Facts

John M. Strough worked as an employee for A.N. Deringer, Inc., a customs broker, from 1984 until February 1995. In October 1994, Strough obtained a sales position at Deringer, and in November 1994, he executed a Confidentiality and Trade Secret Agreement in exchange for $1,000. The Agreement prohibited Strough from competing with Deringer, directly or indirectly, for ninety days after termination within a 100-mile radius of any Deringer office, of which there were at least thirty, many along the U.S.-Canada border. The Agreement included a clause stating that if any restriction was found unreasonable, it would be amended to make it reasonable and enforced as such. It also entitled Deringer to enjoin breaches and recover costs, including reasonable attorney's fees.

In summer 1994, Strough applied for employment with Fritz Companies, Inc., a competing customs broker. On February 15, 1995, Fritz offered Strough a branch manager position; Strough mentioned the Agreement, but a Fritz official assured him it was unenforceable. Strough resigned from Deringer on February 22, 1995, and began working for Fritz the next day in the immediate vicinity of his previous Deringer employment, though not as a salesman. This employment continued for at least the first thirty days post-resignation.

On March 3, 1995, Deringer filed suit against Strough and Fritz in Vermont Superior Court, asserting claims for breach of the Agreement and seeking enforcement of the non-competition provision, damages from the breach, and an award of attorney's fees and costs. Defendants removed the case to the U.S. District Court for the District of Vermont on diversity grounds on March 15, 1995. Deringer moved for a preliminary injunction the next day, which the district court granted on March 21, 1995, directing Strough to comply with the provision until its expiration on May 24, 1995. Fritz then placed Strough outside the original geographic area, and no further disputes arose during the ninety-day period. The district court later granted summary judgment for defendants, denying enforcement of the provision. Deringer appealed to the U.S. Court of Appeals for the Second Circuit.

Analysis

Issue #1

Issue

Did the district court err in declining to resolve whether Strough's conduct breached a reasonably restrictive non-competition provision for the purpose of awarding damages?

Legal Rule

Courts may reform overly broad non-competition agreements to enforce them to a reasonable extent for both injunctive relief and damages, rejecting rules that limit reformation to injunctions only, to avoid anomalies, multiplicity of suits, and encouragement of longer restrictions contrary to public policy favoring limited restrictions.

Rule Analysis

The district court had preliminarily found that Strough likely breached the agreement by working for Fritz in the immediate vicinity and granted injunctive relief on that basis, but declined to finally resolve the issue for damages, deeming it premature since only conduct within a reasonable restriction was at issue.

This approach was rejected, as it would anomalously apply different rules to the same contract in the same lawsuit, leading to confusion and requiring damages actions to resolve before restriction periods expire, which is impractical and contrary to public policy. The cited case supporting non-reformation for damages was dismissed in favor of a partial dissent's reasoning that reformation should apply consistently for injunctions and damages.

Conclusion

Yes, the district court erred in declining to resolve the breach for damages purposes. Damages should be awarded on the same reformed basis as injunctive relief if the contract is reformable under Vermont law and the conduct violated the reformed contract.

Issue #2

Issue

Would Vermont law permit enforcement of a non-competition provision that includes a clause allowing reformation if the provision is found defective?

Legal Rule

Under the Restatement (Second) of Contracts § 184, a court may enforce the rest of an agreement if part is unenforceable due to public policy, provided the unenforceable part is not essential, and may treat only part of a term as unenforceable if obtained in good faith and in accordance with reasonable standards of fair dealing. Vermont courts rely on the Restatement for novel contract issues, and many jurisdictions allow reformation of overly broad covenants to reasonable limits using 'blue pencil' or 'rule of reasonableness' approaches, unless bad faith is shown.

Rule Analysis

Although novel in Vermont, a New Hampshire case upheld reasonable clauses despite an unenforceable one, citing Restatement § 184, and Vermont courts have similarly relied on the Restatement in contract cases.

Numerous jurisdictions enforce defective covenants to valid limits, with trends favoring judicial modification via 'blue pencil' (striking words) or 'rule of reasonableness' (enforcing to necessary extent without undue hardship or public harm), absent bad faith. The agreement's clause explicitly called for amendment if unreasonable, aligning with these principles and supporting reformation.

Conclusion

Yes, Vermont would permit enforcement of a defective restrictive covenant to the limit of its validity. The contract may be reformed, and only the conduct at issue needs examination, not hypothetical scenarios.

Issue #3

Issue

Was Strough's conduct within the scope of an enforceable restriction on competition after reformation?

Legal Rule

Non-competition agreements must be reasonable in time, geography, and industry, not contrary to public policy, unnecessary for employer protection, or unnecessarily restrictive of employee rights, considering the contract's subject matter, circumstances, and performance conditions; the employee bears the burden of proving invalidity. Reformation can limit geography to the employee's former territory if reasonable.

Rule Analysis

The ninety-day time restriction was reasonable and unchallenged, providing time for customer notification and protecting confidential information.

The geographic scope, prohibiting work within 100 miles of any Deringer office, was overly broad but modifiable by limiting to Strough's former offices or applying reasonableness, protecting Deringer's interests near his sales territory without unnecessary expansion.

Factors favoring enforcement included Strough's voluntary departure, training, knowledge of confidential material, short restriction period, his continued employment elsewhere, minimal disruption, and lack of bad faith by Deringer. Strough's employment with Fritz in the immediate vicinity during the first thirty days breached this reformed restriction. For judicial efficiency, the court applied the law to the undisputed facts rather than remanding this issue.

Conclusion

Yes, Strough's conduct violated a reasonable and enforceable reformed restriction. The case was remanded for calculation of damages and attorney's fees as provided in the contract.