6.05 sometimes allows an employer contractually to prevent all competition by a former employee, even competition that does not  make use of the employer's proprietary information.").

Court Trial Court findings

o        The trial court found that plaintiff had a legitimate protectable interest, and the evidence supports the court's finding.

o        The trial court found that during his employment with plaintiff, defendant had acquired inside knowledge about the strengths and weaknesses of plaintiff's products-knowledge that he could use to compete against plaintiff.

o        As the court pointed out, both plaintiff and United Solutions, defendant's only client, served a small market of customers;

o        Even the loss of single contract could deprive plaintiff of revenue for many years,

o        We find no basis for overturning the trial court's conclusion that plaintiff had a legitimate protectable interest.

Df Arg Agreement is more restrictive than necessary to protect interests.

o        Less drastic solutions were available to the trial court to fashion a more reasonable restraint on his employment.

o        The court could have simply prohibited him from soliciting plaintiff's current customers, or

o        Prohibited him from dealing with non cooperative utilities,

Df Arg - imposing a hardship that far outweighs any potential harm to plaintiff

o        According to defendant, a complete ban on competition is not only unduly restrictive, but it effectively prevents him from working in his field of expertise for six months, thereby imposing a hardship that far outweighs any potential harm to plaintiff.

Courts Response

o        Defendant now claims hardship based on nothing more than a bald statement.

o        We find no error in the court's decision.

Court Type of non-compete covenant.

o        Restatement (Second) of Contracts 188 cmt. g, employers "may seek to protect the good will of the business with [either] a general covenant not to compete or with a specific prohibition on contact with customers.

Determining the restraint

o        The reasonableness of the restrictions will vary by industry and will depend highly on the nature of the interest justifying the restrictive covenant.

o        Generally, courts will uphold a contractual ban on an employee's post-employment competition if it would be difficult for an employer to determine when an employee is soliciting its customers.

Courts Restraint Analysis

o        The Df was hired to a regional vice-president of sales

o        He had access to existing customers, information concerning the strengths and weaknesses, the individual needs of the customers, and the prices paid by those customers.

Superior Court Findings

o        The Df acquired knowledge of plaintiff's software designs, customer base, marketing strategy, business practices, and other sensitive information revealing the strengths and weaknesses of plaintiff's software products.

o        It would be extremely difficult to monitor the whether the Df was using the goodwill and knowledge he acquired while working for plaintiff to gain a competitive edge against plaintiff.

o        The evidence supports the court's findings and conclusions.

Df Arg He has not competed with the Pl

Courts Response

o        There is evidence to the contrary.

o        Utility Solutions directly competed with the Pl.

o        In a trade show, the Df represented himself as Utilities solution director.

Df Arg False Representation of signing the non-compete agreement

o        He accepted employment with plaintiff and signed the agreement based on plaintiff's false representations that (1) its software products were suitable for cooperative electric and gas utilities; and (2) it would not seek to enforce the covenant not to compete unless defendant went to work for a major competitor of plaintiff.

Courts Response

o        We find no merit to defendant's argument

o        The court found that plaintiff did not mislead defendant about the capability of its products.

AFFIRMED

Class Notes