Monday, May 23, 2011

Putting "Reasonable" Back in "Reasonable Restraint"

New Image The last time I encountered a Judge Moon opinion, he had dismissed on Twomblygrounds a slip-and-fall case because the injured plaintiff hadn't plausibly pled that the grocery store knew of the spill that caused the plaintiff's injury. I kid you not.

The judge's latest opinion is even more problematic. McClain & Co., Inc. v. Carucci involved an employee who allegedly embezzled nearly $300,000 from his employer. After he left the company, the parties reached a settlement under which Carucci would pay  back almost all of that money. He also agreed not to compete with his by-then-former employer.

Needless to say, he then began competing, or so it's claimed. If you're wondering who would hire a alleged big-time embezzler, he seems to have founded a competing company with his grandfather. Proving yet again that blood's thicker than water.

When McClain filed suit, the defendant raised a  motion to dismiss based (1) on Twombly/Iqbal  and (2) the noncompete was enforceable as a matter of law.  As to the first point, Judge Moon thought it more plausible that an ex-employee would compete than he had that a grocery store might not clean up a spill immediately, a conclusion which is not intuitively obvious to me but maybe I just shop in the wrong stores.

The second point is more interesting to the present audience. According to Judge Moon, the claim could be judged by either of two standards -- a restrictive rule regarding noncompetes in the employment context or a more permissive rule for other restraints. After some discussion, the judge concludes that the noncompete at issue was best judged under the more liberal rule, and was therefore valid (or at least could be found so).

The judge, of course, got it entirely backwards.  The common law barred all restraints of trade -- subject to exceptions where one of the parties had a legitimate interest (i.e., an interest other than restraining competition). The employment relationship was one in which such interests might exist because employers sometimes have trade secrets or confidential information that is protectable.

Restraints of trade unclothed by such interests were said to be "naked" and automatically invalid. If, as claiemd, Carucci had established a competing business at the time of the agreement, the effect of the settlement agreement was to snuff out competition without the usual justification. (There's no indication that, prior to leaving McClain, Carucci had been subject to any kind of covenant not to compete).

Judge Moon's error was essentially to view the deal through a procedural lens -- he stressed the fairness of the bargaining process, that Carucci was represented by counsel, etc. But the rule against restraints on competition was designed to protect the public, not the restrained party (although sometimes the interests coincide), and the fact that an agreement is otherwise valid does not mean that the market is not deprived of the benefits of competition.

More technically, whether a restraint is "reasonable" turns on its relation to legitimate employer interests -- such as protecting confidential information.  Judge Moon never identifies what legitimate interest the noncompete in question serves.

The judge was deciding only a motion to dismiss. We can hope that the error is cured as the case goes forward.

CAS

 

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Employment Common Law | Permalink

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