Systems and Software, Inc. v. Barnes

Systems and Software, Inc. v. Barnes (2004-401); 178 Vt. 389; 886 A.2d 762

2005 VT 95

[Filed 19-Aug-2005]


       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.


                                 2005 VT 95

                                No. 2004-401


  Systems and Software, Inc.	                 Supreme Court

                                                 On Appeal from
       v.	                                 Chittenden Superior Court


  Randy Barnes	                                 April Term, 2005


  Ben W. Joseph, J.

  Wanda Otero-Ziegler of Paul Frank + Collins P.C., Burlington, for
    Plaintiff-Appellee.

  Pietro Lynn and Matthew Siebel of Lynn, Thomas & Mihalich, P.C.,
    Burlington, for  Defendant-Appellant.


  PRESENT:  Reiber, C.J., Dooley, Johnson and Skoglund, JJ., and 
            Allen, C.J. (Ret.), Specially Assigned


       ¶  1.    REIBER, C.J.   Defendant Randy Barnes appeals the superior
  court's order enjoining him from working for Utility Solutions, Inc. or any
  other direct competitor of his former employer, plaintiff Systems &
  Software, Inc., for a six-month period pursuant to the noncompetition
  agreement that he signed when he began working for plaintiff.  He argues
  that the trial court should not have enforced the agreement because (1)
  plaintiff did not have a legitimate protectable interest; (2) the agreement
  contains unnecessary restrictions and imposes an undue hardship on him; (3)
  in any event, he did not violate the agreement; and (4) even if he did,
  plaintiff should be estopped from enforcing it.  We affirm.
   
       ¶  2.    Plaintiff, a Vermont corporation located in Colchester,
  Vermont, is engaged in the business of designing, developing, selling, and
  servicing software that allows utility providers to organize data regarding
  customer information, billing, work management, asset management, and
  finance and accounting.  In August 2002, plaintiff hired defendant as an
  at-will employee to become a regional vice-president of sales.  At the time
  he commenced work for plaintiff, defendant signed a noncompetition
  agreement that, among other things, prohibited him-during his employment
  and for six months thereafter-from becoming associated with any business
  that competes with plaintiff.  In April 2004, defendant voluntarily left
  his position with plaintiff and started a partnership with his wife called
  Spirit Technologies Consulting Group.  Spirit Technologies' only customer
  was Utility Solutions, Inc., which, like plaintiff, services municipalities
  and utilities nationwide with respect to customer-information-systems
  software.

       ¶  3.    On April 27, 2004, plaintiff filed a complaint and a request
  for injunctive relief that sought enforcement of the parties'
  noncompetition agreement.  A hearing was held in June 2004, and on July 22,
  2004, the superior court granted plaintiff an injunction.  In its final
  judgment order dated August 6, 2004, the court enjoined defendant from
  working as a consultant or otherwise with Utility Solutions or any other
  direct competitor of plaintiff.  Defendant appeals from that judgment. 
  Pursuant to a provision of the parties' noncompetition agreement, the
  six-month non-competition period will not begin until a final
  non-appealable judgment is rendered.
   
       ¶  4.    Like many other courts, this Court has adopted a position
  with respect to enforcement of noncompetition agreements similar to that
  set forth in section 188(1) of the Restatement (Second) of Contracts
  (1981), which provides that a restrictive covenant "is unreasonably in
  restraint of trade if (a) the restraint is greater than is needed to
  protect the promisee's legitimate interest, or (b) the promisee's need is
  outweighed by the hardship to the promisor and the likely injury to the
  public."  Cf. Restatement (Third) of Employment Law § 6.05 (Preliminary
  Draft No. 2, May 17, 2004) ("A court will enforce a restrictive covenant in
  an employment agreement to the extent that enforcement is reasonably
  tailored to protect a legitimate interest of the employer.").  We have
  stated that "we will proceed with caution" when asked to enforce covenants
  against competitive employment because such restraints run counter to
  public policy favoring the right of individuals to engage in the commercial
  activity of their choice.  Roy's Orthopedic, Inc. v. Lavigne, 142 Vt. 347,
  350, 454 A.2d 1242, 1244 (1982); accord Dicks v. Jensen, 172 Vt. 43, 51,
  768 A.2d 1279, 1285 (2001).  Nonetheless, we will enforce such agreements
  "unless the agreement is found to be contrary to public policy, unnecessary
  for protection of the employer, or unnecessarily restrictive of the rights
  of the employee, with due regard being given to the subject matter of the
  contract and the circumstances and conditions under which it is to be
  performed."  Vt. Elec. Supply Co., Inc. v. Andrus, 132 Vt. 195, 198, 315 A.2d 456, 458 (1974); accord Fine Foods, Inc. v. Dahlin, 147 Vt. 599, 603,
  523 A.2d 1228, 1230 (1986).
   
       ¶  5.    Here, in arguing that the trial court erred by enforcing the
  parties' agreement, defendant first asserts that the agreement does not
  safeguard a legitimate interest of the employer because it was not needed
  to protect trade secrets or confidential customer information.  This
  argument fails because it is based on a faulty premise-that noncompetition
  agreements may be enforced to protect only trade secrets or confidential
  customer information.  Most jurisdictions do not limit the scope of
  noncompetition agreements to trade secrets or confidential customer
  information, which are often protected by other law even in the absence of
  such agreements.  See 15 G. Giesel, Corbin on Contracts § 80.16, at 141-42
  (rev. ed. 2003) (explaining that employers may use noncompetition
  agreements to protect good will of business in addition to trade secrets
  and other confidential information, which most jurisdictions protect even
  in absence of covenant not to compete); see also 9 V.S.A. §§ 4601-4609
  (cum. Supp. 2004).  Indeed, the recent draft of the third restatement on
  employment law expressly states that noncompetition agreements may protect
  legitimate employer interests such as customer relationships and
  employee-specific goodwill that are "significantly broader" than
  proprietary information such as trade secrets and confidential customer
  information.  Restatement (Third) of Employment Law § 6.05 cmt. b
  ("[Section] 6.05 sometimes allows an employer contractually to prevent all
  competition by a former employee, even competition that does not make use
  of the employer's proprietary information.").

       ¶  6.    It is not necessary in this case to establish the range of
  employer interests, beyond trade secrets and confidential customer
  information, that may be protected through noncompetition agreements. 
  Here, the trial court found that plaintiff had a legitimate protectable
  interest, and the evidence supports the court's finding.  The trial court
  found that during his employment with plaintiff, defendant had acquired
  inside knowledge about the strengths and weaknesses of plaintiff's
  products-knowledge that he could use to compete against plaintiff.  As the
  court pointed out, both plaintiff and United Solutions, defendant's only
  client, served a small market of customers; thus, the loss of even a single
  contract could deprive plaintiff of revenue for many years, especially
  considering the need for service and software updates.  Given these
  circumstances, we find no basis for overturning the trial court's
  conclusion that plaintiff had a legitimate protectable interest.
   
       ¶  7.    Defendant argues, however, that even assuming the parties'
  agreement protects a legitimate interest, the agreement is more restrictive
  than necessary to protect that interest.  He contends that less drastic
  solutions were available to the trial court to fashion a more reasonable
  restraint on his employment. For example, he suggests that the court could
  have simply prohibited him from soliciting plaintiff's current customers,
  or, at a minimum, prohibited him from dealing with non-cooperative
  utilities, given that plaintiff has not dealt with cooperatives for nearly
  twenty years.  According to defendant, a complete ban on competition is not
  only unduly restrictive, but it effectively prevents him from working in
  his field of expertise for six months, thereby imposing a hardship that far
  outweighs any potential harm to plaintiff.

       ¶  8.    We do not find these arguments persuasive, particularly in
  the context of this case, which does not present any of the hallmarks of an
  unequal bargaining relationship between employer and employee.  Defendant
  is a sophisticated consultant, who accepted employment with plaintiff after
  working for one of plaintiff's competitors.  At the time he was hired,
  plaintiff informed defendant that a condition of his employment was that he
  sign a covenant not to compete.  Defendant signed the agreement, which
  explicitly provided that prohibiting him from competing with plaintiff for
  a six-month period following the parties' separation would not prevent
  defendant from earning a living.  Defendant now claims hardship based on
  nothing more than a bald statement that he will be unable to work for six
  months if the agreement is enforced.  We find no error in the court's
  decision not to invalidate the contract based on this unsupported claim.  

       ¶  9.    Nor do we find error based on the superior court's refusal to
  rewrite the agreement to make it more favorable to defendant.  Although a
  restraint on competition is easier to justify "if the restraint is limited
  to the taking of his former employer's customers as contrasted with
  competition in general," Restatement (Second) of Contracts § 188 cmt. g,
  employers "may seek to protect the good will of the business with [either]
  a general covenant not to compete or with a specific prohibition on contact
  with customers," 15 Giesel, supra, § 80.16, at 141 (footnote omitted).
   
       ¶  10.    "Determining which restraints are reasonable has not been an
  exact science."  Id. § 80.6, at 68.  The reasonableness of the restrictions
  "will vary by industry and will depend highly on the nature of the interest
  justifying the restrictive covenant."  Restatement (Third) of Employment
  Law § 6.05 cmt. c.  Generally, courts will uphold a contractual ban on an
  employee's post-employment competition if it would be difficult for an
  employer to determine when an employee is soliciting its customers.  Id. §§
  6.05 cmt. c, 6.06 cmt. c ("Because it is essentially impossible to monitor
  an employee's 'use' of goodwill, this interest will support a complete ban
  on competition as long as it is reasonably limited temporally and
  geographically.").

       ¶  11.    Here, the evidence demonstrates that plaintiff hired
  defendant to be a regional vice-president of sales and provided him access
  not only to existing customers but also to information concerning the
  strengths and weaknesses of plaintiff's products, the individual needs of
  the customers he served, and the prices paid by those customers for
  plaintiff's products and services.  The superior court found that in the
  course of his employment with plaintiff, defendant acquired knowledge of
  plaintiff's software designs, customer base, marketing strategy, business
  practices, and other sensitive information revealing the strengths and
  weaknesses of plaintiff's software products.  Because of the nature of
  plaintiff's business, which often involves customers initiating competitive
  bidding for contracts, it would be extremely difficult to monitor whether
  defendant was using the good will and knowledge he acquired while working
  for plaintiff to gain a competitive edge against plaintiff.  Thus, the
  evidence supports the court's findings and conclusions, which, in turn,
  support its decision to enforce the agreement to the extent that defendant
  is prohibited for a six-month period from working for Utility Solutions or
  any other direct competitor of plaintiff. (FN1)
   
       ¶  12.     Defendant also claims that he has not competed with
  plaintiff or violated the covenant not to compete, but the evidence
  supports the court's findings to the contrary.  The only customer of
  defendant's consulting firm was Utility Solutions, which directly competed
  against plaintiff for at least two different contracts.  Further, shortly
  after defendant left plaintiff's employ, he represented Utility Solutions
  at a trade fair in a booth near plaintiff's booth and identified himself as
  Utility Solution's sales director.  Moreover, the superior court found "not
  credible" defendant's claim that he was hired by Utility Solutions
  exclusively to market a new software product for two of the company's
  existing cooperative clients.  Under these circumstances, the superior
  court's injunction was reasonable.  Cf. Dyar Sales & Mach. Co. v. Bleiler,
  106 Vt. 425, 433, 175 A. 27, __ (1934) (granting relief based on violation
  of non-competition agreement where employee had acquired close relations
  with employer's customers or knowledge of employer's business such that if
  he were to use those acquaintances or knowledge in competing business,
  irreparable harm would occur); Ex parte Caribe, U.S.A., Inc., 702 So. 2d 1234, 1241 (Ala. 1997) (concluding that evidence was sufficient to support
  enforcement of agreement precluding former employee from competing against
  employer in break bulk cargo service business, given customer information
  and business knowledge employee acquired while working for employer).
   
       ¶  13.    We find unavailing defendant's reliance on Concord
  Orthopaedics Professional Association v. Forbes, 702 A.2d 1273 (N.H. 1997),
  for the proposition that the superior court was required to narrow the
  parties' agreement to restrict defendant from soliciting only plaintiff's
  current customers.  In Forbes, a doctor left the employ of a physician's
  group and then sued his former employer, claiming that a covenant banning
  him from competing with the group within a twenty-five-mile radius of its
  business was unenforceable.  Id. at 1274-75.  The court upheld the
  agreement with respect to patients the doctor had treated while working for
  the group, but determined that the group lacked any legitimate interest in
  preventing the doctor from competing for new patients in the area.  Id. at
  1276.  The instant case is distinguishable because, while working for
  plaintiff, defendant acquired specific information concerning plaintiff's
  customers, products, and services that could allow him to gain an advantage
  in competing against plaintiff for new clients.  That was not the situation
  in Forbes.

       ¶  14.    Finally, we find no merit to defendant's argument that
  plaintiff should be equitably estopped from seeking enforcement of the
  noncompetition agreement.  In support of this argument, defendant contends
  that he accepted employment with plaintiff and signed the agreement based
  on plaintiff's false representations that (1) its software products were
  suitable for cooperative electric and gas utilities; and (2) it would not
  seek to enforce the covenant not to compete unless defendant went to work
  for a major competitor of plaintiff.  The trial court specifically found
  that defendant's testimony regarding these alleged representations was not
  credible.  The court found that plaintiff  did not mislead defendant about
  the capability of its products before he signed the noncompetition
  agreement and did not suggest to defendant that it would selectively
  enforce the agreement.  Thus, the court properly rejected defendant's
  equitable estoppel claim.

       Affirmed.



                                       FOR THE COURT:



                                       _______________________________________
                                       Chief Justice


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                                  Footnotes


FN1.  We note that a provision in the parties' noncompetition agreement
  stays enforcement of the agreement pending resolution of any litigation on
  its viability.  Defendant does not argue that the delay in enforcing the
  agreement because of this provision has negated any legitimate protectable
  interest that the plaintiff might have had in enforcing the agreement. 
  Absent such an argument, with reference to the record, we presume that a
  protectable interest still exists.