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The law does not look with favor upon contracts in restraint of trade or competition. Such contracts are narrowly construed. However, restrictive covenants are valid and enforceable if the restraint is reasonable, given the particular circumstances of the case. A covenant's reasonableness is a matter of law for the court to decide. To determine the reasonableness of a restrictive covenant ancillary to an employment contract, the court employs a three-pronged test: first, whether the restriction is greater than necessary to protect the legitimate interests of the employer; second, whether the restriction imposes an undue hardship upon the employee; and third, whether the restriction is injurious to the public interest. If any of these questions is answered in the affirmative, the restriction is unreasonable and unenforceable. In determining whether a restrictive covenant is reasonable, the court will look only to the time when the contract was entered into.
Defendants Eldon Wood and William Hogan began setting up a rival movie theater cleaning company while still working for Syncom Industries, Inc. ("Syncom" or "the company"). When their superiors became suspicious, Wood was informed that he would be suspended without pay for a week. He resigned instead. Hogan was terminated shortly thereafter. Both employees' contracts contained restrictive covenants, which they claimed were unenforceable. The trial court awarded Syncom injunctive relief, compensatory and enhanced damages, and attorney's fees on its claims of breach of contract, breach of fiduciary duty, and loss of business reputation and goodwill. The trial court also denied Hogan’s counterclaim for breach of contract.
Did the district court err in ruling that the restrictive covenants were enforceable?
The court reversed the ruling that the covenants were enforceable because, inter alia, the covenants at issue extended to Syncom’s customers with which the employees had no direct contact; therefore, the covenants were broader than necessary for the purpose of advancing Syncom’s legitimate interest in protecting its goodwill. However, the court remanded the issue of whether the covenants could be reformed as to either employee for a determination of whether Syncom acted in good faith. The court noted that the suspension imposed was not an anticipatory repudiation of the contract even if it could be considered a violation of RSA 275:43-b. The court vacated the compensatory damage award because a proper calculation would depend upon the scope of the covenants.