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Flow Control, Inc. v. Herron Valve

2004 WL 2563563 (N.J. Super. App. Div. 2004) (Unpublished)

EMPLOYER-EMPLOYEE; NON-COMPETITION—It is for a judge, not a jury, to determine the reasonableness of non-competition restrictions and the length of a post-employment restriction period.

A sales representative resigned from his company after eleven years and went to work for a competitor. He then used his former company’s confidential information to form an agreement with one of its customers. This agreement moved all of the customer’s business from the employee’s former company to his new company. The original company brought suit, alleging breach of an employment agreement it had with the employee, which it claimed amounted to a restrictive covenant. The agreement recited that the employee was “[to] refrain from any arrangement, contractual or otherwise, to represent, assist or solicit sales for present or former [company] principals/vendors without first obtaining written approval from [the company].”

During trial, the original employer claimed that it and its employee had discussed every aspect of the agreement at length, including its restrictive covenant. Specifically, it claimed that it told the employee that the restriction was binding post-employment. The employee testified that these discussions did not cover the restrictive covenant, nor were there discussions about how long the restrictions would last, nor whether they would apply after he left the original company.

On appeal, the employee contended that the lower court’s judge, not its jury, should have determined the enforceability of the restrictive covenant, including what time limitation would be reasonable under the circumstances.

There is a three-prong test to determine the reasonableness of a restrictive covenant. Specifically, the covenant must protect the legitimate interests of the employer. It can’t impose an undue hardship on the employee. It can’t impair the public interest. Generally, noncompetition agreements are looked upon by courts with disfavor because of their potential restraint on trade. Although an employer has a legitimate interest to protect its confidential information, an employee will not be precluded from using non-confidential information when barring such use would simply prevent competition. Therefore, a court must analyze the nature of the confidential information possessed by the employee and balance it against the legitimacy of the employer’s interest in keeping the information secret.

The Appellate Division felt that the lower court mistakenly let the jury determine the reasonableness of the restrictions and the length of the post-employment period for which the covenant should be enforced. On remand, the lower court was told to apply the three-part test, and that any time limitation would impact on the measure of damages. Furthermore, the lower court needed to determine the meaning and intent of the covenant by examining the specific language used, as well as the circumstances under which the agreement was signed, and the existence of any similar employment agreements with other employees. The lower court judge was also directed to give consideration to whether the employee had used any confidential information.

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