A curious decision out of Connecticut highlights the Hobson’s choice that some employers in that state might face if they do not secure covenants not to compete from all of their employees. In Creative Dimensions, Inc. v. LaBerge, the Connecticut Superior Court rejected enforcement of an 18 month non-compete and non-solicitation agreement against two former owners of the company, reasoning that the absence of non-competes with other employees rendered the agreement unfair under Connecticut law. Daniel Schwartz’s Connecticut Employment Law Blog has a fine write up on this case as well.
Creative Dimensions, Inc. (CDI) purchased the business from Daniel LaBerge and William Miller in 2005 and secured 18 month covenants not to compete and non-solicitation agreements from each of them as part of that transaction. As part of the deal, LaBerge and Miller relocated to Connecticut. In 2009, they left to join a competitor and CDI moved to enforce their non-competes. It is unclear why CDI waited until 2012 to commence the action.
The Superior Court declined to enforce the non-competes after applying a five-factor test under Connecticut law that focuses on the (1) length of time of the covenant; (2) geographic scope of the covenant; (3) fairness of the protection accorded to the employer; (4) extent of the restraint on the employee’s opportunity to pursue an occupation; and (5) extent of interference with the public interest. The court rejected the covenants under the third prong, essentially reasoning that the absence of any non-competes with other current and former sales employees was persuasive evidence that there was no protectible interest justifying the non-competes.
The Superior Court rejected any notion that the two former owners should be treated any differently from any other employee. In the court’s view, in the context of the sale of the business, the non-compete may have been reasonable during the first three years of their relationship since LaBerge and Miller were critical to the transition of the new business to its new owners. However, after three years, the court found that LaBerge and Miller were now like any other at-will employee and, therefore, the absence of any non-compete with other employees became more relevant.
The court also emphasized the absence of any proof of any trade secrets or confidential information that would justify the non-competes and rejected efforts to justify customer lists, since the identity of CDI’s customers was readily available. When CDI tried to counter by arguing that LaBerge and Miller were “very entrepreneurial,” the court said that argument was undermined by the fact that CDI also outsourced some of its work from to time to established competitors without any restrictions.
How should an employer respond? This argument is made frequently in non-compete litigation but is rarely embraced, which makes this decision unusual. Courts generally confine themselves to the agreement at issue and make the decision on the circumstances before them. From a litigation standpoint, it should serve as reminder to employers of the importance of being prepared to justify the legitimate need for the non-compete by presenting evidence of trade secrets or relationships with important customers.
This decision is also curious because it involved a non-compete that accompanied a sale of a business. Courts are generally more deferential to non-competes in this setting because (1) the non-compete has been negotiated at arms’ length between sophisticated parties with the assistance of counsel; (2) courts recognize that the transfer of goodwill critical to the business naturally accompanies and supports the non-compete; and (3) the former owners are generally paid a tidy sum in exchange for the sale of the business. The Superior Court seems to have rather cavalierly dismissed these considerations (or perhaps CDI did not emphasize them forcefully enough) when it found that these interests were no longer present after three years.
For Connecticut employers, and particularly those acquiring a business, this decision could prove to be problematic because it could force those employers to secure non-competes with other employees from whom they might not otherwise seek non-competes. For employers outside Connecticut, the decision should be of less concern, since its reasoning was highly fact-specific and was rooted in Connecticut’s law governing non-competes.