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Grinspec, Inc. v. Lance

A-3313-01T1 (N.J. Super. App. Div. 2003) (Unpublished)

EMPLOYMENT; NON-COMPETITION—When an employee is fired shortly after executing a non-compete amendment to an existing employment agreement, the amendment may lack sufficient consideration to be enforceable or if it works a hardship on the employment, it may not be enforceable.

An employer, engaged in the sale of health insurance to the public sector, required an employee to sign a employment agreement with a non-compete clause. The agreement prohibited the employee, upon termination or resignation from the company, from attempting to sell insurance to the public school market or to solicit former clients. After nine years, the employer required the employee to sign a new non-compete agreement.

The new non-compete agreement prohibited the employee from soliciting any public sector insurance clients for a two year period and also specified that employer would be entitled to liquidated damages for breach of the agreement. The employee was advised that he was required to sign the new non-compete agreement in order to continue his employment. Four months later, the employee was fired. The employee then began working for a competitor of his former employer, first selling only in the private sector, and then selling insurance in the public sector. The employee also sold insurance to former clients of his former employer. The employer sued its ex-employee to enforce the non-compete clause. It also sued the new employer for tortious interference. The lower court found the non-compete clause enforceable and granted the former employer its liquidated damage claim. It also found that while the new employer was guilty of tortious interference with prospective economic advantage, the old employer failed to meet its burden of proof as to damages.
The Appellate Division reversed and remanded. A non-compete agreement may be enforced if there is ample consideration for signing it, if it is limited in duration and scope, and if it will not create undue hardship on the employee’s ability to earn a living. A court may find that continued employment is sufficient consideration for a non-compete agreement, but it depends on the circumstances. The Court here found that since the employee was fired four months after he signed the non-compete agreement, there was insufficient consideration. With respect to the issue of undue hardship, the Court noted that the new employer testified that the employee was originally hired to sell insurance to the private sector but was having difficulty doing so because his entire work experience was based on selling insurance to the public sector. The Court therefore found that enforcement of the second non-compete agreement created an undue hardship. Even though the Court found the second non-compete agreement unenforceable, it found that second agreement to be a substituted contract. When a substituted contract is void, one must look at the original contract. Therefore, the Court remanded the case back to the lower court, noting that the original non-compete agreement was valid and enforceable. The consideration for the original non-compete agreement was the employee’s employment for nine years. The original non-compete was also limited to the public school market and not the entire public sector. On remand, the lower court was told to consider the reasons for the employer’s former clients taking their business to the ex-employee’s new employer.

With respect to the tortious interference claim against the new employer, the Court found that there was no malicious interference. There was no fraudulent, dishonest or illegal conduct. Rather, there was healthy competition. The Court also affirmed the lower court’s ruling that punitive damages were not appropriate since the new employer reviewed the second non-compete agreement and permitted the employee to compete after concluding that the non-compete agreement was overly broad, vague, and unenforceable.

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