Opinion
NO. 2013-CV-00094
03-28-2013
Granite Investment Advisors, Inc. v. Michael L. Timm
ORDER
The Petitioner, Granite Investment Advisers Inc. ("Granite") seeks preliminary injunctive relief, seeking to enjoin Michael L. Timm ("Timm"), its former employee, from violating a noncompetition agreement it entered into with him during the time he was employed by Granite. For the reasons stated in this Order, Granite's request for preliminary injunctive relief is DENIED.
I
A hearing on Granite's Petition for a Preliminary Injunction was held on March 13, 2013. The parties proceeded by offer of proof. The facts recited in this Order are based upon the offers of proof and affidavits and are therefore not binding upon the parties, but subject to proof at trial.
The noncompete executed by Timm provides that any dispute arising under the agreement will be resolved by arbitration. Both parties, however, have asserted that this court should decide the request for preliminary injunction and by doing so have waived that portion of the arbitration agreement.
Many of the facts are not in serious dispute. Granite is a Delaware corporation with a principal place of business in Concord, New Hampshire. It is a registered investment adviser under the Investment Advisers Act, 15 U.S.C. 80b-1 et seq. It provides portfolio management for individuals, corporations and nonprofit institutions, including public and private employee retirement funds. Timm is an individual who resides in Hopkinton, New Hampshire. He holds an MBA from the Tuck School of Business at Dartmouth College. In February 2008, he was hired as a portfolio manager by Boston Private Value Investors ("BPVI"), which was acquired by Granite on April 1, 2009.
Timm asserts that during his time at Granite he was not in a sales role. He asserts that he did not recruit, solicit or negotiate rates for Granite customers or clients. He asserts in his affidavit that in the fall of 2009 the CEO and Managing Partner of Granite, Scott Schermerhorn ("Schermerhorn"), encouraged him to partner with a Granite sales employee, Dudley Milliken ("Milliken"). Timm Affidavit, ¶ 7. Milliken was responsible for soliciting clients and managing the relationships. Timm was responsible for managing the clients' portfolios once Milliken obtained the account for Granite. According to Timm's affidavit, he had very little interaction with clients, and he and Milliken operated in this arrangement for three years. According to Granite's Petition, one of the clients that Timm did work for while employed by Granite was an investment firm called Aurora Financial Advisors, LLC ("Aurora").
Granite does not appear to dispute Timm's characterization of his job function. According to Schermerhorn's affidavit:
9. While employed by Granite, Timm worked exclusively with Dudley ("Tripp") Milliken ("Milliken") on the same Granite client accounts.Affidavit of Scott Schermerhorn, ¶ 9, 10.
10. Milliken was the "relationship" person and Timm provided financial investment advice. They worked as a team servicing the same Granite clients, including those associated with Aurora.
When Timm was hired by BPVI, he was paid a flat salary. His offer of employment included a nondisclosure agreement which stated in relevant part that:
"In consideration for this offer of employment, you agree that, except in performing your services for BPVI, you shall not, either during your employment with BPVI or thereafter, use for your own benefit or disclose to for use for the benefit of any person outside of BPVI, any confidential or proprietary information of BPVI, including without limitation client lists, information about past clients, potential clients, financial reports and regulatory filings, whether you have such information in your memory or embodied in writing or other tangible form..."The employment agreement did not contain a noncompetition agreement. According to the Timm Affidavit, and the documents appended to it, the confidentiality agreement with BPVI was negotiated prior to his employment with the company. When Timm was hired by BPVI, he was paid a flat salary.
Five months after Granite's acquisition of BPVI, in September 2009, Timm was asked to sign a noncompete. He states that Granite never told him he would be asked to sign a noncompete agreement when he began his employment. Timm Aff., ¶ 11. He further states that when he signed the agreement, he did so with the understanding that his job duties and compensation structure would remain the same throughout his employment. Id. at, ¶ 12. However, he avers in ¶ 13-14 of his affidavit that after he signed the noncompete, Granite made unilateral changes to his compensation structure, requiring him to work on a straight commission basis. While initially Granite took steps to provide him approximately the same compensation he had received as a salaried employee, the commission structure had the effect of reducing his compensation. Id. at, ¶ 14.
Granite does not directly refute these allegations. The Schermerhorn affidavit simply states that "on September 17, 2009, Granite and Timm executed [the noncompete agreement] when Timm was awarded a percentage of the fees for the accounts he was managing and was given an incentive for bringing in new clients." Schermerhorn Aff., ¶ 8. Granite does not directly refute Timm's claim that this agreement was imposed unilaterally, and had the effect of reducing his compensation. The parties apparently agree that this compensation structure continued until January 2012, when Timm was again paid on a salaried basis.
The noncompete recites in relevant part that:
In consideration of Employee's continued employment by the Company during such time as may be mutually agreeable to Company and Employee, and in consideration of the company providing Employee with continued access to training, Company clients and Proprietary or Confidential information, this Agreement being a condition thereof and ancillary thereto, the Company and Employee hereby agree as follows:
Timm claims that the noncompete would be illegal under recently enacted RSA 275:70 which requires that prior to or concurrent with making an offer of change in job classification or an offer of one, every employer shall provide a copy of the noncompete and non-piracy as part of the employment agreement to the employee or potential. However, the relevant events occurred before the effective date of the statute.
In relevant part, the document provides:
2. Prohibition on Solicitation of Customers. During the employment of Employee by the Company, and for a period of two (2) years thereafter, Employee shall not, directly or indirectly, either for Employee or for any other person or entity, solicit or provide investment adviser services to any client or prospective client of the Company, or attempt to induce any client to terminate such client's relationship with the Company, nor shall Employee interfere with or disrupt or attempt to interfere with or disrupt any such relationship(Emphasis supplied).
4. Non-compete. During the term of Employee's employment with the Company,
and for a period of two (2) years following the termination of Employee's employment with the Company, Employee will not in any way, directly or indirectly, either (a) be employed by or serve as a consultant or adviser to, (b) serve as a principal, proprietor, partner, member, manager, officer, or director of, or (c) invest in or have any other ownership interest in or right with respect to, any enterprise which is located in Concord, New Hampshire or within a seventy-five (75) mile radius thereof, and which is directly or indirectly engaging in a business which is competitive with Company's business.
On January 2, 2013, Timm and Milliken abruptly tendered their resignations and went to work for Aurora, which is located in Wellesley, Massachusetts. According to the Schermerhorn affidavit, Aurora's offices are 63 miles from Concord, New Hampshire. Granite asserts that it established the 75 mile radius for the restriction because it wanted to be sure it included the Boston area which is a prime location for many competitors. Granite also alleges that Timm works from his home in Hopkinton, New Hampshire two days a week and that Timm's home is 7.5 miles from Granite's office in Concord. Timm asserts that the Wellesley office is actually 79 miles from Concord, but does not deny that he works out of his home in Hopkinton, New Hampshire two days a week in his Affidavit.
The parties appear to dispute whether or not Aurora is a competitor within the meaning of the noncompete. According to Timm's affidavit, Aurora is a wealth management firm, and Granite, by contrast, is an investment management firm. Granite's revenues are almost entirely from investments on behalf of institutional and high net worth clients. According to Timm, Aurora provides financial advisory services while Granite provides investment management services. However, Timm admits that, at the very least, "there is some overlap in the services the two companies provide" Aff. ¶ 21. For purposes of this Order, the Court finds that Aurora does, in fact, compete with Granite. See, e.g., Technical Aid Corp. v. Allen, 134 N.H. 1, 20 (1991) (holding that defendant's argument of a corporation which placed exclusively construction laborers did not compete with a corporation which placed primarily technical personnel was "semantic at best").
Although Milliken also left Granite to work for Aurora, no action has been brought against him. He signed a noncompete with Granite in 2009, which extended to a geographic radius of 30 miles from Concord New Hampshire. Milliken Aff., ¶ 6. He also negotiated a carve out to the nonsolicitation provision in this agreement, making it clear that he was free to solicit and contact certain clients he had brought to the company. Id., at ¶ 7. Of the fourteen clients Granite's Petition claims that Timm is working for, Milliken claims nine of them are either close personal friends or family members. Id., a ¶19. For reasons not clear, Milliken apparently terminated his employment in April 2011 and then was rehired as an independent consultant in October 2011. The 2011 offer letter, appended to his affidavit does not contain a noncompete or nonsolicitation provision.
III
The public policy of the State of New Hampshire encourages free trade and discourages covenants not to compete. Concord Orthopaedics Prof'l Ass'n v. Forbes, 142 N.H. 440, 443 (1997). Such agreements are narrowly construed. Merrimack Valley Wood Products v. Near, 152 N.H. 192, 197 (2005). However, restrictive covenants are valid and enforceable if they are supported by consideration, and if the restraint is reasonable, given the particular circumstances of the case. Id. The New Hampshire Supreme Court has specifically held that continued employment constitutes consideration for a covenant not to compete. Smith, Batchelder & Rugg v. Foster, 119 N.H. 679, 683 (1979). Here, however, Timm has provided an affidavit which asserts that the noncompete was unilaterally imposed, and that it reduced his compensation. This averment is not specifically denied by Granite. Granite has the burden of persuading the Court that the restrictive covenant is valid and enforceable, and it has not provided an adequate basis from which the Court could make such a finding.
Moreover, the Court believes that the restraint imposed is not reasonable, given the particular circumstances of the case. Merrimack Valley Wood Products v. Near, 152 N.H. at 197. To determine the reasonableness of a covenant not to compete, the New Hampshire Supreme Court has applied 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. Syncom Indus., Inc. v. Wood, 155 N.H. 73, 79 (2007). This three-part test apparently finds its genesis in the Restatement (Second) of Contracts, § 188. Technical Aid, 134 N.H. at 8.
The Restatement takes the position that a restraint that is ancillary to an otherwise valid transaction or relationship is an unreasonable restraint of trade if one of two conditions is present. The first condition is that the restraint is greater than necessary to protect the promisee's legitimate interest. The second is that the promisee's need was outweighed by the hardship to the promisor and the likely injury to the public. If these conditions are not present, then the covenant cannot be ancillary to an otherwise enforceable agreement and is simply a naked restraint of trade. Restatement (Second)Contracts §188.
The first step in determining the reasonableness of a restrictive covenant is to identify the legitimate interests of the employer, and to determine whether the restraint is narrowly tailored to protect those interests. Merrimack Valley, 152 N.H. at 197. The New Hampshire Supreme Court has stated:
Legitimate interests of an employer that may be protected from competition include: the employer's trade secrets that have been communicated to the employee during the course of the employment; confidential information communicated by the employer to the employee, but not involving trade secrets, such as information on a unique business method; an employee's special influence over the employer's customers, obtained during the course of employment; contacts developed during the employment; and the employer's development of goodwill and a positive image.Syncom, 155 N.H. 79, (quoting Nat'l Employment Ser.Corp. v. Olsten Staffing Svc., 145 N.H. 158, 160 (2000)). Employers also have a legitimate interest in protecting information about their customers gained by employees during the course of their employment. Technical Aid, 134 N.H. at 9.
The noncompete at issue in this case purports to restrict Timm from providing "investment adviser services to any client or prospective client" of the Petitioner. The New Hampshire Supreme Court has specifically held that when the employer seeks to protect its goodwill with customers, a covenant that restricts the former employee from soliciting business from prospective customers sweeps too broadly. See Syncom,155 N.H. at 80; see also Concord Orthopaedics, 142 N.H. at 443 (holding that restrictive covenant prohibiting physician from competing with former practice for new patients was overbroad).
However, the fact that the noncompete is overbroad is not the end of the matter in New Hampshire. A noncompetition agreement which is overbroad, may, in some circumstances, be enforced. A few courts take the strict view that an overbroad restriction is not enforceable, reasoning that courts should not be in the business of rewriting contracts, and if courts will not do so, then the party in the superior negotiating position should have an incentive to use restraint in writing the provision in the first place. See, e.g., Poynter Invs., Inc. v. Century Builders of Piedmont, Inc., 694 S.E. 2d 15, 17-18 (S.C. 2010); Paragon Tech Inc. v. Info Smart Tech, Inc. 718 S.E. 2d 357, 358 (Ga. App. 2011). A few jurisdictions simply delete the offending provision and enforce the rest. Ackerman v. Kimball Int'l., Inc., 652 N.E.2d 507 (Ind. 1995). The majority view, based upon the Restatement (Second) of Contracts § 184 (2), appears to be accepted by the New Hampshire Supreme Court. To give the employer an incentive to avoid overreaching, courts adopting this approach impose a general requirement of good faith on the employer. Rothstein, Craver, Schroeder and Shoben, Employment Law § 8.5 (4th ed.) (West 2009). As the Restatement notes, "[p]ost-employment restraints are scrutinized with particular care because they are often the product of unequal bargaining power because the employee is likely to give scant attention to the hardship he may later suffer through the loss of his livelihood." Restatement (Second) of Contracts § 188 cmt. g.
One respected commentator has suggested that New Hampshire belongs to this group. Rothstein, Craver, Schroeder and Shoben, Employment Law §_(4th ed.) (West 2009). The Court disagrees, based upon the cases discussed infra.
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This approach has been applied in an unbroken line of New Hampshire cases. In Smith, Batchelder & Rugg, (supra), the Court held a noncompetition agreement which prohibited the employee from representing any person, firm or corporation who was a client of the employer at any time prior to the termination of the employment without the express written approval of the employer was overbroad. Id. at 683. In the absence of a defined geographical coverage within the covenants, the two state region of New Hampshire and Vermont was established as the area covered, which was unreasonably large. The class of clients protected by the covenant was too broad because the class included all clients served by the plaintiff during its existence whether or not they were current clients. Id. The noncompete was presented to the defendants only after they had substantially changed their positions, after they had accepted employment with the plaintiff. The Court held that an employer may be entitled to equitable relief in the form of reformation or partial enforcement of an overly broad covenant upon a showing of his exercise of good faith in the execution of the employment agreement, but upheld the trial court's finding that the plaintiff had not made such a showing. Id. at 686. The Court noted that the defendants signed the covenants after they were hired by the plaintiff under oral employment agreements and were employed for three years before they signed the agreement containing the noncompete. Id. at 683.
Similarly in Technical Aid, (supra) the Court held that a noncompete which prohibited the defendant from engaging in competition in a business similar to that of plaintiff within 100 miles of any office to which he had been assigned in the preceding year, or soliciting accounts and personnel for engaging in any other competitive activities within such an area for a period of 18 months following his termination, was overbroad. 134 N.H. at 10 The New Hampshire Supreme Court upheld the trial court's refusal to modify the contract because the plaintiff did not establish that it acted in good faith; the Court noted:
This finding was evidently based on Technical Aid's presentation of the contract to Allen on his first day of employment, after Allen had given notice to his previous employer in reliance on an oral agreement with Technical Aid, and on Technical Aid's insistence that he sign the contract immediately. These facts closely track those in Smith, Batchelder & Rugg, where we upheld a master's denial of good faith on the part of an employer.Id, at 134 N.H. 18.
In Merrimack Valley (supra), the Court found that a noncompete which purported to prohibit the defendant from selling materials to any customers which the plaintiffs had sold to within 12 months prior to the date of termination for a period of one year from the date of termination was unreasonable. Id. at 152 N.H. at 198. The Court found reformation unwarranted, because it found that the Plaintiff had not acted in good faith. Id. at 200. The trial court emphasized that the defendant was not asked to sign a noncompetition agreement until after he had begun work. Id. The plaintiff argued on appeal that good faith and advance notice are not one and the same. Id. The Court agreed, but upheld the trial court's finding because the trial court found:
[The plaintiff] did not discuss the salesman agreement or the restrictive covenants with the [defendant] during his interview, and that the defendant was not presented with the agreement until 6 months after he started working for the plaintiffs. Further, when the salesman agreement was finally presented to him, he "was informed his ability to retain his position was contingent upon signing the agreement," which, in its first order in 1999, the trial court found he was in no position to decline. Upon reviewing the record, we find evidence to support the trial court's determination that the plaintiffs acted in bad faith in executing the salesman agreement.Id. at 201.
In Syncom (supra) the Court held that a noncompete which would have prohibited the former employees from soliciting business from any of the plaintiff company's customers located in any territory serviced by the company while they were in the employ of the company, was overbroad. 155 N.H. at 80. Recognizing that the plaintiff company had a legitimate interest in protecting information the defendant employees may have obtained while employed by it, the Court held that "it is difficult to imagine how the defendants, had they terminated their employment within several weeks of being hired, could have gained the kind of inside information contemplated by Technical Aid with regard to all of Syncom's customers, in all of its territories." Id. One of the defendants argued that the restrictive covenant was unenforceable because he was first shown the contract and required to sign it on the first day of work, after he had left his previous employment. The trial court did not consider this issue and the Supreme Court remanded, noting that "duress of the sort claimed by [the defendant] is the kind of bad faith that would allow the trial court to decline to reform the restrictive covenant". Id. at 84-85. The federal courts considering over broad restrictive covenants under New Hampshire law have been disinclined to narrow them. See, e.g., Maddog Software v. Sklader, 382 F.Supp.2d 68, 283 (D.N.H. 2005).
The Court did uphold the narrowing of an overbroad restrictive covenant in Concord Orthopaedics, in circumstances quite different from those here. In that case, the Court upheld a narrowing of a covenant which provided that the former employee physician could not treat any patients within a 25 mile radius of the plaintiff's location for two years, to provide that the physician could not treat existing Concord Orthopaedics patients, except for emergency surgery, for two years. Id. at 444. However, the agreement had not been imposed on the defendant physician, who apparently had been a director of the plaintiff, and who had resigned when the compensation system was changed. Id. at 441-442. The Court noted while employed by Concord Orthopedics, the defendant physician "enjoyed the protections the covenant afforded him in the event other physicians terminated their employment with [plaintiff]." Id. at 445.
Consideration of these cases leads inexorably to the conclusion that, on the record here, the covenant cannot be reformed. In the first place, it is far broader than the other covenants considered by the Court in Smith, Batchelder & Rugg, Technical Aid, Merrimack Valley, Syncom; it purports to prohibit Timm from working in an enterprise "which is directly or directly engaged in a business which is competitive with [Granite's] business within a 75 mile radius of Concord, New Hampshire. While Granite has a legitimate interest in preventing Timm from appropriating its goodwill developed in part by his contact with its existing clients, it has no legitimate interest in preventing Timm from competing with non-clients. In light of settled New Hampshire law, such a covenant could not be proposed in good faith. The noncompete, as written, is a naked restraint of trade and unenforceable.
Second, it was presented to Timm five months after Granite acquired his former employer, and he avers by affidavit that when he agreed to sign the non-compete he was assured that his salary and compensation structure would remain the same throughout his employment. Timm Aff, ¶ 12. However, he avers that after he signed the agreement, his compensation system was unilaterally changed by Granite from salary to commission, which resulted in loss of income. Id. at ¶¶ 13-14. While the New Hampshire Supreme Court has held that continued employment may constitute adequate consideration for a non-compete, on the facts here, Granite offered continued employment on certain terms and then breached the agreement. Smith, Batchelder and Rugg, 119 N.H. at 683. Apart from the issue of good faith, the covenant lacks consideration. For these reasons, the court finds that Granite did not act in good faith. See Restatement (Second) of Contracts §184 (2).
Granite does not dispute any of these allegations in its papers. An employer who seeks equitable relief in reformation of an overly broad covenant bears the burden of showing his exercise of good faith. Smith, Batchelder & Rugg, 119 N.H. at 682. An employer may not merely assert that it did not act in bad faith, "for the absence of bad faith does not equal good faith for the purpose of this inquiry". Maddog Software v. Sklader, 362 F.Supp.2d at 283. Granite has not carried that burden. Therefore, based upon the on the offers of proof presented, the covenant is overbroad and cannot be reformed. Since this finding disposes of Petitioner's request for preliminary injunctive relief, and because the parties have agreed to arbitrate the merits of this dispute, the Court need not address the other claims made by Respondent. It follows that the Motion for a Preliminary Injunction must be denied.
SO ORDERED.
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Richard B. McNamara,
Presiding Justice
RBM/