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In Brian's 1:1 Fitness, LLC v. Jeremy Woodward, the New Hampshire Superior Court ruled that a non-compete clause contained within an independent contractor agreement was unenforceable. While the Court emphasized that these cases are always "highly fact-sensitive," in this particular case, the Court found that the non-compete agreement imposed an unreasonable restraint on trade. The decision is important for businesses that use independent contractors, because it demonstrates that New Hampshire Courts may enforce non-compete agreements found in an independent contractor agreement differently from similar clauses found in an employment agreement.
Facts: Brian's 1:1 Fitness, LLC ("Brian's") is a personal fitness center and Woodward was one of the many personal trainers who worked at the center. Woodward and Brian's entered into an independent contractor agreement. The Agreement provided that Woodward would pay a set fee for use of Brian's facility and he would keep the balance of whatever additional revenues he earned from his clients. The Agreement contained standard language that permitted Woodward to carry out his work according to his own strategies and plans, and expressly permitted Woodward to enter into similar agreements with other businesses.
Non-Compete Clause: In addition to the above terms, the Agreement also subjected Woodward to a covenant to not compete with Brian's for a period of two years after the termination of the Agreement within a 25-mile radius of Brian's facilities. Woodward was also precluded from providing personal training services to any client to whom Brian's had provided products or services for a period of two years prior to the termination of the Agreement. Both parties agreed to the terms of this non-compete clause at the outset of the independent contractor relationship.
Shortly after Woodward resigned from Brian's in January 2013, he opened a competing business. Three of Brian's trainers left with Woodward, and many clients also left Brian's to go with Woodward. Brian's immediately filed suit in court seeking to enforce the non-compete clause contained within the independent contractor agreement.
Court declines to Enforce Non-Compete Clause: Although there are several New Hampshire Supreme Court decisions addressing the enforceability of non-compete agreements in the context of an employer-employee relationship, there are no decisions that address the enforceability of a non-compete in the context of an independent contractor relationship. In the employment context, the New Hampshire Supreme court assesses the "reasonableness" of a restrictive covenant by use of a three-part test: (i) whether the restriction is greater than necessary to protect the legitimate interests of the employer; (ii) whether the restriction imposes an undue hardship upon the employee; and (iii) whether the restriction is injurious to the public interest.
In applying this three-part test, the Superior Court emphasized that the test for the reasonableness of a covenant not to compete also requires "that a reviewing court understand the nature of the transaction before it." In reviewing the facts before it in Brian's, the Court noted that independent contractors, as compared with employees, "have less access to legitimately confidential information of their employers" and bring their own independent skills and strengths to the enterprise. Independent contractors work with less supervision and have a less intimate relationship with the employer; they are free to enter into similar agreements with others and hold themselves out as a separate business entity. Consequently, when reviewing the nature of this transaction, the Court concluded that Brian's did not have "a legitimate interest" to be protected from competition and that the non-compete agreement was "simply a restraint of trade, which is not in the public interest."
Takeaways: The Brian's decision highlights that New Hampshire courts may decline to enforce non-compete covenants against independent contractors. Consequently, now is a good time for businesses using independent contractors to review their written agreements with these contractors and assess whether the company interests are being adequately protected. In some circumstances, a business may decide that an "employer-employee" relationship is an overall better choice because the likelihood of a non-compete being enforced in the context of an employment relationship is greater than in the context of independent contractor relationship, and there are generally misclassification risks involved with independent contractors (see E-Alert). Businesses may also want to assess whether there may be other covenants or restrictions that might better protect the company's confidential information when using independent contractors. The Brian's decision did not assess the enforceability of non-disclosure or non-solicitation covenants, and those covenants may be more easily enforced against an independent contractor.
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