| Representative Arthur J. O'Neill, Chairman
William R. Breetz
Representative Robert Farr
Jon P. Fitzgerald
Robert W. Grant
Representative Michael P. Lawlor
Michael W. Lyons
Mary Anne O'Neill
Joel I. Rudikoff
Edmund F. Schmidt
Joseph J. Selinger, Jr.
Judge Elliot N. Solomon
Professor Colin C. Tait
Professor Terry J. Tondro
I. Milton Widem
Senator Donald E. Williams, Jr.
Jo A. Roberts
Law Revision Commission
RESTRICTIVE EMPLOYMENT AGREEMENTS
Report of the Connecticut Law Revision Commission
to the Judiciary Committee
of the Connecticut General Assembly
Prepared by Jo A. Roberts
February 15, 2000
RESTRICTIVE EMPLOYMENT AGREEMENTS
Report of the Law Revision Commission
to the Judiciary Committee
of the General Assembly
In response to a request (included with this report as Attachment A) by Senator Donald E. Williams, Jr. and Representative Michael P. Lawlor, Co-Chairmen of the Judiciary Committee of the Connecticut General Assembly, the Law Revision Commission voted to undertake a study of Connecticut's law on restrictive employment agreements, also known as noncompete agreements. The request asks the Commission to examine the laws in the light of proposed SB 1307 AAC, Restrictive Employment Agreements, introduced by the Labor and Public Employees Committee during the 1999 legislative session. The bill subsequently was referred to the Judiciary Committee and not reported out. A copy of SB 1307 is attached to this report as Attachment B.
To complete the requested study, the Commission formed a study committee that held an information and discussion session with representatives from several Connecticut Bar Association sections, the Connecticut Broadcasters Association, the Insurance Association of Connecticut, the Citizens for Economic Opportunity, the Connecticut Employment Law Association, the Connecticut Business and Industry Association, the Connecticut Defense Lawyers Association and AEtna, as well as legal practitioners representing both employers and employees. A list of participants is attached to this report as Attachment C.
RECOMMENDATIONS OF STUDY COMMITTEE:
The conclusion of the study committee is that Connecticut common law as it exists presently provides an equitable balance between the interests of both employers and employees in determining the enforceability of noncompete agreements. Therefore:
1. The committee recommends that the legislature take no action at this time and allow the courts, which are in the best position to determine the appropriate outcome in each case, to further develop the law in this area as changes in the business community occur and new situations arise.
2. Should the legislature choose to act at this time, the committee recommends that it consider codifying the common law with several additions that will provide direction for further common law development in this area. A draft of a proposed bill to effect this recommendation is attached to this report as Attachment D.
The remainder of this report, after providing a summary of present Connecticut law, supports the committees recommendations.
A. Summary of Connecticut Law
Employees in many professions and businesses receive specialized training or knowledge from their employers, often at the employers' expenditure of significant time and money. When such an employee leaves the employer:
[T]he former employer's competitive advantage within the industry could be imperiled. Similarly, the employer could incur harm if the product of the labor and creativity of its technologically skilled employees were to be used by someone other than the employer. Trade secret, patent and copyright law may afford an employer some protection for its technological investment in such circumstances. However, an employer often can secure additional protection of its technological investment through an employment contract containing a post-employment restrictive covenant and related provisions and trade secret, confidentiality and assignment clauses.
Arthur J. Schwab, Protection of Technological Investment Through Employment Contracts, 4 NO. 11 J Proprietary Rts. 2 (Nov. 1992).
Connecticut law provides guidance as to what constitutes a valid and binding restrictive employment covenant. In Scott v. General Iron and Welding Company, 171 Conn. 132 (1976), the plaintiff employee worked for the defendant company for almost two decades. In 1971 the defendant offered the plaintiff the position of chief engineer, which entitled him to access to design and engineering knowledge and to the defendant's customer lists. After negotiation, the plaintiff signed an employment agreement with the defendant. Shortly thereafter, a salary dispute arose and the plaintiff declined the management position, returning to his previous position with the company. A year later the plaintiff voluntarily left General Iron and took a job with another company. The plaintiff wished to participate in the management of that company.
During the period between signing the employment agreement and the salary dispute, the plaintiff had full access to the company's customer list, composed of more than one thousand customers located in twenty-five to seventy-five Connecticut towns. The plaintiff was introduced to many of the customers and called upon them himself to solicit business. The agreement between the plaintiff and the defendant contained a covenant prohibiting the plaintiff from disclosing confidential information not generally known in the industry and acquired by him during his employment with the defendant concerning the defendant's products, processes, services, research, inventions and the like. The following provisions in the agreement were at the center of the dispute between the parties:
3. The Employee further agrees that for a period of five years after the termination of his employment with the Corporation he will not, within the State of Connecticut, directly or indirectly, own, manage, operate, control, act as agent for, participate in, or be connected in any manner with the ownership, management, operation, or control of any business similar to the business conducted by the Corporation at the time of the termination of his employment. 4. It is agreed between the parties hereto, that this Agreement may be voided by their mutual consent in writing. It is understood that the Agreement is in no way intended to restrict the Employee, upon termination of his employment with the Corporation, from continuing to earn a living, as an employee, in his trade or specialty.
General Iron at 136.
The plaintiff argued that the restriction in paragraph three of the agreement was unreasonably restrictive and was in restraint of trade. Citing previous decisions on the issue, the court reiterated Connecticut law as to the validity of a restrictive covenant:
In order to be valid and binding, a covenant which restricts the activities of an employee following the termination of his employment must be partial and restricted in its operation 'in respect either to time or place ... and must be reasonable -- that is, it should afford only a fair protection to the interest of the party in whose favor it is made and must not be so large in its operation as to interfere with the interests of the public'.... The interests of the employee must also be protected, and a restrictive covenant is unenforceable if by its terms the employee is precluded from pursuing his occupation and thus prevented from supporting himself and his family.
General Iron at 136-137. The court then determined that the restriction at issue was reasonable.
However, the court in Trans-Clean Corp. v. Terrell, 1998 WL 142436 (Conn. Super 1998) reached the opposite conclusion about a restrictive covenant, citing General Iron as authority. In this case, the plaintiff corporation brought an action against the defendant, a former employee, to enjoin him from competing against the plaintiff in the commercial restoration business and to prohibit him from using its customer lists in soliciting customers. At the time the defendant was hired, he entered into a written agreement with the plaintiff in which he agreed not to compete with the plaintiff in a similar business within a sixty mile radius of the plaintiff's home office for a period of two years from the date his employment contract ended. The defendant subsequently terminated his employment with the plaintiff and started his own restoration business, soliciting customers that appeared on the plaintiff's customer lists.
In holding the restriction to be unreasonable, the court (in a decision authored by Judge Melville) initially noted the holding in General Iron that a post-employment covenant is enforceable if the restriction is reasonable. The court then identified five factors to be considered in evaluating the reasonableness of a restrictive covenant:
(1) the length of time the restriction operates; (2) the geographic area covered; (3) the fairness of the protection accorded to the employer; (4) the extent of the restraint on the employee's opportunity to pursue his occupation; and (5) the extent of interference with the public's interests.
Trans-Clean Corp. at 42. Applying the reasonableness standard to the present facts, Judge Melville concluded that the sixty-mile radius restriction was unreasonable because the plaintiff failed to demonstrate that it was likely to actively conduct its business within that area when, to the contrary, it had expanded its territory as far as New Jersey and Long Island.
In addition, the court found that the plaintiff's customer lists did not rise to the level of trade secrets deserving the heightened protection of a restrictive covenant. The court noted that Connecticut law looks to a number of factors to determine whether a substantial level of secrecy exists to protect certain information:
1) the extent to which the information is known outside the business; 2) the extent to which it is known by employees and others involved in the business; 3) the extent of measures taken by the employer to guard the secrecy of the information; 4) the value of the information to the employer and his competitors; 5) the amount of the effort or money expended by the employer in developing the information; 6) the ease or difficulty with which the information could be properly acquired or duplicated by others.
Trans-Clean Corp. at 43. In the present case, the court held that the plaintiff's customer lists had not been compiled by any unique method (the names were developed from such sources as trade magazines and the Yellow Pages) and that the company had never adopted any general policy designed to protect disclosure of its customer lists by current employees. The plaintiff's application for temporary injunction of the defendant was therefore denied.1
Connecticut case law, as it has developed in this area, seems to provide well-established guidelines for reasonable post-employment covenants restricting a former employee's subsequent employment or competition with the former employer.2 In addition to Connecticut law, the committee reviewed both statutory and case law from other states. For a discussion of limitations by other states on restrictive employment agreements, see the attached memorandum dated May 3, 1999 by Laura Jordan, Research Attorney, Office of Legislative Research (Attachment F).
B. Discussion of Study Committee Recommendations
In developing its recommendations to the Judiciary Committee, the study committee thoughtfully considered comments offered by participants at an informational meeting held on October 14, 1999 at the Commission offices. After reviewing those comments and Connecticut law, the committee concluded that the common law criteria for determining the enforceability of noncompete agreements provides a careful balancing of the interests of the parties to such an agreement. Further, as the business community changes, largely due to the rapid growth of technology, determining the impact of those changes on noncompete agreements and continuing to balance the rights of the parties to them are best handled by the courts, which have the best opportunity to assess the needs of the parties.
However, should the legislature wish to act in this area, the committee identified several issues that might lend themselves to legislation. Adopting the proposed bill, in whole or in part, contained in Attachment D would not contravene the current common law and might guide continued common law development.
Initially, the committee believed strongly that legitimate business reasons exist for enforcing some noncompete agreements and, therefore, opted not to support the approach of SB 1307, which would have prohibited noncompete agreements entirely.
1. Codification of Common Law.
The committee determined that a statute might clarify the law in this area by, first, codifying the common law. Subsection (b) of the draft accomplishes this goal.
2. Prior Disclosure of Noncompete Agreement.
Committee members believed that disclosing to an employee that a noncompete agreement must be signed and providing him with a written copy of the agreement is critical to giving the employee a bona fide option to accept the employment and sign the agreement or to decline the offer. The disclosure, as provided in subsection (c) of the draft, must be made to the employee before the employee has left his previous employment, before he accepts a promotion or before the employer undergoes a substantial change in circumstances, such as a sale, financing, or entering into a joint venture, partnership or the like. The committee believed that, once the employee is given a fair opportunity to learn the terms of the agreement and to accept or reject them, prior to his altering his current position, he may then fairly be held to the terms of the agreement.
3. Termination of Employee.
In subsection (d) of the proposed bill, the committee attempted to strike an equitable balance between the interests of employers and employees where the employee's employment has been terminated. No majority view emerged among committee members on this issue. One view (formulated differently in versions 1 and 2) was to make noncompete agreements unenforceable where the employer has terminated the employee, except for the employees wilful misconduct or for just cause, as those terms are defined under Connecticut Unemployment Compensation law. Another view (version 3) was that noncompete agreements would be enforceable after termination, except where the employer had acted inappropriately in terminating the employee. The final view (version 4) was that a noncompete agreement would not be enforceable after an employer termination, except where the termination was for "just cause," as that term is discussed in case law. The committee has included these four options in Attachment D with additional commentary.
4. Court Costs and Attorneys Fees.
The committee believed that requiring each party to pay its own court costs and attorneys fees for challenging or seeking to enforce a noncompete agreement (despite provisions commonly found in agreements that permit employers to recover costs if the employer prevails) would likewise achieve a better balance between employer and employee. This requirement would remove a potential deterrent to employees who are subject to a former employers noncompete agreement, or employers considering hiring them, from challenging enforcement of that agreement. The subsection is intended also to deter employers from seeking to enforce noncompete agreements, other than against those employees who are most likely to have significant adverse impacts on their business, since employers may no longer shift their costs to the employee. However, proposed subsection (e) retains the discretion of the court to award costs and fees to the prevailing party as the court deems appropriate.
5. Additional Provisions.
Finally, in response to comments from participants both at the informational session and who reviewed a draft of the proposed bill, the committee recommends adding subsections (f) and (g) to any legislation of these matters. Subsection (f) assures that employers may still enforce any rights given them under trade secret or other applicable law. Subsection (g) excludes collective bargaining agreements from application of the proposed legislation.
More detailed commentary is provided after each subsection of the proposed bill in Attachment D.
 The decision is unclear as to what extent the fact, observed by the court, that the defendant was married and had nine children to support influenced the court's ruling. Back
 For additional case law both upholding and rejecting restrictive employment covenants, see Attachment E to this report, a memorandum dated September 26, 1997 by Judith Lohman, Principal Analyst, Office of Legislative Research, pp. 4-6. Back