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Arcola Sales & Service Corp. v. Kelly

2005 WL 2219486 (N.J. Super. Ch. Div. 2005) (Unpublished)

EMPLOYER-EMPLOYEE; CONFIDENTIALITY; NON-COMPETITION—Where there a doubt about the underlying supporting facts in a claim by an ex-employer that a former employee is misusing confidential or proprietary information or is violating a contractual non-competition restriction, the ex-employer will not get preliminary, injunctive relief.

When a sales representative began working for a business that sold school buses in New York and New Jersey, “he was required and did sign a Non-Competition Agreement.” He had no previous experience in bus sales. The agreement contained a non-competition covenant and non-disclosure provision. Those provisions expired one year after the sales representative’s termination, whether voluntary or involuntary. The company claimed that during the course of the sales representative’s employment, it invested time and expense in training him and then paid him commissions on his sales. It also claimed that during this training, the sales representative became privy to the bus company’s “confidential business information, including manufacturers’ costs, pricing policies, and customer information.” About seventeen months after he was hired, the sales representative was fired, allegedly for failing for refusing to follow procedures and performing poorly. One example was that the sales representative never obtained a commercial driver’s license which was necessary for delivery and demonstrating the use of purchased buses to customers. When he was fired, the sales representative asked whether, under the agreement, he could sell trucks and was told that he could sell anything but buses and related services. Shortly after he was fired, the sales representative was hired by a competing bus sales company. The former employer tried to reach its ex-sales representative, but to no avail. Therefore, the former employer sent cease-and-desist letters to both its former employee and his new employer, notifying each of an alleged violation of the agreement. Despite some correspondence back and forth, nothing happened and the former employer sued on a variety of grounds, including breach of contract, misappropriation of proprietary information, conversion, tortious interference with contractual relations, and unfair competition.

In response to the suit, the former employee told a very different story. He maintained that his sales territory was only New Jersey, not New York. Further, he claimed that it was only several months after began his employment with his former employer that he was presented with the non-competition agreement, and then only after he inquired about overdue commission payments. He claimed that at no time between when he first spoke to his former employer and when he started employment was there any mention made of a non-competition agreement. In fact, he asserted that he “felt compelled to sign the Agreement because he had been advised, in no uncertain terms, that unless he signed the Agreement he would not receive the commissions due and his employment would be in jeopardy.” Further, although admitting he received training from his former employer, the former employee maintained “that this training did not involve any secret practices, formulas, strategies, etc. and, in fact, the information he learned was available to the public on” the former employer’s website. Lastly, he alleged that he was fired in an effort to deprive him of earned commissions. In addition, the former employee claimed that while on a conference call with his former employer and a representative of the Department of Labor’s Unemployment Department, his former employer suggested that he contact the competitor since his former employer was aware that the competitor was looking for a salesman. The new employer also certified that its competitor actually made them aware of the availability of this very same employee.

At the outset, the Court pointed out that “injunctive relief is an extraordinary equitable remedy that should only be entered upon a showing, by clear and convincing evidence, of entitlement to relief.” Under the seminal case, the party seeking injunctive relief “bears the burden of demonstrating that: 1) irreparable harm is likely if the relief is denied; 2) the applicable underlying law is well settled; 3) the material facts are not substantially disputed and there exists a reasonable probably of ultimate success on the merits; and 4) the balance of the hardship to the parties favors the issuances of the requested relief.” Harm is considered irreparable in equity “if it cannot be redressed adequately by monetary damages.” “[I]njury to or destruction of a business constitutes irreparable harm for which preliminary and permanent injunctive relief may be appropriate.” The New Jersey Supreme Court has stated: “Where the employee through his employment has learned the business practices and methods of his employer which if disclosed to a competitor may result in irreparable injury to the complainant, the court may presume irreparable injury will ensue from the breach of the covenant.” Further, it is clearly settled law that “post-employment restrictive covenants are enforceable if reasonable; that is, they (a) protect the legitimate interests of the employer, (b) impose no undue hardship on the employee; and (c) do not injure the public interest.” An employer has a patently legitimate interest in protecting trade secrets, but if the level of that interest does “not rise to the level of the proprietary interest deserving of judicial protection, a court will conclude that a restrictive agreement merely stifles competition and therefore is unenforceable.” According to the second requirement, “the hardships on the employer must also be considered. A restrictive covenant may cause undue hardships to an employee if it places substantial limitations on where an employee works, or if it prevents an employee from engaging in his or her livelihood.” As to the third requirement, “the public has a clear interest in safeguarding fair commercial practices and in protecting employers from theft or piracy of trade secrets, confidential information, or, more generally, knowledge and technique in which the employer may be said to have a proprietary interest. ... However, the public also has an interest in fostering competition, creativity and ingenuity.” Lastly, “it is well established in New Jersey law that ‘when there is a breach of a material term of an agreement, the non-breaching party is relieved of its obligation under the agreement.’”

With that as background, the Court recognized that the parties disagreed as to the circumstances surrounding the agreement. The sales representative claimed that the agreement was not a condition of employment. The company, on the other hand, suggested that it was the sales representative’s “procrastination that caused the Agreement to not be signed” until several months after he began employment. This factual dispute undermined the company’s claim that there was a reasonable probability of success on the merits. There was also a dispute between the parties as to the geographic location of the sales territory. The actual sales territory was relevant in determining whether the geographic scope of the non-competition agreement was reasonable. This again made it problematic as to whether the former employer would be successful on the merits. The final area where the facts were controverted were the circumstances under which the sales representative was hired by the competitor after being fired by the first company. If representatives at the original employer “did indeed facilitate the new employment relationship between [the sales representative] and [his new employer], the Agreement may not be enforceable under the doctrine of estoppel.” If the original employer was estopped from enforcing the agreement, then its claim would be moot. Consequently, in the Court’s mind, because the original employer had failed to satisfy all of the requirements needed to obtain injunctive relief, in particular by failing to demonstrate reasonable success on the merits, the injunction was denied.


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