GARY KADI v. MICHAEL MASSOTTO

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-2555-07T22555-07T2

GARY KADI,

Plaintiff-Appellant,

v.

MICHAEL MASSOTTO,

Defendant-Respondent.

 

Submitted October 7, 2008 - Decided

Before Judges Winkelstein, Fuentes and Chambers.

On appeal from the Superior Court of New Jersey, Chancery Division, Passaic County, C-101-07.

Law Office of Charles Shaw & Associates, attorneys for appellant (Mr. Shaw, of counsel and on the brief).

Mandelbaum, Salsburg, Gold, Lazris & Discenza, attorneys for respondent (Stuart Gold, of counsel and on the brief).

PER CURIAM

Plaintiff Gary Kadi and defendant Michael Massotto jointly owned a dental consulting business. In April 2004, plaintiff sold defendant his one-half share of the business pursuant to the terms of a written agreement. After a dispute arose concerning the agreement's restrictive covenant, defendant demanded arbitration seeking, among other things, damages and injunctive relief. Plaintiff filed a cross-demand for arbitration seeking to vacate the restrictive covenant contained in the agreement.

Following two days of testimony, the arbitrator issued an award on March 29, 2007, granting defendant's request for injunctive relief, but denying the parties' remaining requests for relief. The injunction prohibited plaintiff from providing competing dental consulting services directly or indirectly with defendant: (1) until April 13, 2014 in New York, New Jersey, Connecticut, and Pennsylvania (the New York metropolitan area); and (2) until April 13, 2009 in any state east of the Mississippi, excluding the New York metropolitan area.

Plaintiff filed a complaint in the Superior Court seeking to vacate the arbitrator's award, asserting that the arbitrator exceeded her powers by not applying New Jersey law pursuant to the terms of the agreement. On November 5, 2007, Judge McVeigh issued an opinion and entered an order affirming the arbitrator's award. She subsequently denied plaintiff's motion for reconsideration. It is from Judge McVeigh's orders that plaintiff has taken an appeal. We affirm.

I

Plaintiff and defendant met in 1997. Plaintiff had been a consultant in the dental industry, helping dental offices market and build a practice, while defendant had been doing similar consulting work for chiropractors. Until 2001, they shared office expenses and worked together, but maintained separate businesses.

In 2001, they became equal partners in a new business known as Staff Driven Practices (SDP), limiting their consulting work to the dental industry. To promote their business, plaintiff and defendant gave seminars, wrote articles, and wrote a book entitled 25 Surefire Ways To Ruin Your Dental Practice. They established numerous contacts in the dental, legal, accounting and financial areas. The SDP office was located in Wayne, and plaintiff and defendant focused on promoting their business within the New York metropolitan area. SDP earned $450,000 in gross sales in 2001, and by 2003 it generated over $600,000 in sales. Plaintiff and defendant each earned twelve to fifteen thousand dollars per month.

In 2003, the parties' relationship became strained. After plaintiff told defendant that he wanted to leave the business, they agreed that defendant would purchase plaintiff's interest in SDP. Consequently, over several months, the parties negotiated a purchase price and the scope of a restrictive covenant. SDP's major asset was its goodwill, its clients, and its "unique methodology." It did not have many "hard assets"; aside from furniture and computers, it had about thirty to fifty thousand dollars in cash in its operating account.

Plaintiff initially wanted $750,000 for his share of the business. Ultimately, the parties stipulated that the value of the company was $1.2 million and they agreed to a purchase price of $600,000 plus a $150,000 "incentive payment" that plaintiff would receive if the company's average gross revenue for the three years following his departure was at least $1.4 million.

Defendant initially requested that the agreement include a nationwide restrictive covenant, which would have prohibited plaintiff from working in the dental consulting industry for ten years. Defendant wanted this broad restrictive covenant because he was "mortgaging [his] life" to purchase plaintiff's share of the business. After paying the $600,000, he would have "zero" personal resources. Although the then current market for the company was the New York metropolitan area, defendant planned to expand the company into other markets throughout the country.

The agreement ultimately included the following restrictive covenant:

6.01 Restrictive Covenants. Each of the Company, Remaining Member [defendant] and Seller [plaintiff] agree that (a) Remaining Member would not have purchased Sellers' Interests at the Purchase Price unless and until Seller agreed to the restrictions that follow and (b) the future success of the Company depends that clear and concise restrictions on Seller's future activities be delineated. . . .

6.02 Non-Compete. Seller shall not, directly or indirectly, coach, consult with, be employed by or own any entity that provides coaching or consulting services ("Services") to the Business nor shall Seller directly or indirectly as a principal, owner, employee, shareholder or consult engage in the Business:

For a period of [ten] (10) years in the states of New York, New Jersey, Connecticut and Pennsylvania ("New York Metropolitan Area").

For a period of five (5) years in any state east of the Mississippi River, excluding the states in the New York Metropolitan Area;

For a period of three (3) years in any states west of the Mississippi River, excluding Arizona.

These restrictions shall not apply to Services that Seller provides to dental practices only in the State of Arizona who are not Customers and other clients who are not Customers of the Company on the Effective Date regardless of the field. Except as described in the sentence that follows this one, communications from Arizona to dental practices or with clients outside the State of Arizona shall not constitute a competing Business or providing Services if such dental practices or dental clients are not Customers of the Company. However, Seller's direct or indirect provision of marketing materials to dental practices, dental clients, dental practice staff members, dental industry professionals, dental industry networks and dental industry referral sources in the New York Metropolitan Area, whether or not the foregoing are Customers, shall constitute a violation of these non-competition, non-solicitation provisions. For purposes of this restrictive covenant, a competitive company or firm is any business organization or sole proprietorship that operates in the Territory and whose activities include the Business of the Company as described herein. Seller may engage in any consulting activities in connection with any business or profession other than Business of the Company so long as such activities do not include Customers.

Defendant understood the covenant to mean that for three years, plaintiff had "no right to work with any client outside the State of Arizona" or provide marketing materials to clients outside of Arizona. Plaintiff understood the covenant to mean that as long as he had an office in Arizona, he could conduct business with any state outside of the New York metropolitan area.

The agreement also contains a nonsolicitation clause, which states that plaintiff "shall not, directly or indirectly, pirate or attempt to pirate or solicit for himself or any other company any current employee or independent contractor, Customer, referral source or industry contact of the Company" for ten years. Attached to the agreement were lists of the company's customers, its industry contacts, and members of its referral network. The agreement prohibited plaintiff from "contact[ing] any Customer under any circumstances," aside from obtaining a reference or a testimonial.

The agreement also contained an arbitration clause, which provided that the "award [of the arbitrator] shall be final and binding upon the parties." The agreement further provided that "the construction and enforcement of [the agreement's] terms and the interpretation of the rights and duties of the Parties shall be governed by the laws of the State of New Jersey."

The parties executed the agreement, and closed the sale on April 13, 2004. After plaintiff left SDP, the business's gross revenue increased from $600,000 in 2003 to $1,250,000 in 2005. Despite this financial growth, it did not expand geographically; aside from one dentist in Massachusetts, all of its clients were still located within the New York metropolitan area.

Plaintiff moved to Arizona in February 2005. In May 2005, he formed his own dental consulting company, "Next Level Practice." To obtain business he wrote articles, appeared at speaking engagements, and distributed a book he wrote, entitled Million Dollar Dentistry.

In 2004 and 2005, plaintiff appeared at the New York Dental meeting, and in January 2006 he attended a conference in Dallas. While at the New York meeting, plaintiff gave out two copies of his book and two business cards.

As of the date of the arbitration, plaintiff had three clients outside of Arizona: one in Illinois, one in Wisconsin, and one in California. Although he was soliciting business outside of Arizona, he did not market or provide services to the New York metropolitan area. Plaintiff's revenues from dental consulting were $400,000 in 2005, and between $500,000 and $600,000 in 2006. Plaintiff personally earned about $120,000 each year.

Defendant claimed that, in violation of the restrictive covenant, plaintiff contacted SDP customers and contacts. Plaintiff acknowledged that after he left the business, he was contacted by one of SDP's clients, Dr. Breault, concerning whether he should stay with SDP or use plaintiff's services. Ultimately, defendant refunded the doctor about half of the money he had previously paid to SDP for services.

II

In defendant's demand for arbitration, he sought $25,000 in damages; an injunction against plaintiff's further violations of the restrictive covenant; and disgorgement of $200,000 plaintiff had earned from clients located outside of Arizona. In his cross-demand for arbitration, plaintiff sought to vacate the restrictive covenant and nonsolicitation clauses contained in the agreement. In her decision, the arbitrator made the following findings:

Read in tandem, the exceptions outlined in the [restrictive covenant] give [plaintiff] the right to market himself outside Arizona but not to individuals and entities located in the New York Metropolitan Area, as such term is defined in the Agreement ("NYMA") or to Customers. This was a reasonable compromise because most of [defendant's] clients were located in these states.

[Plaintiff] contends that he did not violate this restriction when he attended the [New York Dental meeting] and distributed copies of his book. However this argument is disingenuous. While [plaintiff] is free to distribute the book from Arizona to clients outside the NYMA he cannot distribute his book (or other marketing materials) while visiting the NYMA or to potential dental industry clients located in the NYMA.

RENDITION OF SERVICES OUTSIDE THE STATE OF ARIZONA

[Plaintiff] also argues that so long as he maintains an office based in Arizona he can furnish services to dentists located outside the state but not in the NYMA. [Plaintiff] testified that he did not intend to comply with the covenants that limited his practice east and west of the Mississippi. He believed he could do so based on the "carve-out" language above.

He relies on the phrase, ". . . to dental practices or with clients outside the State of Arizona. . ." to support his position. The wording is ambiguous and open to interpretation. But if [plaintiff] is permitted to render services anywhere in the United States (excluding NYMA), two of the restrictive covenants become meaningless. This is counter to the rules of contract construction. Although he is free to market himself in the permitted locations outside Arizona, the restrictions prohibit him from providing coaching and consulting services to out of state clients until the expiration of the applicable time periods.

COMMUNICATIONS WITH CUSTOMERS

[Defendant] claims that [plaintiff] violated the restrictions by soliciting various Customers. [Plaintiff] admits that he spoke to Customers but denies soliciting them. The agreement unambiguously forbids [plaintiff] from contacting Customers except as explicitly provided in Subparagraph 6.05 (which allows him to obtain references and testimonials). The Agreement makes no distinction between social conversation and solicitation. Accordingly, [plaintiff] must abstain from any communication with Customers wherever located, except for the limited purpose described in Paragraph 6.05 of the Agreement.

DISGORGEMENT OF PROFITS

[Defendant] requests disgorgement of the sum of $200,000 representing the amount [plaintiff's New Jersey business] received from its out of state clients. Under New Jersey law, disgorgement is allowed where a party has engaged in unfair competition. Although [defendant] established that [plaintiff] breached the Agreement there was no evidence that [plaintiff] was unfairly competing against [defendant] for these customers.

ELIMINATION OF RESTRICTIVE COVENANTS

[Plaintiff] states that the restrictive covenants in the Agreement place an undue burden on him, are unreasonable and requests that they be eliminated.

Under New Jersey law, a restrictive covenant will be enforced if it is reasonable under the circumstances, in that it does not impair the public interest, causes no undue hardship and protects legitimate interests.

It is undisputed that under New Jersey law, restrictive covenants in agreements for the sale of a business are given more deference than those appearing in employment contracts. In this case, the partners were not involved in an employee/employer relationship.

Additionally, both [defendant] and [plaintiff] were represented by sophisticated and experienced counsel in the negotiations leading up to the sale. [Plaintiff] was not at a disadvantage when he agreed to the terms of the Agreement nor was he under duress.

[Plaintiff] claims that the limitations cause him undue hardship because they are disproportionate. However, the covenants do not prevent him from making a living. [Plaintiff] can provide consulting services to clients in Arizona. He can also provide consulting services to clients other than dental practices anywhere throughout the country. [Plaintiff's] prohibited activities are limited to those that directly compete with the services offered by [defendant].

[Plaintiff] also maintains that [defendant] has no protectible interests. The testimony established that when [defendant] purchased [plaintiff's] interest, the Company had little or no inventory, equipment, real property, accounts receivable or tangible goods. [Defendant], in essence, purchased the goodwill of the Company (e.g. a customer base, program of services and its reputation) and [plaintiff's] promise to refrain from competition and solicitation in the specified markets. He has a legitimate interest in preserving the Company's goodwill in these states and in preventing [plaintiff] from competing with Company in its home market.

Finally, by its own terms, the Agreement prevents the elimination of the restrictive covenants. Subparagraph 8.01 of the Agreement provides, "The arbitrator may not amend or vary any provision of this Master Agreement or any Contract Document."

The arbitrator enjoined plaintiff from providing competing services directly or indirectly until April 13, 2014 in the New York metropolitan area, and until April 13, 2009 in any state east of the Mississippi, excluding the states in the New York metropolitan area. Additionally, the arbitrator enjoined plaintiff from distributing Million Dollar Dentistry in the New York metropolitan area until April 13, 2014, and from communicating with SDP's customers, its industry contacts, and members of its referral network, as identified on the lists appended to the agreement.

When plaintiff challenged the arbitrator's decision in court, he argued the arbitrator exceeded her authority by not applying New Jersey law as required by the parties' agreement. He claimed that her decision should therefore be vacated under N.J.S.A. 2A:23B-23(a)(4). Specifically, he claimed that the arbitrator failed to apply the three-part test set forth by the Supreme Court in Solaris v. Malady, 55 N.J. 571 (1970) to determine when an arbitrator's decision should be set aside.

Judge McVeigh rejected plaintiff's arguments. Her opinion included the following findings:

The Arbitration agreement clearly shows that the arbitrator applied New Jersey law. In fact, the arbitrator specifically articulates the very standard that Plaintiff suggests the arbitrator failed to apply. The arbitrator states, "[u]nder New Jersey law, a restrictive covenant will be enforced [if it] is reasonable under the circumstances in that it does not impair the public interest, causes no undue hardship and protects legitimate interests." The arbitrator then goes through each element and explains the reasoning for [her] conclusion.

. . . .

The parties argue extensively as to the "reasonableness" of the time restrictions in the arbitration agreement. "The length of time that is reasonable in order to protect goodwill varies under the circumstances." Laidlaw, Inc. [v. Student Transp. of Am.,] 20 F. Supp. 2d 727, 756 (D.N.J. 1998)]. "Ordinarily, if a restrictive covenant is overly broad or unreasonable, the Court may limit[]. . . its application concerning its geographical area, its period of enforceability, and its scope of activity to make it reasonable." Id. at 757.

However, as the arbitrat[or] notes, section 8.01 in the Arbitration agreement specifically states "[t]he arbitrator may not amend or vary any provision of this Master Agreement." Likewise, in a situation such as this where the parties have agreed to the specific length of time provided in this contract and where the parties deliberately agreed that the arbitrator may not amend or vary any provision within the contract, "this Court may not rewrite their contract." Baron [Assoc.], Inc. v. Tri-County Asphalt Corp., 86 N.J. 179, 212 ([] 1981).

This motion was brought before this Court to decide on the narrow issue of whether the arbitrator "exceeded the scope of [her] authority" to warrant a vacation of the arbitration award. The Court [will not] delve into the "reasonableness" of the arbitrator's findings. "The essence of arbitration is that, by agreement of the parties, the arbitrators decide both the facts and the law. The forum chosen by the parties operates as a trial court, and [j]udicial review of [the awards rendered by an arbitrator] is extremely narrow, generally confined to matters of corruption or errors appearing on the face of the award. An arbitrator's factual determinations concerning the merits of the dispute submitted to him are not reviewable by the court." Ukranian Nat'l Urban Renewal Corp. v. Joseph L. Muscarelle, Inc., 151 N.J. Super. 386, 396 (App. Div. 1977) (internal citations omitted). The court's review is limited to the determination as to whether "one or more of the criteria of N.J.S.A. 2A:24-8 is fulfilled." Id. (internal citations omitted).

For these reasons, this Court will NOT vacate the arbitration award. It is clear that [plaintiff] is dissatisfied and disagrees with the arbitrator's decision and interpretation of the law. Unfortunately, that is not a basis to vacate the arbitrator's decision.

III

Plaintiff argues that the trial court should have vacated the arbitration award because the arbitrator exceeded her powers by failing to apply New Jersey law as required by the parties' agreement. He claims that under New Jersey law the restrictive covenant was unreasonable and unenforceable; therefore, the arbitrator was obligated to strike or at least "blue pencil" the covenant. Defendant maintains that the arbitrator applied New Jersey law and the covenant is reasonable and enforceable.

New Jersey favors voluntary arbitration as an efficient means to resolve disputes. Malik v. Ruttenberg, 398 N.J. Super. 489, 494-95 (App. Div. 2008). Arbitration is "'meant to be a substitute for and not a springboard for litigation.'" N.J. Turnpike Auth. v. Local 196, I.F.P.T.E., 190 N.J. 283, 292 (2007) (quoting Local No. 153, Office & Prof'l Employees Int'l Union v. Trust Co. of N.J., 105 N.J. 442, 449 (1987)).

To ensure that an arbitration award creates finality, "there exists a 'strong preference for judicial confirmation of arbitration awards.'" Ibid. (quoting Weiss v. Carpenter, Bennett & Morrissey, 143 N.J. 420, 442 (1996)). This long standing policy of narrow judicial review is embodied in the New Jersey Arbitration Act (NJAA), which prohibits interference with arbitration awards, except in "extremely limited circumstances." Malik, supra, 398 N.J. Super. at 495 (citing N.J.S.A. 2A:23B-23). The court has the ability to vacate an arbitration award under the six statutory bases enumerated in N.J.S.A. 2A:23B-23(a):

(1) the award was procured by corruption, fraud, or other undue means;

 
(2) the court finds evident partiality by an arbitrator; corruption by an arbitrator; or misconduct by an arbitrator prejudicing the rights of a party to the arbitration proceeding;
 
(3) an arbitrator refused to postpone the hearing upon showing of sufficient cause for postponement, refused to consider evidence material to the controversy, or otherwise conducted the hearing contrary to section 15 of this act, so as to substantially prejudice the rights of a party to the arbitration proceeding;

 
(4) an arbitrator exceeded the arbitrator's powers;

 
(5) there was no agreement to arbitrate, unless the person participated in the arbitration proceeding without raising the objection pursuant to subsection c. of section 15 of this act not later than the beginning of the arbitration hearing; or
 
(6) the arbitration was conducted without proper notice of the initiation of an arbitration as required in section 9 of this act so as to substantially prejudice the rights of a party to the arbitration proceeding.

 
[N.J.S.A. 2A:23B-23.]

In Tretina v. Fitzpatrick & Assoc., 135 N.J. 349, 355-56 (1994) the New Jersey Supreme Court considered whether an arbitrator who makes a legal error exceeds his powers. Prior to Tetrina, in Perini Corp. v. Greate Bay Hotel & Casino, Inc., 129 N.J. 479, 496 (1992), a plurality of the Court held that when an arbitrator makes "egregious mistakes of law" he has "exceeded [his] powers." 135 N.J. at 356-57. The Tretina Court rejected the Perini plurality's holding and adopted Chief Justice Wilentz's concurring opinion, which restricted judicial review, and concluded that in most cases arbitration awards should not be vacated based merely on a mistake of law. Id. at 357-58. The Court held that unless the parties contractually agree to a different standard of review, "'arbitration awards may be vacated only for fraud, corruption, or similar wrongdoing on the part of the arbitrators.'" Id. at 358 (quoting Perini, supra, 129 N.J. at 548-49 (Wilentz, C.J., concurring)).

Here, plaintiff claims that the arbitrator did not merely make a mistake of law; rather, he claims that she exceeded her powers under N.J.S.A. 2A:23B-23(a)(4) by failing to apply New Jersey law. Although we agree with plaintiff that if the arbitration agreement calls for the arbitrator to apply New Jersey law, and the arbitrator fails to do so, the arbitrator exceeds his or her powers, see Tretina, supra, 135 N.J. at 365, that is not what occurred here. The arbitrator did, in fact, apply New Jersey law.

New Jersey courts will only enforce a covenant not to compete in an employment contract if it is reasonable under the Solari/Whitmyer test. Maw v. Advanced Clinical Commc'ns, Inc., 179 N.J. 439, 447 (2004). An agreement is reasonable under that test if it: (1) protects legitimate interests of the employer; (2) does not impose an undue hardship on the employee; and (3) is not injurious to the public. Ibid. Yet, "[e]ven if the covenant is found enforceable, it may be limited in its application concerning its geographical area, its period of enforceability, and its scope of activity" under what is known as the "blue pencil" rule. Coskey's Television & Radio Sales and Serv., Inc. v. Foti, 253 N.J. Super. 626, 634 (App. Div. 1992) (citing Solari, supra, 55 N.J. at 585). And when a noncompete agreement is "ancillary to the purchase of a business," it is "accorded far more latitude." Id. at 633.

Here, the Solari/Whitmyer test is applicable. See Laidlaw, Inc. v. Student Transp. of Am., 20 F. Supp. 2d 727, 754 (D.N.J. 1998) (finding the Solari/Whitmyer test applicable to determine whether a noncompete agreement ancillary to the sale of a business is enforceable); Graziano v. Grant, 326 N.J. Super. 328, 344-45 (App. Div. 1999) (the court "perceive[d] no difference between a covenant ancillary to an employment agreement and a covenant ancillary to the sale of a medical practice," finding the same three-prong Solari/Whitmyer test applicable to determine whether the covenant was enforceable). The arbitrator clearly articulated the three prong test under Solari/Whitmyer, stating, "[u]nder New Jersey law, a restrictive covenant will be enforced if it is reasonable under the circumstances, in that it does not impair the public interest, causes no undue hardship and protects legitimate interests."

We turn then to the first prong of the Solari/Whitmyer test, which requires the court to consider whether the covenant protects a legitimate interest of the employer. Maw, supra, 179 N.J. at 447. Legitimate interests of the employer include trade secrets, proprietary information, and customer relations. Ingersoll-Rand Co. v. Ciavatta, 110 N.J. 609, 636 (1988). Along these lines, we have previously recognized that consulting firms expend great resources to solicit clients and each client "represents a significant investment of time, effort and money which is worthy of protection." A.T. Hudson & Co. v. Donovan, 216 N.J. Super. 426, 434 (App. Div. 1987). "Courts will not," however, "enforce a restrictive agreement merely to aid the employer in extinguishing competition, albeit competition from a former employee." Ingersoll-Rand, supra, 110 N.J. at 635.

Here, with respect to the first prong, the arbitrator found that defendant had a legitimate interest in the "goodwill of the company," which included its "customer base, program of services, and its reputation." Because customer relations is a legitimate interest of the employer, id. at 636, the arbitrator applied New Jersey law in finding that defendant had a legitimate interest to protect.

The second prong of the Solari/Whitmyer test requires the court to consider whether the covenant imposes an undue hardship on the employee. Maw, supra, 179 N.J. at 447. The court must consider "the likelihood of the employee finding other work in his or her field, and the burden the restriction places on the employee." Cmty. Hosp. Group, Inc. v. More, 183 N.J. 36, 59 (2005). The reason for the employee's termination is also a relevant factor; if the employee terminates the relationship, the court is less likely to find an undue hardship because the employee subjected himself to the restriction. Ibid.

Here, the arbitrator applied the second prong of the test and found that the covenant did not impose an undue hardship because it did not prevent plaintiff from earning a living. The arbitrator stated that plaintiff could provide dental consulting services to clients in Arizona and he could provide non-dental consulting services anywhere throughout the country. The arbitrator observed that plaintiff has the ability to work in the dental consulting field in Arizona, where he now lives, and he can also do dental consulting work in any state west of the Mississippi. And notably, plaintiff voluntarily entered into the agreement and is subject to its restriction. See Cmty. Hosp., supra, 183 N.J. at 59. Thus, the arbitrator applied New Jersey law and found that the covenant did not impose an undue hardship.

The third prong of the Solari/Whitmyer test requires the court to determine whether the covenant is injurious to the public. Maw, supra, 179 N.J. at 447. The court generally focuses on this prong when the case involves the public's right to have free access to the advice and services of professionals licensed by the state, such as attorneys, accountants, and physicians. Coskey's, supra, 253 N.J. Super. at 634.

Here, the arbitrator addressed the third prong. She observed that plaintiff made no allegation that the public interest was impaired by this agreement. Further, like in A.T. Hudson, supra, defendant's interest in preserving his customer relationships outweighs the public's interest in "an unrestricted choice of [dental] consultants." 216 N.J. Super. at 434. The record contains no evidence that dentists would be unable to otherwise find these services or that the public would be injured in any other way.

We next examine the geographic and temporal scope of the restrictive covenant. "Even if the covenant is found enforceable, it may be limited in its application concerning its geographical area, its period of enforceability, and its scope of activity." Coskey's, supra, 253 N.J. Super. at 634. A restrictive covenant will only be enforced to the extent that it is necessary to protect the employer's legitimate interest. Ingersoll-Rand, supra, 110 N.J. at 629. Under what is known as the "blue pencil" rule, courts "may compress or reduce the geographical areas or temporal extent of [the covenants'] impact so as to render the covenants reasonable." Cmty. Hosp., supra, 183 N.J. at 50 n.3.

There is no bright line standard as to what is a reasonable term of enforceability for a covenant. See e.g. Karlin v. Weinberg, 77 N.J. 408 (1978) (enforcing covenant that prohibited physician from practicing dermatology within a ten-mile radius of his former employer's office for a five-year period); Schuhalter v. Salerno, 279 N.J. Super. 504, 513 (App. Div.) (finding accounting partners' covenant for a term of two years was a "modest imposition"), certif. denied, 142 N.J. 454 (1995); A.T. Hudson, supra, 216 N.J. Super. 426 (enforcing two-year restriction prohibiting former principal from soliciting consulting company's customer relationships).

Here, the restrictive covenant prohibits plaintiff from doing business in any state east of the Mississippi for five years, and in the New York metropolitan area for ten years. Although the covenant has broad geographic and temporal scope, our standard of review does not call for us to examine the covenant as a court of first instance. Consequently, even if we were to conclude, which we have not, that the arbitrator made a legal error in enforcing the covenant's broad geographic and temporal reach, that does not constitute an "egregious mistake of law" so as to warrant a vacation of the arbitrator's award. Tretina, supra, 135 N.J. at 356-58. If the arbitrator simply failed to "blue pencil" or limit the scope of the agreement, that may constitute a legal mistake, or a misapplication of New Jersey law, but it does not constitute a failure to apply New Jersey law. It would provide no grounds to set aside the arbitrator's award.

Plaintiff's remaining arguments are without sufficient merit to warrant discussion in a written opinion. Rule 2:11-3(e)(1)(E). We affirm substantially for the reasons expressed by Judge McVeigh in her thorough and well-reasoned opinion.

 

Plaintiff was no longer prohibited from doing business in states west of the Mississippi River because the three-year prohibition of plaintiff competing in this area had passed.

The Court was interpreting the prior arbitration act, N.J.S.A. 2A:24-1 to -11. Tretina, supra, 135 N.J. at 355. Nonetheless, both the statute considered in Tretina and the present arbitration act have similar language, stating that an arbitration award can be vacated if the arbitrator exceeds his powers. See ibid.; N.J.S.A. 2A:23B-23(a).

Solari Industries, Inc. v. Malady, 55 N.J. 571 (1970); Whitmyer Bros., Inc. v. Doyle, 58 N.J. 25 (1971).

(continued)

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A-2555-07T2

November 10, 2008