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Kadi v. Massotto

A-2555-07T2 (N.J. Super. App. Div. 2008) (Unpublished)

NON-COMPETITION — Although New Jersey law permits an arbitrator or a court to modify non-competition covenants, neither is obligated to do so if the protected party has a legitimate interest in maintaining its customer base, program of services, and reputation where the restrictive covenant does not impose an undue hardship on the restricted party who is not prevented from earning a living.

Two business partners were co-owners of a company that provided consulting services to dental practices. After the relationship between them became strained, one of the partners sold his one-half share of the company to the other partner. The agreement between the seller and the remaining business owner had a restrictive covenant that prevented the seller from providing any similar services to the dental industry for a ten-year period in the New York Metropolitan area, for five years in all states east of the Mississippi River outside of the New York Metropolitan area, and for a three-year period in all states west of the Mississippi except for Arizona. The agreement also contained non-solicitation provisions that barred the seller from soliciting any customers, clients or employees of the company other than to obtain a reference. Additionally, the agreement contained an arbitration clause and stated that it was to be construed under New Jersey law.

The seller moved to Arizona where he formed his own dental consulting company and wrote a book on running a successful dental practice. Roughly three years after the agreement was signed, the seller had two clients east of the Mississippi and one west of the Mississippi. At one point, the seller attended a conference in New York and handed out two copies of his book and some business cards. After the seller came into contact with one of the old company’s clients, his former partner demanded arbitration seeking damages and an injunction against further violations of the restrictive covenant. The seller made a cross-demand for arbitration and sought to have the restrictive covenant and non-solicitation clauses struck from the agreement. The arbitrator enjoined the seller from providing competing services in the New York Metropolitan area until the end of the ten-year period (as stated in the agreement) and until the end of the five-year period for all other states east of the Mississippi River. On the seller’s challenge, the lower court upheld the arbitrator’s decision.

On appeal, the Appellate Division noted that arbitration decisions were only to be overturned under limited circumstances such as where there was fraud, corruption, misconduct, partiality, excess exercises of power or certain procedural deficiencies. The seller’s argument that the arbitrator exceeded her powers by not applying New Jersey law regarding restrictive covenants was rejected. The Court ruled that the arbitrator applied New Jersey law in finding that the former partner had a legitimate interest in maintaining the company’s customer base, program of services, and reputation, and that the restrictive covenant did not impose an undue hardship on the seller who was not prevented from earning a living. It also found that the restrictive covenant did not pose any harm to the public interest. The Court pointed out that according to New Jersey law, courts are allowed to limit a non-compete agreement’s geographical reach or scope of its restriction. Here, however, it found that even if the arbitrator had misapplied New Jersey law by not making any such adjustments, her decision did not amount to a failure to apply New Jersey law. Based on its findings and conclusions, the Court affirmed the decision of the arbitrator not to strike the restrictive covenant from the agreement and her decision to enjoin the seller from breaching its terms.


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