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Laidlaw, Inc. v. Student Transportation of America, Inc.

20 F. Supp.2d 727 (D. N.J. 1998)

NON-COMPETITION AGREEMENTS—A non-competition agreement executed in connection with the sale of a business but which extends beyond a further period of employment is analyzed for enforceability based upon the change, over time, in the buyer/employer’s interest to be protected.

A large school bus transportation company sought a preliminary injunction against a competitor formed by four of its former employees. It sought relief based upon a non-competition agreement originally executed by several of the former employees when they sold their own bus business to the larger company. The covenant not to compete ran from the time of the sale until five years after each of them, respectively, no longer received remuneration from the buyer. Initially, the parties argued as to whether the term “remuneration” meant only the purchase price or was also intended to include any other payments that the employees may have received, such as salary. After a lengthy analysis of parol evidence, the District Court found that the restrictive covenants expired five years from the date that each of the former employees ended their employment with the large company. The Court then set out to determine whether the particular non-competition agreements were enforceable under New Jersey law. Its reading of New Jersey law was that such agreements are enforceable if they are reasonable in view of all the circumstances of the particular case. The Court’s further understanding was that an employee’s covenant not to compete “would generally be found to be reasonable where it simply protects the legitimate interests of the employer, imposes no undue hardship on the employee, and is not injurious to the public.” It also recognized a distinction between covenants related to the sale of a business “which are accorded far more latitude” and the more narrowly construed restrictive covenants ancillary to an employment contract. Therefore, another threshold issue was how to categorize the non-compete agreement within the sale agreement since part of it was ancillary to the sale of the business, but the balance of it ran from the end of a term of employment. In trying to reach this decision, the Court took a look at the “protectable interests” of the large company, recognizing that if employment continues well past the date of sale, the buyer’s need to protect its purchase would be long gone and it would be Procrustean to say that the covenant was wanted for the buyer’s protection.

Unfortunately for the large school bus contractor, the District Court found that it no longer had a protectable interest in the purchased goodwill. The Court found that goodwill exists and has some importance in the New Jersey school bus business, even though there is generally no goodwill in a system that is purely based upon the direct submission of public bids. There, the only question is which applicant is the lowest responsible bidder. New Jersey school busing, however, does not involve a pure public bidding system. School boards do not have to open their bus contracts to public bidding every year. They have the ability to renew a contract provided that the renewal price represents less than a 30% increase over the original contract. Therefore, the Court recognized that goodwill, past service, and customer relations can and do play a role in whether a New Jersey school board will choose to renew a contract or open it for bid. Here, the larger company showed nothing that its new competitor or former employees had done or could do to even raise a doubt that it, the nation’s largest school bus contractor, was not a “responsible” bidder. Consequently, once a school board opens a contract for bidding, goodwill was irrelevant and nothing that the former employees (or their new company) had been shown to do denigrated the goodwill of the larger company. This meant that the larger company had no protectable interest.

The length of time that is reasonably needed to protect goodwill varies under the circumstances. Here, the original company had over nine years in which to develop its own goodwill. In the District Court’s view, such a period is well beyond the time in which a buyer of a school bus business has a protectable interest in purchased goodwill. Under New Jersey law, if a restrictive covenant is overly broad or unreasonable, a court may limit its application. Having found nine years to be more than sufficient time, the Court found that the purchasing company no longer was entitled to protection.

The larger school bus company also alleged that its employees had taken a variety of confidential information. The Court, however, found that much of the allegedly stolen information was either irrelevant, not confidential, or may have been confidential, but had become stale. In fact, the Court concluded that what the larger company really sought to prevent was not its former employees’ use of confidential information, but their competition. To the Court, the former employees represented a serious threat to the larger company because they knew the New Jersey school bus business and knew how to bid competitively. An employer, however, may not prevent an employee from using the general skills in the industry which have been built up over the employee’s tenure with the employer. In addition, general knowledge of a former employer’s inner workings, alone, does not create a protectable interest sufficient to justify the enforcement of a restrictive covenant.


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