Technical Aid Corp. v. Allen, 89-428

• Decision Date: 13 March 1991
• Docket Number: No. 89-428,89-428
• Citation: 134 N.H. 1,591 A.2d 262
• Parties: TECHNICAL AID CORPORATION v. Sherman John ALLEN, Jr. and another.
• Court: New Hampshire Supreme Court

Page 262

591 A.2d 262

134 N.H. 1

TECHNICAL AID CORPORATION v. Sherman John ALLEN, Jr. and another.

No. 89-428.

Supreme Court of New Hampshire.

March 13, 1991.

Rehearing Denied June 27, 1991.

Law offices of Randall E. Wilbert, Nashua (Robert G. Hendricks, on the brief, and Randall E. Wilbert, orally), for plaintiff.

Winer and Bennett, Nashua (Gary A. Braun, on the brief and orally), for defendants.

JOHNSON, Justice.

This is a bill in equity in which the plaintiff, Technical Aid Corporation (Technical Aid), seeks money damages against two former employees, Sherman John Allen, Jr., and Mark E. Redmond, and against E & S Associates of Hudson, Incorporated (E & S). Technical Aid alleges that Allen violated various restrictive covenants contained in his employment contract with Technical Aid, and that Redmond and E & S intentionally interfered with Technical Aid's contractual relationship with two former Technical Aid employees.

The Superior Court (M. Flynn, J.), sitting without a jury, held a two-day trial beginning on September 20, 1988. On August 16, 1989, the court issued findings and rulings, and dismissed Technical Aid's petition. The court found all the restrictions in Allen's contract at issue to be unenforceable, not to have been violated, or both. Independent of the above rulings, the court also found that the liquidated damages clause was unenforceable. Finally, the court found that Technical Aid had neither proved its intentional interference with contractual relationship claims, nor proved any resulting damages. We affirm in part, reverse in part, and remand.

Technical Aid raises the following issues on appeal: (1) whether the post-employment restrictive covenants of Allen's contract are reasonable and enforceable; (2) whether Allen's involvement in the genesis of E & S while still employed at Technical Aid, and E & S's servicing of one of Technical Aid's customers, constitute violations of Allen's employment contract; (3) whether the liquidated damages clause contained in Allen's contract was enforceable, and, if not, whether actual damages should be awarded; and (4) whether the passage of time between the submission of the case and the rendering of the court's decision led to inconsistent findings which were prejudicial to Technical Aid.

Technical Aid is in the business of providing temporary and contract professionals to industry. Its one division, Tech/Aid, supplies a variety of technical personnel; a number of wholly-owned subsidiaries provide other specialized technical personnel and clerical workers.

Allen was hired by Technical Aid on or about April 20, 1981. When he first reported for work on April 27, 1981, Allen was told that he was expected to sign an employment contract (the contract) containing a number of restrictive covenants. Allen had not previously been told that he would have to sign such a contract. He wanted to take the contract home and have a lawyer look at it, but he was told that he could not work for Technical Aid without signing the contract immediately. Having already given notice to his previous employer, Allen felt he had no choice but to sign the contract.

The contract contained the following restrictions:

"6. ACKNOWLEDGEMENT OF CONFIDENTIAL NATURE OF EMPLOYMENT AND GOODWILL INTERESTS OF TECHNICAL AID

... EMPLOYEE, therefore, agrees that he will not while in TECHNICAL AID'S employ, directly or indirectly, either alone or in association with any other person or firm, engage in any activity whatsoever which is competitive to TECHNICAL AID for himself or in association in any capacity with any other person or firm engaged in a similar business to TECHNICAL AID'S.

7. AGREEMENT NOT TO ENGAGE IN COMPETITIVE BUSINESS

EMPLOYEE further agrees that in the event of termination of this Agreement for any reason whatsoever, he will not, for a period of eighteen (18) months from the date of such termination (such period not to include any period(s) of violation or period(s) of time required for litigation to enforce the covenants herein) either directly or indirectly, on his own account or as agent, stockholder, employer, employee or otherwise in conjunction with any other person or entity engage in competition in a business similar to that of TECHNICAL AID located within a radius of one hundred (100) miles of any office to which he was assigned by TECHNICAL AID within the preceding year, nor will he solicit accounts, personnel, or engage in any other competitive activities within said area. EMPLOYEE further agrees that regardless of geographic location, he will not, during such time period service any customers TECHNICAL AID has done any business with during the preceding year....

8. AGREEMENT NOT TO COMPETE FOR ACCOUNTS OR PERSONNEL

EMPLOYEE further agrees that within said period of eighteen (18) months, as well as the duration of this Agreement, he will not in any way solicit, divert, take away or attempt to solicit, divert or take away any staff, temporary personnel, trade, business or good will from TECHNICAL AID or otherwise compete for accounts or personnel which became known to him through his employment with TECHNICAL AID and agrees not to influence or attempt to influence any of TECHNICAL AID'S customers or technical personnel not to do business with TECHNICAL AID."

In addition, in paragraph 9 of the contract, Allen agreed not to divulge any confidential information acquired while in the employ of Technical Aid.

After working in Technical Aid's national office for a number of years, Allen was transferred to the Nashua, New Hampshire, office. He was a factor in gaining Seppala & Aho, a construction firm, as a client for Technical Aid. Allen began placing temporary construction workers with Seppala & Aho; however, Technical Aid told him to spend more of his time placing technical workers.

In November, 1985, Technical Aid lost the Sanders Associates account, a major source of income for Allen. Dissatisfied with his prospects for future income, Allen soon thereafter decided to leave Technical Aid. Together with Redmond, who had previously left the employ of Technical Aid, Allen took steps towards forming E & S, a New Hampshire corporation, and entering the temporary personnel business. The certificate of incorporation was issued on March 24, 1986. Allen and Redmond were the sole stockholders, each owning fifty shares of stock. In April, 1986, they arranged for financing and leased office space for E & S.

On May 10, 1986, Allen resigned from Technical Aid. Thereafter, he worked for E & S, participating only in management. He did not solicit or service customers.

On June 26, 1986, Technical Aid filed a petition for a temporary restraining order, preliminary and permanent injunction, and damages. On July 10, 1986, a restraining order was issued against Allen, enjoining him from soliciting, diverting or otherwise contacting any of sixty listed client companies of Technical Aid. The injunction was dissolved in September, 1987. E & S continued to solicit and service Seppala & Aho, one of the listed companies, while the order was in effect and thereafter.

I. Enforceability of the Covenants

This court has stated that "the law does not look with favor upon contracts in restraint of trade or competition." Dunfey Realty Co. v. Enwright, 101 N.H. 195, 197, 138 A.2d 80, 82 (1957). Such contracts are to be narrowly construed. See Home Gas Corp. v. Strafford Fuels, Inc., 130 N.H. 74, 80, 534 A.2d 390, 394 (1987). Nonetheless, restrictive covenants are valid and enforceable if the restraint is reasonable, given the particular circumstances of the case. Smith, Batchelder & Rugg v. Foster, 119 N.H. 679, 683, 406 A.2d 1310, 1312 (1979). "In determining whether such restriction is reasonable, the court will look alone to the time when the contract was entered into." Seaboard Industries, Inc. v. Blair, 10 N.C.App. 323, 331, 178 S.E.2d 781, 786 (1971) (quoting Rakestraw v. Lanier, 104 Ga. 188, 194, 30 S.E. 735, 738 (1898)); accord Cook v. Johnson, 47 Conn. 175, 178 (1879). The determination of whether a covenant is reasonable is a matter of law for this court to decide. See, e.g., Seach v. Richards, Dieterle & Co., 439 N.E.2d 208, 212 (Ind.Ct.App.1982).

To determine the reasonableness of a restrictive covenant ancillary to an employment contract, this court employs a three-pronged test: first, is the restriction greater than is necessary to protect the legitimate interests of the employer; second, does the restriction impose an undue hardship on the employee; and third, is the restriction injurious to the public interest? Smith, Batchelder & Rugg v. Foster supra; see Restatement (Second) of Contracts § 188 (1979); Blake, Employee Agreements Not to Compete, 73 Harv.L.Rev. 625, 648-49 (1960). If any of these questions is answered in the affirmative, the restriction in question is unreasonable and unenforceable.

Paragraphs 7 and 8 of the contract contain a number of restrictive covenants. We will address the enforceability of each in turn.

A. Paragraph 7

The trial court ruled that paragraph 7 of the contract failed all three prongs of the reasonableness test. Paragraph 7 contains two separate restrictions. The first (the covenant against competition) prohibits Allen, for a period of eighteen months following his termination, from "engag[ing] in competition in a business similar to that of Technical Aid" within 100 miles of any office to which he had been assigned in the preceding year, or "solicit[ing] accounts, personnel, or engag[ing] in any other competitive activities within said area."

As a preliminary matter, we find to be in error the trial court's conclusion that "the word 'competition' is so vague in this context that one cannot be sure what would be considered competition." The trial court further opined that the provisions of paragraph 7 are so expansive that they could be "construed to prohibit Allen from even having a job with a business similar to that of ...