restrictive covenant

February 17, 2021

United Health Care Rebuffed on Injunction Request

Although a former executive was bound by a restrictive covenant, the fact that his duties after joining a competitor were directed to a different market made the scope of the restrictions unreasonable.
A restrictive covenant that is not narrowly tailored to protecting specific interests of the former employer at stake in a lawsuit is less likely to be enforced with a preliminary injunction.
A company that relies on the inevitable disclosure doctrine faces a high hurdle to show the certain use of a trade secret in a competitive manner.

An attempt by United Health Care to block an executive from joining a competitor failed when a federal judge found the medical insurance and services company had failed to establish it was likely to succeed when the case goes to trial. The dispute identifies some of the steps that a new employer take to prevent its just-hired employee from running afoul of a restrictive covenant.

The defendant Carlos Louro in this this case, United Health Care v. Louro, was an executive supervising the underwriting of national accounts at United. He had recently been promoted to vice president and served on a high-level, national accounts strategy group. He had also received stock options and restricted stock awards, which contained restrictive covenants and non-disclosure provisions..

The trial court construed Louros agreements with United that and restricted him from:“[e]ngag[ing] in or participat[ing] in any activity that competes, directly or indirectly, with any Company activity, product, or service that [Louro] engaged in, participated in, or had Confidential Information about during [Louro’s] last 36 months of employment with the Company” or assist anyone in any of those activities for one year after Louro’s termination of employment.” Continue reading

February 1, 2021

A Non-Competition Agreement from the Great Beyond

by Jay R. McDaniel, Esq.

A case in which a restrictive covenant was enforced against an accountant who happened to be beneficiary under her deceased former employer’s will is among recent business divorce cases worthy of note.

Restrictive Covenant Given in Purchase Agreement Survives Death

A covenant not to compete given in connection with the sale of an accounting practice is enforceable against a beneficiary of will who happened to be a competitor of the practice that bought the Cases-of-Note-Non-Competition-1-1024x536 deceased account. Here is what happened in McCarthy & Co, P.C. v. Steinberg, a case before a federal court in Pennsylvania. Harris Fox sold his accounting practice to the plaintiff with a multi-year restrictive covenant. The terms of the sale provided for payment of 25 percent of the revenue earned from Fox’s clients during the five-year period. The restrictive covenant remained in place for three years after the last payment under the sale agreement. The defendant, Judith Steinberg, had worked for Fox for 24 years and at the time of the sale, Fox had asked that plaintiff hire her. Steinberg stayed for four years, then resigned started practicing with a direct competitor. Continue reading

December 29, 2020

Psychologists, Like Lawyers, Not Subject to Restrictive Covenants

by Jay R. McDaniel, Esq.

Restrictive covenants preventing competition by former employers are enforceable only to the extent that they are reasonable under New Jersey law.
Lawyers and psychologists are exceptions to the general rule, however, because both are subject to disciplinary rules that prohibit restrictions against competition.
Courts have recognized that the personal relationship and confidentiality that exist between a lawyer or psychologist and their clients are such that a restriction on competition is appropriate.
Physicians continue to be subject to restrictions on competition that protect a legitimate interest and that do not impose unreasonable restrictions on the party subject to the agreement.

In the world of business divorce, one of the key issues is the existence or absence of restrictive covenants that prohibit competition from former shareholders, partners, members or employees. It affects the value of a business – particularly professional and sales-driven businesses – because restrictive covenants generally protect the good will of the enterprise.

There are only two classes of professionals for whom restrictions on competition are always unenforceable. These are lawyers and psychologists, not because of psychologist-5154576_1920-1024x683 any specific distinction between them and other deeply personal relationships, but because the professions are subject to unique restrictions. Attorneys are prohibited from restricting competition by the Rules of Professional Conduct that govern lawyers. Psychologists are subject to an administrative regulation that have the same effect.

Restrictions on Competition Barred by Regulation

In a 2005 decision, the New Jersey Appellate Division distinguished between physicians, who are subject to “reasonable” restrictions on competition, from those imposed on psychologists.

There are also two classes of restrictive covenants to consider. The are those restrictive covenants in which there has been some purchase of good will, which courts will distinguish from a traditional employment business. Enforcing a restrictive covenant against a party that has sold a business, for example, is going to be quite different from enforcing a restrictive covenant against

When there is no contractual limation to restrict the key players from competing, or when restrictive covenants are unenforceable, the value of the good will in the business is typically diminished. Consider the rainmaker who leaves a law firm with his or her large book of business. All of the good will tied up in those relationships is portable, and any valuation of the firm has to consider the loss of those clients and so much of the reputation of the firm that was tied to the departing attorney. Continue reading

February 7, 2017

Employee Termination Without Cause May Limit Enforceability of Non-Compete Agreement

by Jay R. McDaniel, Esq.

Litigating with a former employee for violation of a restrictive covenant agreement becomes more complicated when the former employee was terminated without good cause. And because we are an at-will employment economy, this becomes an issue more frequently than one might imagine.

As one author notes, it typically is not the underperformer who creates a problem for their former employer. It’s the superstars, of course, that threaten to walk out the door not because they were fired but because they plan on taking a big chunk of business.

Include Poor Performance as Grounds for Termination

May 15, 2013

The Little Big Breach – Restrictive Covenants

by Jay R. McDaniel, Esq.

Most of the cases that we handle – like any other litigation – get settled before trial. One of the incentives to settle is that invariably the departing owner will agree to some sort of restrictive covenant against competing against his former company.

The case that goes to trial, or which is resolved on a substantive motion, leaves this issue wide open. In fact, there is no statutory basis to deter the ousted business owner from setting up a competitor and trying to lure away the business of his former company, and one would suppose with a bankroll secured by the purchase of his or her interest.

Since most business divorce litigation ends with a deal, and restrictive covenants are critical aspects of those transaction, I thought it worthwhile to write about a recent decision of the Appellate Division that gives a stern warning that the restrictive covenant had better been honored.

Although a former executive was bound by a restrictive covenant, the fact that his duties after joining a competitor were directed to a different market made the scope of the restrictions unreasonable.

A restrictive covenant that is not narrowly tailored to protecting specific interests of the former employer at stake in a lawsuit is less likely to be enforced with a preliminary injunction.

A company that relies on the inevitable disclosure doctrine faces a high hurdle to show the certain use of a trade secret in a competitive manner.

Restrictive Covenant Given in Purchase Agreement Survives Death

Restrictive covenants preventing competition by former employers are enforceable only to the extent that they are reasonable under New Jersey law.

Lawyers and psychologists are exceptions to the general rule, however, because both are subject to disciplinary rules that prohibit restrictions against competition.

Courts have recognized that the personal relationship and confidentiality that exist between a lawyer or psychologist and their clients are such that a restriction on competition is appropriate.

Physicians continue to be subject to restrictions on competition that protect a legitimate interest and that do not impose unreasonable restrictions on the party subject to the agreement.

Restrictions on Competition Barred by Regulation

Include Poor Performance as Grounds for Termination