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Solito v. Direct Capital Corp.

State of New Hampshire MERRIMACK, SS SUPERIOR COURT
May 17, 2018
No. 219-2017-CV-00411 (N.H. Super. May. 17, 2018)

Opinion

No. 219-2017-CV-00411

05-17-2018

Richard Solito, Jesse Kells and Matthew Will v. Direct Capital Corporation And C.I.T. Bank, Cross-claim Plaintiff v. Richard Solito, Jesse Kells and Matthew Will And Direct Capital Corporation and C.I.T. Bank, v. Ascentium Corporation


ORDER

Richard Solito ("Solito"), Jesse Kells ("Kells") and Matthew Will ("Will"), (collectively the "Former Employee Plaintiffs"), all former employees of Direct Capital Corporation ("DCC"), have brought an action against DCC for the purposes of, inter alia, challenging restrictive covenants which DCC asserts are applicable to them. DCC is a subsidiary of Capital Direct Group, Inc., which is a subsidiary of CIT Bank, NA ("CIT"), which is a subsidiary of C.I.T. Group, Inc. DCC has filed Counterclaims seeking a declaratory judgment and alleging breach of contract against the Former Employee Plaintiffs and theft of trade secrets against Solito. CIT has filed Cross-claims alleging that the Former Employee Plaintiffs violated their duty of loyalty to DCC and CIT while working for DCC. DCC and CIT have filed a Complaint against Ascentium Capital, LLC ("Ascentium") alleging intentional and improper inference with contracts, misappropriation of trade secrets, and civil conspiracy.

The Former Employee Plaintiffs and Ascentium (collectively "the Plaintiffs") move to compel DCC to produce communications with its counsel concerning the invalidity and unenforceability of Noncompetition, Nondisclosure, and Nonsolicitation agreements that DCC allegedly imposed on its employees in 2007, as well as the Nondisclosure and Nonsolicitation Agreements that DCC allegedly imposed on employees in 2013. The Motion to Compel is DENIED. The Plaintiffs move to amend their Statements of Affirmative Defenses to add the affirmative defense of collateral estoppel. The Motion to Amend is GRANTED. Finally, the Plaintiffs move in limine to preclude DCC and CIT (collectively "the Defendants") from offering evidence of alleged good faith related to the 2007 Agreements. The Motion in Limine is DENIED without prejudice. The Plaintiffs also move for reconsideration of this Court's Order of April 11, 2018 finding that RSA 275:70 (2012) did not apply to the 2013 agreement between Solito and DCC. The Motion is DENIED.

I. Background

The following allegations, taken for the most part from the Former Employee Plaintiffs' Complaint against DCC, are helpful in order to understand the Motions which have been filed. Solito, Kells and Will are all former employees of DCC and now work for DCC's competitor, Ascentium. (Compl. ¶ 7.) In 2007, DCC had all employees sign an agreement containing noncompetition, nondisclosure and nonsolicitation covenants (the "2007 Agreement"). (Id. ¶ 9.) Kells and Will are parties to the 2007 Agreement. (Id.) In 2013, the 2007 Agreement was determined to be unenforceable by the New Hampshire Superior Court. (Id. ¶ 10.) Later that same year DCC presented its employees with a new nondisclosure and nonsolicitation agreement (the "2013 Agreement") and asked employees to sign it. (Compl. ¶ 11.) Solito signed the 2013 Agreement. (Compl. ¶ 12.) Kells and Will declined to sign the 2013 Agreement. (Id.) In June 2017, Will executed a Restricted Stock Unit Award Agreement which contained an exhibit with restrictive covenants which was presented to him by DCC. (Id.) Will alleges that he was "duped" into signing this agreement. (Id.)

Following their departures from DCC, Solito, Kells and Will each received letters reminding them of their obligations under their various agreements. (Compl. ¶¶ 11-13.) The Former Employee Plaintiffs allege that DCC has attempted to enforce its various agreements with former employees, including the Former Employee Plaintiffs, through litigation.

The Defendants deny that they have engaged in any wrongdoing. Their response to the Complaint can be summarized as follows: DCC asserts that the 2013 Agreement which was presented to DCC employees is a voluntary agreement and the employees were told they could sign the agreement or the company would continue to rely on the 2007 Agreement. (Def. Direct Capital Corp.'s Answer and Amended Counterclaims and Cross-claims of CIT Bank, N.A. [hereinafter "Answer"] ¶ 11.) DCC asserts that following an opportunity to review it, Solito signed the 2013 Agreement. (Id.) Kells and Will, however, chose not to sign the 2013 Agreement and the Defendants assert that they are bound by the 2007 Agreement. (Id.) The Defendants have also brought counterclaims and counterclaims; they do not seek to enforce the noncompetition clause of the 2007 agreement against Kells and Will, but only the nonsolicitation and nondisclosure clauses. (Id. ¶ 113.) The Defendants also seek to enforce the 2013 Agreement against Solito and a covenant in a Restricted Stock Unit Award Agreement that was signed by Will. (Id. ¶¶ 154-61.) In addition to equitable relief, the Defendants seek compensatory damages on various theories, including breach of contract, breach of the duty of loyalty, and misappropriation of trade secrets in violation of RSA 350-B, New Hampshire's Uniform Trade Secret Act ("NHUTSA").

II. Plaintiffs' Motion to Compel

The Plaintiffs specifically seek to compel DCC to produce communications with its counsel concerning the invalidity and unenforceability of the 2007 Agreement and the 2013 Agreement (collectively "the Agreements"), to the extent those communications occurred before or in conjunction with the Agreements being presented to employees. The Plaintiffs acknowledge that these communications would ordinarily be protected by attorney-client privilege, but argue DCC waived that privilege by affirmatively putting forth its "good faith" as part of its request that the Court reform the otherwise unenforceable Agreements: "[i]n short, when DCC affirmatively alleged 'good faith' compliance with the law to request that the Court reform the otherwise unenforceable agreements, DCC placed 'at issue' communications it had with its counsel concerning the invalidity and unenforceability of the Agreements, because those communications are probative of DCC [sic] alleged subjective good faith." (Pls.' Mot. to Compel, ¶ 2.)

To accept the Plaintiffs' position that DCC has placed its advice of counsel at issue, the Court must accept two propositions; first, that the determination of whether or not a party who seeks reformation of a restrictive covenant acts in good faith requires a subjective analysis of the party's mental state; and second, assuming that subjective good faith is relevant to the inquiry, the fact that DCC must prove that it acted in good faith to obtain relief thereby constitutes a waiver of what legal advice it obtained about the covenant it seeks to enforce.

A. The Requirement of Good Faith

Some courts refuse to reform restrictive covenants at all, some will only excise offending parts ("blue penciling") and the majority of courts will reform them by excising offending provisions. See generally 15 G.M. Geisel, Corbin on Contracts (hereafter "Corbin") § 80.15, at 136-41 (rev. ed. 2003). The New Hampshire Supreme Court has held, following the Restatement (Second) Contracts § 184(2), that an employer may be entitled to reformation of an unreasonably broad restrictive covenant if it can prove that it acted in good faith in execution of the contract. See Smith, Batchelder & Rugg v. Foster, 119 N.H. 679, 682 (1979). Modification of the covenant is the majority rule, and is favored by commentators. Corbin, § 80.15, at 140. However, the requirement that the employer prove that it acted in good faith in drafting the covenant does not exist in most states. Id. at 138-40.

The New Hampshire Supreme Court has considered whether or not an employer could be held to have acted in good faith on a number of occasions, and its analysis has always turned upon objective consideration of the facts. See Smith Batchelder & Rugg, 119 N.H. at 683 (the Court declined to modify a restrictive covenant where the noncompete was presented to the employees only after they had substantially changed their positions); Technical Aid Corp. v. Allen, 134 N.H. 1, 17-18 (1991) (the Court declined to modify a restrictive covenant presented to the employee on his first day of employment after he had already given notice to his previous employer in reliance on an oral agreement of employment); Merrimack Valley Wood Prods. v. Near, 152 N.H. 192, 200-01 (2005) (the Court declined to enforce a non-compete which was not presented to the employee until six months after he had begun work and when it was presented to him he was told that his continued employment was contingent upon signing the agreement at which point he was in no position to decline to sign it); Syncom Indus. v. Wood, 155 N.H. 73, 84-85 (2007) (the Court noted that presenting an employee with a noncompete for the first time on his first day work would be the sort of bad faith that would allow a trial court to decline to reform the restrictive covenant). The Supreme Court's approach makes sense for obvious reasons: "[b]ecause persons rarely explain to others the inner workings of their minds or mental processes, a culpable mental state must, in most cases, be proven by circumstantial evidence." State v. Belleville, 166 N.H. 58, 63 (2014).

The Former Employee Plaintiffs suggest that the Court should apply the Uniform Commercial Code ("UCC") definition of "good faith" to determine whether or not an employer acted in good faith. RSA 382-A:1-201(b)(20) (defining "good faith" to mean "honesty in fact and the observance of reasonable commercial standards of fair dealing"). However, they cite no authority for that proposition. To the extent that Article 2 of the UCC, which applies to transactions of goods suggests a subjective standard, an objective standard of good faith to be applied in cases involving restrictive covenants is suggested by Corbin,§ 80.26, at 182, which, in support of the proposition that a covenant may be reformed if the employer acts in good faith, cites Data Mgmt. Inc. v. Green, 757 P.2d 62 (Ala. 1988). In that case, the Supreme Court of Alaska held that good faith in this context is akin to the analysis of unconscionability under UCC 2-302, a standard which looks to the circumstances of the transaction, rather than the party's subjective intent. See generally American Home Improvement, Inc. v. Iver, 105 N.H. 435, 439 (1964) ("Inasmuch as the defendants have received little or nothing of value and under the transaction they entered into they were paying $ 1,609 for goods and services valued at far less, the contract should not be enforced because of its unconscionable features.").

Moreover, "the absence of proof of bad faith does not equal proof of good faith for purposes of this inquiry." Maddog Software, Inc. v. Sklader, 382 F. Supp. 2d 268, 283 (D.N.H. 2005). Rather, the court must consider "all the relevant circumstances of a particular case." Id. (citing Merrimack Valley Wood Prods., 152 N.H. at 200.) Illustrative of the application of the New Hampshire approach is Maddog Software, Inc., in which the United States District Court for the District of New Hampshire declined to modify an overbroad restrictive covenant, finding that the employer had not proved it acted in good faith. Id. at 283-84. The court did so by considering the facts before it and inferring intent from those facts:

Here, [Maddog] has offered no explanation whatsoever for restricting [the defendant] from competing in a geographic area encompassing the entire northeastern section of the country despite the fact that Maddog never had any customers in any of those states, save Pennsylvania and New Jersey. [Maddog] also failed to explain any legitimate business reason for restricting [the defendant] from competing for a period of three years following his termination. Instead, in response to questioning from [the defendant] on these subjects at the motion hearing, [Maddog] stated, "Your livelihood is of no concern of mine whatsoever."
Id. at 283. See also Ferrofluidics Corp. v. Advanced Vacuum Components, Inc., 968 F.2d 1463, 1471 (1st Cir. 1992) (applying New Hampshire law, and affirming reformation of a covenant where "the covenant was flawed only as concerned the remoteness of its termination date, and the restrictions as a whole were not so harsh as to warrant an inference that Ferro meant to enserf its employee").

The conceptual foundation for the New Hampshire requirement of good faith likely arises from equitable jurisprudence. An employer who seeks reformation seeks equitable relief, and hoary common law maxims require a person who seeks equitable remedies to have acted equitably. Cornwell v. Cornwell, 116 N.H. 205, 210 (1976) (citing 2 J. Pomeroy Equity Jurisprudence § 399 at 99 (1941) ("Those who come to equity must do so with clean hands, or equitable relief will be denied.").

In sum, for purposes of resolving the Motion to Compel, the Court assumes that the good faith of the party seeking reformation must be considered from both a subjective as well as objective standpoint, and that the best evidence of subjective intent are the objective circumstances. Therefore, legal advice given to an employer regarding the validity vel non of a restrictive covenant would be relevant to a determination of the employer's intent and ultimately to whether the employer is entitled to reformation of an unreasonable restrictive covenant.

B. Implied Waiver of Attorney-Client Privilege

The fact that subjective intent is relevant to DCC's good faith in the execution of the Agreements does not end the Court's inquiry. "[W]here a party raises a claim which in fairness requires disclosure of the protected communication, the privilege may be implicitly waived." XTL-NH, Inc. v. N.H. State Liquor Comm'n, No. 2013-CV-119, 2015 N.H. Super. LEXIS 10, at *13 (N.H. Super. Ct. Oct. 28, 2015) rev'd on other grounds, No. 2016-0546, 2018 WL 1545893 (N.H. Mar. 30, 2018) (quoting Chevron Corp. v. Pennzoil Co., 974 F.2d 1156, 1162 (9th Cir. 1992). An implied waiver of attorney-client privilege occurs only when the privilege holder injects the privileged material into a case such that the information is actually required for resolution of the issue. Livingston v. 18 Mile Point Drive, Ltd., 158 N.H. 619, 627 (2009); In re Dean, 142 N.H. 889, 890 (1998); Aranson v. Schroeder, 140 N.H. 359, 370 (1995). Ultimately, the issue is one of fairness; privilege is implicitly waived "when a party uses an assertion of fact to influence the decisionmaker while denying its adversary access to privileged material potentially capable of rebutting the assertion." In re County of Erie, 546 F.3d 222, 229 (2d Cir. 2008) (quotation omitted). As a distinguished commentator has noted, "[p]erhaps the best articulation of when the advice of counsel is or is not placed into issue by the assertion of some claim or defense is still that of the Third Circuit [in Rhone-Poulenc Rorer, Inc. v. Home Indem. Co., 32 F.3d 851 (3d Cir. 1994]." E.S. Epstein, The Attorney-Client Privilege and the Work Product Doctrine Vol. I, at 701 (6th ed. 2017):

In these cases, the client has made the decision and taken the affirmative step in the litigation to place the advice of the attorney in issue. Courts have found that by placing the advice in issue, the client has opened to examination facts relating to that advice. Advice is not in issue merely because it is relevant, and does not necessarily become in issue merely because the attorney's advice might affect the client's state of mind in a relevant manner. The advice of counsel is placed in issue where the client asserts a claim or defense, and attempts to prove that claim or defense by disclosing or describing an attorney client communication.
Rhone-Poulenc Rorer, Inc., 32 F.3d at 863.

The Plaintiffs claim that DCC has placed at issue communications it had with its attorneys because it "affirmatively alleged 'good faith' compliance with the law." (Pls.' Mot. to Compel, at 2.) However, the Plaintiffs have provided no authority that a mere assertion of good faith, without some suggestion that the good faith is based upon analysis of the law, necessarily constitutes a waiver of attorney-client privilege. The cases proffered by the Plaintiffs all differ from the instant case in that the party invoking privilege took a position which explicitly put its attorneys' advice at issue. See, e.g., Hamilton v. Yavapai Cmty. Coll., No. CV-12-08193-PCT-GMS, 2016 WL 8199695, at *2 (D. Ariz. June 29, 2016) (where a party asserts subjective good faith "with respect to [its] understanding and compliance with the law, the party's knowledge about the law is vital, and the advice of counsel is highly relevant to the legal significance of the client's conduct." (emphasis added)). Indeed, this was the premise of the Court's ruling in XTL-NH, Inc., 2016 N.H. Super. LEXIS 10 (Oct. 28, 2015).

In that case, the plaintiff did not seek to pierce attorney-client privilege, but to bar the defendant from relying upon it.

In support of their position, the Plaintiffs cite language in Bacchi v. Mass. Mut. Life Ins. Co., 110 F. Supp. 3d 270, 276 (D. Mass. 2015): "if the defendant were to raise the defense that it acted based on its own subjective good faith belief that its actions were lawful, then the reliance element would likely be met, and that is so even if the defendant were to state that it did not intend to introduce any evidence regarding its attorneys' advice." But the Plaintiffs ignore the further language in the opinion; after discussing a case in which a court properly found waiver where an attorney filed an affidavit summarizing guidance it had received from the Department of Labor, the court noted:

By contrast, there is no waiver if the defendant intends to establish its good faith defense by showing that its conduct was actually lawful, or was actually approved by regulators, and does not intend to rely on counsel's opinion or advice. That is because such a defense depends on objective facts, making the advice of the defendant's counsel irrelevant.
Id. at 277 (citation omitted). That is precisely the Defendants' position. (Defs.' Obj. to Mot. to Compel, at 8.)

Other courts have recognized the distinction between an argument that conduct was actually legal, which does not result in waiver, and an argument that a party acted in good faith belief based upon belief that his actions were legal. See Henry v. Quicken Loans, 263 F.R.D. 458, 469 (E.D. Mich. 2008); Banco do Brasil, S.A. v. 275 Washington Street Corp., No. 09-11343-NMG, 2011 WL 3208027, at *3-4 (D. Mass. July 27, 2011). While a party could waive privilege to produce relevant evidence it does not follow that merely asserting a claim upon which the advice of counsel would be expected would necessarily waive privilege.

The Plaintiffs have provided no cases in which a court set aside attorney-client privilege based upon a claim by an employer that it acted in good faith in presenting a restrictive covenant to an employee. Epstein has noted:

It is rare that the party bringing a claim can thereby invade the defendant's privilege to prove its claim. Yet such can occur. It does so most frequently in the case where an insured brings a bad faith failure to provide insurance coverage claim against the insurer. In that situation it is the claimant who can put its adversary's entire file into play.
E.S. Epstein, The Attorney-Client Privilege and the Work Product Doctrine Vol. I, at 720 (6th ed. 2017). Epstein concludes that the fact an insurance carrier may be compelled to waive its attorney-client privilege merely by asserting a good-faith claim is an "anomalous result" which may be explained by analyzing the terms of the insurance agreement; "[t]he insurer is assumed to owe the insured a duty not only to defend but also to indemnify," which the insured has already paid for, and, therefore, "the relationship between the cestui qui trust (the insured) and the fiduciary (the insurer) are not those that prevail in the marketplace. The bargain has already been struck." Id.

No similar considerations are applicable when a court considers whether to partially enforce a restrictive covenant; the interests of the employer in maintaining its goodwill, the public interest in maintaining competition in the marketplace, and the employee's interest in being able to obtain a livelihood must be balanced in a way which protects the various economic interests. See Syncom Indus., 155 N.H. at 78-79. While it is no doubt true that piercing DCC's attorney-client privilege might produce relevant evidence, that is true of many circumstances in many cases, and cannot, standing alone, be a basis for piercing the privilege. It follows that the Motion to Compel must be DENIED.

III. Plaintiffs' Motion to Amend Affirmative Defenses

The Plaintiffs move to amend their Statements of Affirmative Defenses to add the affirmative defense of collateral estoppel. They assert that this amendment is necessary and appropriate because they learned for the first time in mid-March 2018 that DCC plans to challenge the Court's (Wageling, J.) prior decision in Direct Capital Corp. v. Balboa Capital Corp., 218-2011-CV-0184 (N.H. Super. Ct. Aug. 13, 2013) (hereinafter "Balboa Order"), in which the Court declined to reform the 2007 Agreements after finding that DCC did not act in good faith at the time of execution.

In New Hampshire, motions to amend are liberally allowed by statute.

Amendments in matters of substance may be permitted in any action, in any stage of the proceedings, upon such terms as the court shall deem just and reasonable, when it shall appear to the court that it is necessary for the prevention of injustice; but the rights of third persons shall not be affected thereby.
RSA 519:4; see also N.H. Super. Ct. Civ. R. 12(a)(3). The Court can permit amendment of pleadings "unless the changes would surprise the opposing party, introduce an entirely new cause of action, or call for substantially different evidence." Sanguedolce v. Wolfe, 164 N.H. 644, 647-48 (2013) (citing Tessier v. Rockefeller, 162 N.H. 324, 340 (2011)). The decision to allow amendment of pleadings is in the discretion of the trial court. Coan v. N.H. Dep't of Env't Servs., 161 N.H. 1, 11 (2010).

The Defendants do not dispute that liberal amendments are permitted in New Hampshire. Rather, the Defendants argue that pursuant to Super. Ct. Civ. R. 9, the Plaintiffs have waived the affirmative defenses of collateral estoppel and res judicata by failing to raise those defenses in their answer. Rule 9(d) provides that "[f]ailure to plead as affirmative defenses or file a Motion to Dismiss based on affirmative defenses . . . within the time allowed in section (b) of this rule will constitute waiver of such defenses." However, the Court has discretion to waive the requirements of Superior Court Rule 9(d). Super. Ct. Civ. R. 1(d); see Fothergill v. Seabreeze Condos. at Hampton Ass'n, 141 N.H. 115 (1996) (applying former Superior Court Rule 28).

First, the Court notes that the Defendants do not argue, nor does the Court find that the Defendants are unfairly prejudiced or surprised by the proposed amendment. This case is in the early stages of litigation. The parties are in the process of exchanging limited discovery for preliminary injunction purposes, but discovery in this case is nowhere near complete. Moreover, the proposed amendment does not seek to introduce a new cause of action or call for completely different evidence, nor will it cause any delay to the proceedings. For these reasons, and in light of the Plaintiffs' representations, the Plaintiffs' Motion to Amend Affirmative Defenses is GRANTED.

IV. Plaintiff's Motion in Limine to Preclude Certain Evidence of Alleged Good Faith Related to the 2007 Agreements

The Plaintiffs move in limine to preclude the Defendants from offering evidence of circumstances or conduct that existed or occurred before or at the time of the execution of the 2007 Agreements in support of any argument by the Defendants that they acted in good faith for purpose of reformation of the 2007 Agreements. The Plaintiffs contend the Defendants are collaterally estopped from making such an argument by the Court's prior decision in Balboa.

"The doctrine of issue preclusion (collateral estoppel) bars a party to a prior action, or a person in privity with such party, from relitigating any issue or fact actually litigated and determined in the prior action." Mahindra & Mahindra, Ltd. v. Holloway Motor Cars of Manchester, LLC, 166 N.H. 740, 750 (2014). Collateral estoppel may preclude the relitigation of findings previously made by a court when:

(1) the issue subject to estoppel is identical in each action; (2) the first action resolved the issue finally on the merits; (3) the party to be estopped appeared in the first action or was in privity with someone who did; (4) the party to be estopped had a full and fair opportunity to litigate the issue; and (5) the finding at issue was essential to the first judgment.
Garod v. Steiner Law Office, PLLC, 170 N.H. 1, 5-6 (2017). The burden of proving collateral estoppel is on the party asserting it. See Gray v. Kelly, 161 N.H. 160, 164 (2010).

Here, the Plaintiffs have failed to establish that the issue subject to estoppel is identical in each action or that DCC had a full and fair opportunity to litigate the issue. In Balboa, the Court found the 2007 Agreements were "staggeringly overbroad" and imposed a "significant undue hardship." (Balboa Order, at 8-10.) In light of these findings, the Court concluded the 2007 Agreements were unenforceable unless they could be reformed. "Courts reform overly broad restrictive covenants if the employers first show that they acted in good faith in the execution of the employment contracts." Smith, Batchelder & Rugg, 119 N.H. at 685. In its Order, the Court performed a good faith analysis of the circumstances surrounding the execution of the 2007 Agreements specific to each of the three defendants in Balboa. (Id. at 11-12.) The Court did not consider the issue of whether DCC acted in good faith in the execution of the 2007 Agreements with respect to all DCC employees, nor were the facts surrounding DCC's execution of the 2007 Agreements with Kells, Will, or Solito before the Court in Balboa. DCC disputes the applicability of Balboa to the instant case, asserting that "there are numerous material facts present in this case that were not present in Balboa." (Defs.' Obj. to Pls.' Mot. in Limine, at 5; see Defs.' Obj. to Pls.' Mot. Amend, at 13-16.)

While there may be portions of the Balboa Order that the Defendants are collaterally estopped from relitigating in the present case, the Plaintiffs have failed to establish that the doctrine of collateral estoppel precludes the Defendants from offering any evidence in this case of good faith surrounding the execution of the 2007 Agreements with Kells, Will, or Solito. It follows that the Plaintiffs' Motion in Limine is DENIED without prejudice.

V. Plaintiffs Motion to Reconsider

The Plaintiffs argue that the Court overlooked or misapprehended a number of issues when interpreting RSA 275:70. In 2012, RSA 275:70 was enacted and the 2012 version of the statute remained in effect until it was amended in 2014. The 2012 version provides as follows:

Prior to or concurrent with making an offer of change in job classification or an offer of employment, every employer shall provide a copy of any non-compete or non-piracy agreement that is part of the employment agreement to the employee or potential employee. Any contract that is not in compliance with this section shall be void and unenforceable.
RSA 275:70 (2012). The Court previously determined that the 2012 version of RSA 275:70 does not apply to restrictive covenants presented to an existing employee when there is no offer of employment or change in job classification involved. See (Apr. 11, 2018) (Order, McNamara, J.) (hereinafter "April Order") at 13-17. Recently, the Rockingham Superior Court similarly concluded that RSA 275:70 did not invalidate a restrictive covenant presented to an existing employee where there was no evidence of a change in his employment position. See NRC East Envtl. Servs., Inc. v. Murphy, Rockingham Cnty. Super. Ct., No. 218-2018-CV-00267 (Apr. 2, 2018) (Order, Delker, J.) at 7-8 ("The plain language of the prior version of the statute requires 'an offer of change in job classification or an offer of employment.'").

In NRC East Envtl. Servs., Inc., the employee relied on RSA 275:70 to challenge the validity of an "At-Will, Non-Solicitation, Confidentiality and Non-Compete Agreement," which he signed in April 2013, after nearly 30 years of employment. The Court (Delker, J.) rejected the employee's argument under both the current version of RSA 275:70, as well as the 2012 version, in light of the fact there was no evidence that the restrictive covenants were part of a change in job classification or an offer of employment. --------

The arguments raised in the Motion to Reconsider were, for the most part, considered and rejected in the Court's April Order. The Plaintiffs have, however, focused on one argument: in essence, that this Court's interpretation of RSA 275:70 leads to an absurd result because the Court's interpretation would permit an employer to surprise a new employee with restrictive covenants on the first day of work after the new employee has already accepted the position. According to the Plaintiffs:

Accordingly, during the 2-year period that the statute was in effect, the only way for an employer to validly enter into a restrictive covenant with an existing employee was to present the covenant prior to or concurrent with an offer of change in job classification, and the only way for an employer to validly enter a covenant with the new employee was to present the covenant prior to or concurrent with the job offer.
(Pls.' Reply in Supp. of Mot. to Reconsider, at 3.)

At oral argument on the Motion to Reconsider the Plaintiffs conceded that if their interpretation of RSA 275:70 was accepted, it would mean that that the statute impliedly repealed the 39-year-old precedent of Smith Batchelder & Rugg, 118 N.H. 679, which provides in substance that continued employment is consideration for a restrictive covenant and therefore a restrictive covenant is not per se invalid if it is offered to an employee after he has accepted employment. There is, however, no indication in the legislative history that the legislature intended such a result. And most importantly, the New Hampshire Supreme Court's interpretation of Smith, Batchelder & Rugg would not permit the injurious hypothetical posited by the Plaintiffs.

In Smith, Batchelder & Rugg, three employees orally negotiated the terms of their employment with a representative of the employer before beginning employment. Id. at 681. After the employees substantially changed their positions in reliance upon the prior oral agreements, they were presented with written employment contracts containing a covenant not to compete that were not part of the prior oral agreements. Id. The Court refused to reform the covenants, which were deemed unreasonable, given that "all three [employees] executed their employment agreements after they were hired and . . . none of the three were given any opportunity to understand the restrictive covenants in their employment agreements." Id. at 685. Thus, under Smith, Batchelder & Rugg, an employee may be relieved from unreasonable restrictive covenants because presenting restrictive covenants for the first time shortly after an employee is hired is indicative of an employer's lack of good faith in the execution of the agreement containing the restrictive covenants. See id. at 685. Smith, Batchelder & Rugg has been followed in an unbroken line of cases. See Technical Aid Corp., 134 N.H. at 17-18 (employer lacked good faith where it presented contract to employee on his first day after the employee had given notice to his previous employer in reliance on an oral agreement with the new employer and insisted that the employee sign the contract immediately); Merrimack Valley Wood Prods., 152 N.H. at 197; Syncom Indus., 155 N.H. at 83-84.

Smith Batchelder & Rugg and its progeny can best be understood as an expression of the implied covenant of good faith and fair dealing: "there is an implied covenant that the parties will act in good faith and fairly with one another." Livingston, 158 N.H. at 624. "The various implied good-faith obligations fall into three categories: (1) contract formation; (2) termination of at-will employment agreements; and (3) limitation of discretion in contractual performance." Id.; see also Centronics Corp. v. Genicom Corp., 132 N.H. 133 (1989). Under Smith, Batchelder & Rugg, a new employee may be entitled to relief from the restrictive covenants under the first and third categories of implied good-faith obligations. There is no suggestion anywhere in the legislative history of RSA 275:70 that the legislature intended to alter these settled principles of law by its enactment.

For these reasons, the Court declines to reconsider the ruling that RSA 275:70 does not invalidate the 2013 Agreement signed by Solito. Accordingly, the Motion to Reconsider is DENIED.

SO ORDERED

5/17/18
DATE

s/Richard B . McNamara

Richard B. McNamara,

Presiding Justice RBM/


Summaries of

Solito v. Direct Capital Corp.

State of New Hampshire MERRIMACK, SS SUPERIOR COURT
May 17, 2018
No. 219-2017-CV-00411 (N.H. Super. May. 17, 2018)
Case details for

Solito v. Direct Capital Corp.

Case Details

Full title:Richard Solito, Jesse Kells and Matthew Will v. Direct Capital Corporation…

Court:State of New Hampshire MERRIMACK, SS SUPERIOR COURT

Date published: May 17, 2018

Citations

No. 219-2017-CV-00411 (N.H. Super. May. 17, 2018)

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