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U.S. Foodservice, Inc. v. Raad

2006 WL 1029653 (N.J. Super. Ch. Div. 2006) (Unpublished)

EMPLOYER-EMPLOYEE; NON-COMPETITION—Post-employment restrictive covenants, if reasonable, are enforceable, and courts have set out three elements of the test for reasonableness; otherwise, courts do not look upon restrictive covenants with favor and restrictions that merely stifle competition are unenforceable.

Former employees of a company that sold food and food-related products were hired by a competitor soon after they left their old employer. Each had signed a non-solicitation and non-disclosure agreement with their old employer. The old employer argued that its former employees had actively solicited customers in violation of the agreement.

First, the old employer argued that after its employees left, their new employer received orders from several of their former clients. The Court referred to this evidence as a corollary, rather than causative, assertion. Second, the former employer asserted that some of its employees stole or attempted to steal business from a number of former clients.

The old employer sought a temporary restraining order against its former employees and its competitor. In a prior order, the Court restrained the competitor from actively soliciting those of the old employer’s customers serviced by the former employer while working for their old employer. In a separate and prior order, the Court also temporarily restrained the employees from actively soliciting business from any customers they had serviced at their former employer. This, the latest of the cases addressed the old employer’s request for preliminary restraints against the employees for failing to follow the prior orders.

The Court explained that injunctive relief is an extraordinary equitable remedy. Further, the movant bears the burden of demonstrating the following: (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 probability of ultimate success on the merits; and (4) the balance of the hardship to the parties favors the issuance of the requested relief.

The old employer argued that it would be irreparably harmed if the employees were permitted to contact its customers, utilize its proprietary and confidential information, and fuel the competitor’s business. The competitor and the former employees argued that there was no evidence that they were using any of the old employer’s confidential or proprietary information, or that they were contacting the old employer’s customers with whom they did not already have a pre-existing business relationship. The Court, while acknowledging the generally accepted principle that improper use of trade secrets constitutes irreparable harm, expressed skepticism over the old employer’s ability to satisfy the first prong. It did, however, acknowledge that injury or destruction of a business may constitute irreparable harm for which preliminary injunctive relief may be appropriate.

Then, the Court shifted its analysis to the second prong and held that the old employer’s request was based on settled law. The Court explained that post-employment restrictive covenants, if reasonable, are enforceable. It elaborated on the three elements of the test for reasonableness. The covenant must: (a) protect the legitimate interests of the employer; (b) impose no undue hardship on the employee; and (c) not injure the public interest. It pointed out that courts do not look upon restrictive covenants with favor, as they potentially restrain trade. Restrictions that merely stifle competition are unenforceable. As to the first requirement, the Court explained that an employer has a patently legitimate interest in protecting its trade secrets as well as its confidential business information and has an equally legitimate interest in protecting its customer relationships. The second requirement considers the employee’s hardships. And, the last requirement considers the dual nature of the public’s interest. Namely, a court weighs the public’s interest in safeguarding fair commercial practices against protecting employers from theft or piracy of proprietary interests.

Next, the Court discussed the principles of the third prong governing a preliminary injunction—likelihood of success on the merits. A movant must show a reasonable probability of ultimate success on the merits to prevail on its application for interim relief.

Finally, the Court explained that an injunction should not issue when the benefit to the complainant is slight compared to the harm to the defendant.

Applying these principles to the circumstances of the case, the Court concluded that only limited restraints were appropriate at that time. It reasoned that to grant the relief requested by the old employer could prematurely enforce an overbroad, unreasonable, restrictive covenant. Accordingly, all requests for preliminary relief over and above what had previously been entered as temporary relief were denied and the temporary relief previously entered was continued as preliminary relief.

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