Howard Schultz & Associates v. Broniec

Brief Fact Summary. An employee signed an employment agreement forbidding the employee, if he stopped working for the employer, from competing with the employer.  After the employer/employee relationship ended, the employer sought to enforce this clause.

Synopsis of Rule of Law. If a covenant not to compete "is strictly limited in time and territorial effect" and "otherwise reasonable considering the business interest of the employer sought to be protected and the effect on the employee" it will be enforceable.

Facts. On November 20, 1972, the Defendant, Frank D. Broniec (the "Defendant"), entered into an employment agreement with Edward C. Aubitz ("Mr. Aubitz").  The Defendant was responsible for auditing the accounts of Mr. Aubitz's clients and his principal, the Defendant, Howard Schultz and Associates, Inc. (the "Defendant").  The employment agreement included a restricting covenant which read "[Defendant] will not, for a period of two years after the termination of this agreement, for any reason thereafter, engage, directly or indirectly, as principal, agent, employer, employee, or in any capacity whatsoever, in any business, activity, auditing practice, or any other related activities, in competition with the principal (Howard Schultz & Associates) or associate's (Aubitz) business within any area or areas from time to time constituting the principal's or associate's area of activity in the conduct of their respective businesses, as of the date of said termination. . . ."  The Defendant was also not allowed to
reveal certain confidential information.

Issue. Is the covenant not to compete in this agreement enforceable?

Held. No.  The court observes first that not all kinds of restrictive covenants are unenforceable.  If a covenant not to compete is "is strictly limited in time and territorial effect" and "otherwise reasonable considering the business interest of the employer sought to be protected and the effect on the employee", it will be enforceable.  There are two types of territorial restrictions.  First, those concerning the territory where the employee is employed.  Second, those involving the entire territory in which the employer does business.  The first category is generally enforceable.  The second category is generally not valid "absent a showing by the employer of the legitimate business interests sought to be protected." 
•    The court then concludes the non-compete clause before it is invalid for three reasons.  First, because its scope includes the employer's and principal's territory and the Plaintiff does not justify this territorial restriction.  Second, the fact that the Defendant was not allowed to accept employment with a competitor "in any capacity" is too broad.  This imposes a stricter limit "upon the employee that is necessary for the protection of the employer."  Third, the non-compete covenant is not enforceable where the "nature of the business activities in which the employee is forbidden to engage is not specified with particularity." In other words, the covenant "fails to specify with particularity the activity which the employee is prohibited from performing."
•    Further, the court refused to rewrite the parties' agreement and strike the offensive language.  In other words, the court refused to adopt a policy of "severability of employee covenants not to compete."   Additionally, the court argues that "[w]hen courts adopt severability of covenants not to compete, employee competition will be deterred even more than it is at present by these overly broad covenants against competition."

Discussion. This case offers a comprehensive look at how courts construe covenants not to compete.  It is also interesting to compare this case to [Karpinski v. Ingrasci].