Connecticut Appellate Court Strikes Down Noncompete Provision of Partnership Agreement as Overly Restrictive
In a decision dated February 23, 2021, the Connecticut Appellate Court issued a stark reminder that the bounds of noncompete provisions must be narrowly tailored.
In DeLeo v. Equale & Cirone, 202 Conn. App. 650 (2021), the court considered a noncompete provision that would have required a departing partner to pay the partnership an amount equaling 150% of the total average annual fees billed to each partnership client serviced in violation of the noncompete provision for a period of five years. Initially, the trial court enforced the provision as a liquidated damages clause. However, on appeal, the Appellate Court held that the trial judge erred in failing to conduct a reasonableness analysis to determine the provision’s enforceability. On remand, the trial court concluded that the noncompete provision constituted an unreasonable restraint on trade and therefore refused to enforce it. Defendants—the partnership and its partners—appealed.
In affirming the lower court’s ruling, the Appellate Court considered and rejected each of the partnership’s arguments in favor of enforceability. As an initial matter, the court emphasized that although public policy favors freedom of contract between sophisticated commercial partners like the parties to this case, equality of bargaining power is not determinative of whether a noncompete provision is enforceable. Rather, the court must consider whether the restriction itself is reasonable. Under settled Connecticut case law, reasonableness turns on:
The length of time the restriction is to be in effect;
The geographic area covered by the restriction;
The degree of protection afforded to the party in whose favor the covenant is made;
The restrictions on the employee’s ability to pursue his occupation; and
The extent of the interference with the public’s interests.
As to the degree of protection afforded the partnership, the court conceded that an employer has a legally recognized right to protect its business interest in retaining the goodwill of its clients. But, according to the court, the relevant inquiry is not merely whether the employer has a protectable interest, but instead whether the means used to protect that interest “are reasonably necessary and whether they unreasonably deprive the plaintiff of his right to make a living and the public’s right to access the free market.” The noncompete provision at issue in this case failed this test for several reasons.
First and most significantly, the record demonstrated that if the provision were enforced, the departed partner would have been effectively forced out of his role as an accountant for a period of five years because the fees owed to the partnership under the terms of the noncompete would exceed his profits at his new firm. This outcome struck the court as particularly problematic given that the clients in question either followed the departed partner to the partnership or were cultivated and serviced exclusively by him during his employment. Thus, according to the court, they were not truly partnership clients.
Second, the noncompete provision was not necessary to protect the partnership’s business interests. Even absent the noncompete, the partnership had the opportunity to retain the clients. And, unlike the departed partner, if the noncompete were not enforced, the partnership would still have access to a minimum of 70% of its client base.
Third, the record demonstrated that enforcing the noncompete would have imposed undue hardship on the departing partner’s clients, who had come to trust the departed partner and would be required to expend time and money to bring a new accountant up to speed.
Finally, though the court did not attempt to draw a bright line rule, it found the five-year temporal duration of the noncompete provision unreasonable in this instance.
In the end, the court was persuaded that the noncompete provision was unreasonable and therefore unenforceable. The decision stands as a stark reminder not to overreach when crafting restrictive covenants governed by Connecticut law.