A.N. Deringer, Inc. v. John M. Strough and Fritz Companies, Inc.
103 F.3d 243, 12 I.E.R. Cas. (BNA) 1401, 1996 U.S. App. LEXIS 33942 (1996)
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Rule of Law:
When a non-competition agreement is overly broad, a court may judicially modify or "reform" the unreasonable terms and enforce the agreement to the extent that it is reasonable, rather than invalidating the entire covenant.
Facts:
- John M. Strough was an employee of A.N. Deringer, Inc. from 1984 through February 1995.
- In October 1994, Deringer promoted Strough to a sales position.
- In November 1994, in exchange for $1,000, Strough executed an agreement containing a non-compete clause.
- The clause prohibited Strough from competing with Deringer for 90 days after termination within a 100-mile radius of any Deringer office.
- The agreement also contained a provision stating that if a court found the restrictions unreasonable, the court could amend them to be reasonable and enforce the amended version.
- In the summer of 1994, Strough had applied for a job with Fritz Companies, Inc., a competitor of Deringer.
- On February 15, 1995, Fritz offered Strough a position; when Strough mentioned the non-compete agreement, a Fritz official told him it was unenforceable.
- On February 22, 1995, Strough resigned from Deringer and began working for Fritz the next day in the immediate vicinity of his former employment.
Procedural Posture:
- A.N. Deringer, Inc. sued John M. Strough and Fritz Companies, Inc. in Vermont Superior Court (a state trial court) for breach of contract, seeking an injunction and damages.
- The defendants removed the case to the U.S. District Court for the District of Vermont (a federal trial court) on diversity grounds.
- Deringer moved for a preliminary injunction, which the district court granted, directing Strough to comply with the non-compete for the 90-day period.
- After the 90-day period expired, the defendants moved for summary judgment, arguing the agreement was unenforceable.
- Deringer cross-moved for summary judgment and damages.
- The district court granted the defendants' motion for summary judgment, holding that the agreement's geographic restriction was unreasonably broad and therefore unenforceable, and that it could not be reformed for the purpose of awarding damages after the non-compete period had expired.
- Deringer, as petitioner-appellant, appealed the grant of summary judgment to the U.S. Court of Appeals for the Second Circuit.
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Issue:
May a court judicially modify an overly broad non-competition agreement to enforce its reasonable components and award damages for a breach of the modified agreement, even after the non-competition period has expired?
Opinions:
Majority - Restani, J.
Yes, a court may modify an overly broad non-competition agreement to enforce it to a reasonable extent and award damages for its breach. The court rejected the lower court's reasoning that it was too late to reform the contract for damages simply because the 90-day restrictive period had expired, finding such a rule impractical and likely to encourage employers to draft longer restrictions. Predicting that Vermont would adopt the modern trend consistent with the Restatement (Second) of Contracts § 184, the court held that it should apply a 'rule of reasonableness' rather than an 'all or nothing' approach. Under this rule, unless there is evidence of bad faith by the employer, a court can enforce a non-compete to the extent it is reasonably necessary to protect the employer's interests without imposing undue hardship on the employee. The court found the 90-day time period reasonable but the geographic scope—a 100-mile radius around more than 30 offices—unreasonably broad. However, the agreement could be reformed to apply only to the area where Strough formerly worked. Because Strough began working for a direct competitor in the immediate vicinity of his former office, he breached the reasonably reformed version of the agreement, entitling Deringer to damages.
Analysis:
This decision aligns Vermont contract law with the modern judicial trend of reforming, rather than voiding, overly broad restrictive covenants in employment agreements. It establishes that clauses allowing for judicial modification are enforceable and shifts risk onto employees who might otherwise assume an overbroad non-compete is entirely invalid. By permitting courts to enforce a 'reasonable' version of a covenant and award damages even after the restriction period ends, the ruling provides employers with a more potent and reliable tool for protecting their business interests against departing employees.
