Facts
- Systems & Software, Inc. developed and serviced specialized customer-information-systems software for utilities and municipalities.
- Randy Barnes was hired in August 2002 as a regional vice president of sales and was an at-will employee.
- At the start of employment, Barnes signed a noncompetition agreement barring him, during employment and for six months after termination, from becoming associated with any competing business.
- In April 2004, Barnes left Systems and formed Spirit Technologies Consulting Group with his wife.
- Spirit Technologies’ only customer was Utility Solutions, Inc., which operated in the same customer-information-systems software market and was treated as a direct competitor of Systems.
- Systems alleged Barnes’s consulting work for Spirit/Utility Solutions violated the noncompete.
Issues
- Whether the noncompetition agreement was enforceable under Vermont’s Restatement-based reasonableness test, including whether Systems had a legitimate protectable interest.
- Whether the agreement was overbroad or imposed undue hardship on Barnes.
- Whether Barnes’s work through Spirit Technologies for Utility Solutions constituted a violation of the noncompete.
- Whether Systems was estopped from enforcing the noncompete.
Decision
- The Vermont Supreme Court affirmed the superior court’s judgment enforcing the noncompetition agreement.
- The Court upheld the injunction barring Barnes from consulting or otherwise working with Utility Solutions or any other direct competitor.
- The Court held Systems had a legitimate protectable interest in client relationships and goodwill, given its small client base and Barnes’s sales role.
- The Court concluded the six-month restraint was reasonable in scope and duration and Barnes failed to show undue hardship.
- The Court rejected Barnes’s non-violation and estoppel arguments.
Legal Principles
- A covenant restraining trade is unenforceable if the restraint is greater than necessary to protect the promisee’s legitimate interest, or if the need for the restraint is outweighed by hardship to the promisor and likely injury to the public.
- An employment noncompete is enforceable when it is no broader than necessary to protect legitimate employer interests (including customer relationships and goodwill), does not impose undue hardship on the employee, and does not harm the public interest.
- Work for a direct competitor through an intermediary entity may fall within a contractual prohibition on being “associated with” a competing business when the intermediary’s engagement is functionally tied to the competitor.
Conclusion
The Vermont Supreme Court enforced a six-month post-employment noncompete against a former sales executive who moved directly into consulting for a competitor, holding the restraint reasonable because it protected the employer’s client relationships and goodwill without a showing of undue hardship or public harm.