Smith, Batchelder & Rugg v. Foster

• Decision Date: 20 August 1979
• Docket Number: No. 79-058,79-058
• Citation: 119 N.H. 679,406 A.2d 1310
• Parties: , 15 A.L.R.4th 551 SMITH, BATCHELDER & RUGG v. William Jay FOSTER, Robert Genovese and Christopher C. Barrett.
• Court: New Hampshire Supreme Court

Page 1310

406 A.2d 1310

119 N.H. 679, 15 A.L.R.4th 551

SMITH, BATCHELDER & RUGG v. William Jay FOSTER, Robert Genovese and Christopher C. Barrett.

No. 79-058.

Supreme Court of New Hampshire.

Aug. 20, 1979.

Gardner & Clauson, Hanover (K. William Clauson, Hanover, orally), for plaintiff.

Orr & Reno, Concord (Ronald L. Snow, Concord, orally), for defendants.

DOUGLAS, Justice.

This is an action in equity brought by the plaintiff to enforce restrictive covenants against the defendants. After a hearing, the Master (E. Paul Kelly, Esq.) recommended that the covenants should be held unenforceable and that a temporary and permanent injunction should issue to prevent the plaintiff from enforcing any of the provisions of the restrictive covenants. This recommendation was upheld by the Superior Court (Johnson, J.), which reserved and transferred the plaintiff's exceptions. We overrule the plaintiff's exceptions.

The plaintiff is the largest accounting firm in both New Hampshire and Vermont with four offices in New Hampshire and three in Vermont. The defendants are former employees of the plaintiff. Before beginning his employment, each defendant had orally negotiated the terms of his employment with a representative of the plaintiff. After these agreements were made, each defendant signed a written contract containing a covenant not to compete with the plaintiff upon termination of the employment. These restrictive covenants were not part of the prior oral agreements but defendants were confronted with the written covenants only after they had substantially changed their positions in reliance upon the prior oral agreements.

The covenants provided that for three years after termination of employment, the employee "will not enter into the employ of, or represent in any manner, any person, firm or corporation who or which was a client of the Employers at any time prior to the termination of this employment without the express written approval of the Employer." The covenants contained a liquidated damages clause which provided that in the event of a breach of the restrictive covenant, the employees would have to pay fifty percent of the fees they received from serving the plaintiff's former clients for three years after the termination of their employment.

In August 1976, the defendants voluntarily terminated their employment with the plaintiff and established an accounting firm in White River Junction, Vermont. The defendants are presently serving 207 clients, 40 of whom are former clients of the plaintiff. The defendants did not receive the express written approval of the plaintiff required by the employment contract before they began to serve these clients.

An employer seeking to enforce a covenant not to compete must show that the covenant is supported by consideration, See Lang v. Johnson, 24 N.H. 302 (1851), and that it is reasonable with respect to the interests of the employer, the employee and the public. Moore v. Dover Veterinary Hospital, Inc., 116 N.H. 680, 367 A.2d 1044 (1976). Even if the trial court determines that the covenant is unreasonable, the employer nonetheless may be entitled to equitable relief in the form of reformation or partial enforcement of an overly broad covenant upon a showing of his exercise of good faith in the execution of the employment contract. Solari Industries, Inc. v. Malady, 55 N.J. 571, 264 A.2d 53 (1970). See generally Insurance Center, Inc. v. Taylor, 94 Idaho 896, 499 P.2d 1252 (1972).

We must examine the provisions of the employment contracts to determine whether the restrictive covenants were supported by consideration. The written covenant contained a clause, not contained in the original oral agreement, that employment was terminable by either party on thirty days' written notice, and terminable by the plaintiff if it was not satisfied with the employees' services. The plaintiff reserved the right to be the sole judge of such satisfaction.

The master incorrectly determined that the notice requirement, added by the written covenant, was not sufficient consideration for the defendants' promises not to compete upon termination of their employment. See Advanced Copy Products, Inc. v. Cool, Ind.App., 363 N.E.2d 1070 (1977). The notice provision itself is not invalid for lack of consideration. A provision "that one party shall have the power to cancel by notice given for some stated period, such as 'notice for thirty days' . . . should never be rendered invalid thereby for lack of 'mutuality' or for lack of consideration." 1A A. Corbin, Contracts § 164 at 83 (1963).

The provision permitting the plaintiff to terminate the contract if dissatisfied with the defendants' work does not render its promise to employ illusory because there is an implicit requirement that the employer, in good faith, be dissatisfied with the employee's work when he exercises his power to terminate the employment. 3A A. Corbin, Contracts § 647 at 105 (1960).

The defendants signed the covenants after they were hired by the plaintiff under oral employment agreements and were employed for approximately three years after they signed their employment contracts. Continued employment after signing an employment contract constitutes consideration for a covenant not to compete contained therein. Daughtry v. Capital Gas Co., 285 Ala. 89, 229 So.2d 480 (1969); Farm Bureau Service Co. v. Kohls, 203 N.W.2d 209 (Iowa 1972). Contra Kistler v. O'Brien, 464 Pa. 475, 347 A.2d 311 (1975).

The trial court determined that the covenants were unenforceable because they imposed unreasonable restrictions upon the employees. The covenant's validity depends upon its reasonableness given the particular circumstances of each case. Moore v. Dover Veterinary Hospital, Inc., 116 N.H. 680, 684, 367 A.2d 1044, 1047 (1976).

In scrutinizing restrictive covenants, this court employs the following three-pronged test: "(a) restraint on employment is reasonable only if it is no greater than necessary for the protection of the employer's legitimate interest, does not impose undue hardship on the employee and is not injurious to the public interest." Moore v. Dover Veterinary Hospital, Inc., supra at 684, 367 A.2d at 1047; Blake, Employee Agreements Not to Compete, 73 Harv.L.Rev. 625, 648-49 (1960).

The master correctly concluded that the restrictive covenant was unreasonable as it related to the employer's legitimate interest. The master found that the plaintiff's earnings exceed two million dollars per year and that it serves over 3,000 clients. The master also found that the defendants serve only 207 clients and that their gross earnings for the period of June 1, 1977, to January 12, 1978, were $47,900. The master held that in the absence of a defined geographical coverage within the covenants, the two-state region of New Hampshire and Vermont would be established as the area covered. He found that this area is unreasonably large. He further found that the class of clients protected by the covenants was too broad because the class includes all clients served by the plaintiff during its existence, whether or not they were current clients.

Several courts have enforced restrictive covenants in the accounting profession to protect the employer's legitimate interest. See Faw, Casson & Co. v. Cranston, 375 A.2d 463 (Del.Ch.1977); Ebbeskotte v. Tyler, 127 Ind.App. 433, 142 N.E.2d 905 (1957); Scott v. Gillis, 197 N.C. 223, 148 S.E. 315 (1929); Racine v. Bender, 141 Wash. 606, 252 P. 115 (1927). These courts reasoned that, due to the nature of the accounting profession and the accountant-client relationship, the restrictive covenants should be enforced because they furthered the employer's legitimate interest "in protecting its business from former employees who have gained knowledge of its clients and internal operations and who...