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referring to the geographic and temporal scope inquiries as "fact-specific"
Summary of this case from Ainslie v. Cantor Fitzgerald, L.P.Opinion
C.A. No. 17481-NC
Date Submitted: March 19, 2001
Date Decided: July 26, 2001
Jeffrey K. Martin and Herbert G. Feuerhake, Esquires of JEFFREY K. MARTIN, P.A., Wilmington, Delaware; Attorneys for Plaintiff.
Kathleen M. Miller and Joelle E. Polesky, Esquires of SMITH, KATZENSTEIN FURLOW, LLP, Wilmington, Delaware; Attorneys for Defendant.
MEMORANDUM OPINION
This lawsuit is brought by Computer Aid, Inc. ("CAI") to enforce restrictive covenants embodied in a contract between CAI and its former employee, the defendant, Stephen J. MacDowell ("MacDowell"). Two covenant clauses are in dispute: (i) a non-compete provision, which CAI seeks to enforce by way of injunctive relief, and (ii) a liquidated damages provision, which CAI seeks to enforce through a monetary recovery. This is the Opinion of the Court, after trial, on the merits of CAI's claims.
I. FACTS
The critical facts are undisputed. The plaintiff, CAI, is a computer consulting company headquartered in Allentown, Pennsylvania, that offers informational technology services to its customers. CAI has ten other branches located throughout the East Coast, including Wilmington, Delaware.
MacDowell, the defendant, began his employment with CAI on June 8, 1998. He started in the "New Associate In-Training Program" (the "Program"), which involved a five-week course that CAI conducted for employees with no prior computer services experience. The Program offers several different courses ("Institutes"), including a Help Desk Institute in which MacDowell was enrolled. After MacDowell accepted the position of Help Desk representative, he agreed to undergo the training for that position and signed two agreements: a "New Associate-In-Training Agreement" (the "Training Agreement"), and an employment contract. The Training Agreement provided that MacDowell would be paid $250 per week, would receive all training and materials for free, and would be employed after successfully completing the Program. MacDowell's base salary for his position would be $26,000 per year, with performance-based "merit increases" throughout the term of his employment.
The Training Agreement contained two provisions that form the basis of this dispute. The first is a "non-compete" provision found in Paragraph 4, which restricts MacDowell from working for a CAI client or a CAI competitor for one year after terminating his employment at CAI. The second is a liquidated damages provision found in Paragraph 1(e), under which MacDowell is required to reimburse CAI $15,000 if he terminates his employment at CAI within two years of completing his training at the Institute.
After MacDowell successfully completed his training at the Institute, he was offered an opportunity to work as a CAI consultant for E.I. duPont de Nemours Co. ("DuPont"). MacDowell interviewed with DuPont's Agricultural Department, and joined that Department's Help Desk Call Center.
On August 23, 1999, approximately 13 months later, MacDowell terminated his employment at CAI, for the stated reason that he needed to care for his terminally ill grandmother. But, on August 30, 1999 — only one week later — MacDowell began employment at a competing firm, RHI Consulting ("RHI"). RHI is a full service consulting firm that offers technology expertise to businesses on a consulting and full-time basis. As an RIM employee, MacDowell was interviewed for an on-site position, again at DuPont but this time in its Legal Department. MacDowell was hired as a Desktop Technician (also known as a Level II Technician) at the Legal Department, and he remains in that position today. This lawsuit followed, and resulted in a trial that took place on March 1, 2000.
MacDowell was paid through August 26, 1999, but was asked not to return after August 23, 1999.
II. THE PARTIES' CONTENTIONS
In this lawsuit, CAI seeks to enforce the aforementioned restrictive covenants in the Training Agreement. CAI claims that the non-compete provision is valid, and that MacDowell breached it when he began working for a competitor one week after terminating his employment with CAI. CAI requests an injunction prohibiting MacDowell from working for RHI for a period of one year starting from the date of this Opinion.
CAI also seeks to enforce the liquidated damages provision that requires MacDowell to pay CAI $15,000 if he terminates his employment with CAI within two years of completing his training at the Institute. CAI claims that the liquidated damages provision is valid and enforceable, because the contracting parties expressly acknowledged that CAI's damages resulting from the breach would not be easily measurable.
MacDowell contends that he did not breach the non-compete provision because, as an RHI employee, he works in a different capacity for a separate division of DuPont, and, thus, is working for a totally separate client. MacDowell asserts that the liquidated damages provision is invalid, because it constitutes an unenforceable penalty that does not reflect CAI's true damages, and, moreover, is being used improperly as a weapon to deter employees from terminating their employment at CAI.
III. ANALYSIS
The parties have stipulated that Pennsylvania law governs both of the plaintiffs claims, which I next proceed to analyze separately.
A. Is the Non-Compete Provision Enforceable?
Under Pennsylvania law, an employee non-compete provision is enforceable if it is: (1) ancillary to the main purpose of the employment arrangement, (2) necessary to protect the employer's legitimate interests, (3) supported by consideration, and (4) appropriately limited as to territory and time. In this case, only two of those four elements are in dispute, namely, (i) whether the non-compete provision was necessary to protect CAI's legitimate interest, and (ii) whether the non-compete provision is appropriately limited as to territory and time.
Volunteer Firemen's Insurance Services, Inc. v. CIGNA Property and Casualty Insurance Agency, Pa. Super., 693 A.2d 1330, 1337 (1997).
1. CAI's Interest in Restricting MacDowell's Ability to Gain Employment with a Competitor.
Where an employee receives specialized training or learns trade secrets, a restrictive covenant may be used to protect the legitimate interests of the employer. In determining whether or to what extent the employer has a legitimate interest in restricting an employee's future employment, the Court must consider the specific relationship between the client and the employee.
Girard Inv. Co. v. Bello, Pa. Supr., 318 A.2d 718 (1974).
CAI's argument runs as follows: CAI developed its reputation in the computer services industry by offering a consulting service delivered by employees having superior technical and interpersonal expertise. That is, CAI's competitive advantage consists of the superior quality of its employees. To assure that superior quality, CAI must invest its money and resources to train persons for a five-week period, using a unique blend of methodologies designed to equip the employee with proprietary techniques in dealing with people and with complex situations.
The foregoing, CAI claims, results in three legitimate interests that may be protected by a contractual provision that reasonably restricts former employees from working for a competitor in the same capacity. First, CAI has proprietary methodologies from which its competitors would unfairly benefit if those competitors are permitted to misappropriate them. Second, CAI has a good reputation that could be damaged if the employee is allowed to work for a competitor as a consultant for the same client. The client may not know that there is a change in employment and could attribute any substandard behavior of the consultant to CAI, as opposed to the competitor. Third, CAI contends that it has a valid interest in maintaining continuity as a result of the employee remaining in his or her position as a consultant for CAI — an interest that would be impaired by the employee's departure.
MacDowell responds that non-compete provisions in an employment contract are subject to a higher level of judicial scrutiny than an identical provision in a sale of a business, because the employee has no "goodwill" to sell and because the employee's livelihood is at stake. In this case, MacDowell argues, CAI has no legitimate employer interest to protect because CAI did not teach him any proprietary techniques. MacDowell claims that the training he received was not unique in any meaningful sense, and that it could have been acquired from any number of other sources. Therefore, MacDowell urges, to enforce the restrictive covenant would restrict an employee from transporting his general skills from one job to another, thereby significantly and unfairly impairing the employee's ability to earn a living.
I find that CAI has a legitimate interest in protecting its proprietary techniques and methodologies. That entitles CAI reasonably to limit by contract MacDowell's options for future employment with a competitor. CAI introduced MacDowell to the computer services industry through its five-week training Institute. That training program provided a foundational skill set of computer knowledge and customer service practices, which enabled MacDowell to seek employment within the same industry and the same geographic area, and that involved the same services. Although MacDowell claims that the information he received at the Institute was commercially available elsewhere, that fact, even if true, does not diminish the proprietary nature of the training he received. Moreover, and in fact, CAI added certain unique elements to that training.
CAI has also shown that the computer consulting industry is highly competitive and service-based. In that industry it is prevalent for a client often to identify with, and be more loyal to, a specific employee than to the faceless firm that employs him. Because it is CAI that actually offers the consulting services, CAI has a legitimate interest in restricting MacDowell's future employment, in a reasonable way, to avoid CAI being forced into the position of having to compete immediately with its own former employee.
See Sidco Paper Co. v. Aaron, Pa. Supr., 351 A.2d 250, 254 (1976) ("the possibility is present that the customer will regard, or come to regard the attributes of the employee as more important in his business dealings than any special qualities of the product or service of the employer, especially if the product is not greatly differentiated from others which are available").
See Id.
Because CAI has demonstrated a legitimate interest in restricting MacDowell's future employment, I next turn to the question of whether the scope of the restrictions contained in the non-compete provision is reasonable both geographically and temporally.
2. The Reasonableness of the Non-Compete Provision as to Territory and Duration.
In determining the reasonableness of a restrictive covenant, two facts pecific inquiries must be made. The first is whether the territorial limitations imposed by the restrictive covenant are reasonable in relation to the employer's legitimate interests. The second is whether the duration of the restrictive covenant is reasonable.
See Records Center, Inc. v. Comprehensive Management, Inc., Pa. Super., 525 A.2d 433 (1987).
Regarding the geographic limitations, the Training Agreement has two relevant provisions. Paragraph 4(ii) provides that the employee shall not work:
a) with any customer of the Company to whom the Associate was previously or is presently assigned; or
b) with any company whose services are competitive with the services of the company within a 50 mile radius of the Company's branch location to which the Associate was assigned at the time of his or her termination.
CAI argues that, given the highly competitive nature of the computer services industry and the significant investment CAI made to develop MacDowell into a specialized employee, a 50 mile radius "non-compete area" is geographically reasonable.
MacDowell responds that such a geographic restriction would be unreasonable, because it prohibits his employment within a 50 mile radius of any of CAI's eleven branches. Because CAI has branches in Wilmington, Delaware; Baltimore, Maryland; Allentown, Harrisburg, Radnor, Lancaster and Wyomissing, Pennsylvania; Rochester and New York, New York; and Bridgewater and Hackettstown, New Jersey; MacDowell argues that he would be precluded from working anywhere on the East Coast.
MacDowell's argument is meritless for two reasons. To begin with, MacDowell misreads the geographic restriction. Paragraph 4(ii) of the Training Agreement limits MacDowell to employment that is further than 50 miles of CAI's branch location to which he was assigned at the time of his termination, not 50 miles from each of CAI's branches. Thus, in this case the only relevant geographic restriction is the area described by a 50 mile radius from Wilmington, Delaware. Second, Pennsylvania courts have repeatedly held that a 50 mile radius restriction is reasonable. In Albee Homes, Inc. v. Caddie Homes, Inc., the Pennsylvania Supreme Court found that: "no doubt the covenant is enforceable as to an area within 50 miles of the place of employment by the covenantee, for we can see a direct and reasonable connection to the protection of business in such a restriction, especially where, as here, the restriction is limited in time to a period of one year after termination of employment." The 50 mile restriction at issue here fits comfortably within the mainstream of Pennsylvania case law.
Pa. Supr., 207 A.2d 768, 773 (1963).
The second issue is whether the time duration restriction is reasonable. Both parties agree, and Pennsylvania case law confirms, that a one year non-compete provision is reasonable. The only issue dividing the parties is when the one-year restriction on MacDowell's employment should begin to run.
See Plunkett Chemical Co. v. Reeve, Pa. Supr., 95 A.2d 925 (1953) (enforcing covenant not to engage in the same line of business for one year with no limitation on the territorial coverage of the restraint . . . in territory in which the employee operated as a salesman).
CAI urges this Court to suspend MacDowell's current employment for a period of one year running from this decision, because he has been in violation of the agreement since the date of his termination. MacDowell responds that the restriction should begin from the termination of his employment at CAI, because that is what the Training Agreement provides. Because that one year period has now elapsed, MacDowell argues, he is now legally free to work at RHI.
Paragraph 4 of The Training Agreement covers the point. It pertinently states that:
The Associate covenants and agrees that the Associate shall not: During the period of employment and for one year following termination of the Associate's employment . . .
Pennsylvania courts look to the language of the parties' contract to determine when a temporal restriction begins. Where, as here, the contract provides that the restriction begins upon termination of employment, the Courts will enforce the provision as running from the date of termination. CAI offers no basis to ask this Court to rewrite the terms of the Training Agreement which CAI drafted and executed. Therefore, the one year non-compete prohibition runs from the date that MacDowell terminated his employment at CAI.
Geisinger Clinic v. DiCuccio, Pa. Super., 606 A.2d 509, 514 (1992) (holding that non-competition agreement that stated "this restriction shall endure for a period of two years from the date of termination" meant period of non-competition began on date of employee's termination and continued for two years from that date).
B. Did MacDowell's Employment at RHI Breach the Non-Compete Provision?
Because the non-compete provision is valid and enforceable, the next issue becomes whether MacDowell breached that provision. Relevant to the analysis is Paragraph 4(ii) of the Training Agreement, which sets forth the terms and scope of the non-compete provision, as follows:
During the period of employment and one year following termination of the Associate's employment, work, render or perform data processing professional services, for his own account or for others, or have any business dealings, either directly or indirectly or through corporate entities or associates;
a) with any customer of the Company to whom the Associate was previously or is presently assigned; or
b) with any company whose services are competitive with the services of the Company within a 50 mile radius of the Company's branch location to which the Associate was assigned at the time of his or her termination.
CAI makes two arguments based on this provision. The first is that MacDowell breached Paragraph 4(ii)(b), because by working in the same capacity at RHI, which is CAI's direct competitor, MacDowell is misappropriating CAI's proprietary methodologies. CAI's second argument is that MacDowell breached Paragraph 4(ii)(a) by consulting with DuPont, a client to which MacDowell was assigned during his employment at CAI. CAI contends that the fact that MacDowell consulted for two different departments at DuPont is irrelevant, because the Training Agreement defines a client to be a "commercial entity," which would be DuPont itself, and not any specific department thereof.
Paragraph 8 of the Training Agreement states: ". . . The term `customer' and `client' as used herein shall refer to any commercial entity or government agency to which the Company [CAI] has during any part of the two years prior to termination, sold data processing services or products or had a contract with or at termination had a contract with, and all operations, corporations and/or organizations owned, operated, related or affiliated with said customer. . . ."
MacDowell responds that the skill set he is utilizing in his employment at RHI is completely different from the skill set he used as an employee of CAI. MacDowell also claims that the skill set that he uses at RHI was developed on his own personal time through self-teaching. For these reasons, MacDowell claims, he is working at DuPont in a different capacity and is not violating the non-compete covenant. Lastly, MacDowell argues that DuPont's Agricultural Department is a different entity than DuPont's Legal Department, because each department made independent hiring decisions when it hired him.
Indeed, MacDowell contends, CAI implicitly admits that the two employment positions require different skill sets, because CAI offers two separate courses for the work that MacDowell did while employed at CAI and the work he is doing as an employee of RHI.
MacDowell's arguments lack merit. It is undisputed that CAI provided the training that enabled MacDowell to enter the computer services industry. Having received that training, MacDowell then left CAI, and one week later commenced employment at RHI, using his CAI training to procure the position at RHI. It may be that there are differences between MacDowell's former and present positions, but that does not matter. The issue is whether MacDowell left CAI to work for a company whose services are competitive with the services of CAI within a 50 mile radius of his former place of employment. Clearly he did. MacDowell's argument that his job at RHI differs somewhat from his job at CAI is irrelevant to that issue. Moreover, under the Training Agreement, the customer/client is DuPont, which makes legally irrelevant MacDowell's effort to distinguish between DuPont's Legal and Agricultural Departments. Because MacDowell is working for a competitor within 50 miles of the CAI branch at which he was employed at the time he left CAI, MacDowell has violated the non-compete provision in Paragraph 4(ii).
C. What is the Appropriate Remedy?
The non-compete provision, which MacDowell has breached, runs for one year from the date of MacDowell's termination. Because over one year has elapsed since MacDowell terminated his CAI employment, CAI's only available remedy is damages. The record does not permit any precise quantification of the actual damages CAI suffered as a result of MacDowell's breach. Nonetheless, this Court must determine money damages in some amount; otherwise, CAI, the aggrieved party, would be left without any remedy.
The best evidence of CAI's damages is found in the Training Agreement, specifically, its liquidated damages clause. In this particular case, resort to the liquidated damages provision is required to determine the appropriate amount of compensatory damages, because the record contains no other evidence of CAI's damages. Although the liquidated damages clause is not being enforced directly, that provision has evidentiary value because its underlying purpose — recapturing CAI's costs incurred to train and employ MacDowell — is relevant to determining CAI's compensatory damages.
Because the objective is to compensate CAI for its loss, the $15,000 liquidated damages amount, although not the measure of damages, serves as a useful starting point. The liquidated damages clause assumes that MacDowell would have had to remain at CAI for two years for CAI to recoup the costs of his training. In this case, MacDowell worked at CAI for thirteen months. It may therefore be inferred that CAI recouped 13/24 of its training costs, but not the remaining 11/24. Because the Training Agreement stipulates that the total training cost is $15,000, MacDowell is liable to CAI for (pro-rated) damages amounting to 11/24 of $15,000, or $6,875.
Holt's Cigar Co. v. 222 Liberty Assocs., Pa. Super., 591 A.2d 743, 748 (1991) (stating that when analyzing a liquidated damages clause, "[C]ompensation, not punishment, is the guiding rule.").
IV. CONCLUSION
Counsel shall submit an appropriate Order implementing the rulings made herein, entering judgment in favor of CAI and against MacDowell in the amount of $6,875, and requiring MacDowell to pay the costs of this proceeding.