The fine print in employment contracts matters

By David Cohen

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A recent automobile insurance television commercial suggests that hardly anyone reads the fine print in insurance contracts, until it is too late.

The same can be said for employment contracts with clauses that protect employers on a range of issues, typically spelled out in such detail that many job seekers simply sign without a thorough understanding of the document. Frankly, if potential employees didn’t sign the contracts as offered, they probably wouldn’t get hired anyway – but at least they should know their rights and obligations going into the situation.

cohenWhich brings me to a lawsuit filed in federal court in Connecticut earlier this month: Aetna sued a former executive who, the company alleges, violated a noncompete clause in his employment contract. The executive worked at Aetna at a high level position, allegedly gaining inside knowledge of the insurance giant’s marketing strategies. Ultimately the executive left Aetna and went to work for a competitor, a move that Aetna did not take kindly to, leading to the lawsuit.

The suit claims that the executive, while working for Aetna, became acquainted with strategic information including sensitive pricing formulas, payments to Aetna providers, and profits. This, Aetna claims, would deliver an unfair benefit to the competitor. Aetna also claims the executive knew the strategic reasons the company decided to participate in the Affordable Care Act in some states but not others.

While my firm is not involved in this matter from either side and has no special knowledge of the case, it nonetheless is of interest since Aetna does not just refer to its noncompete clause in its filings. Rather, the suit highlights the specific nature of the competitive harm Aetna maintains would result from its former employee taking the position with its competition.

Connecticut this year passed legislation with a bearing on these issues, although it only relates to physicians and only physicians. The law, Public Act 16-95, effective July 1, establishes limits on the enforceability of noncompetition restrictions imposed by any employer of a physician.

It requires that the restricted period be no longer than one year and the restricted geographic area be no greater than 15 miles from the primary site where the physician practiced. This allows considerable flexibility for a physician leaving an employer to accept another position or even open a new practice not terribly far from the previous place of employment.

The legislation strikes a balance, giving the employers some protection against competition while also taking into consideration the benefits to the community of retaining a physician who delivers valuable health care and has built patient loyalty.

One provision in the law makes a non-competition clause enforceable only if it is “necessary to protect a legitimate business interest.” In other words, a theoretical harm to the business model of an employer is insufficient to justify the enforcement of a non-competition covenant.

Although this requirement previously existed in common law, it typically was given scant attention. If an employer attempts to enforce a restriction not merely to protect genuinely confidential information but rather to discourage its remaining employees from exercising their freedom to take a new position, the courts will likely not conclude that enforcement of the covenant protects a legitimate business interest.

In the Aetna case, the company acknowledges the additional level of proof necessary to further its claim by listing the specific areas of harm it claims it will suffer through a high-level executive with specific inside knowledge taking a similar position with a competitor.

Attorneys working a case of this nature should be aware, however, that if their employer client is aiming to harm a competitor by denying it the services of a talented employee, this by itself will not constitute a legitimate business interest under the law. Although the new law applies to physicians, resourceful attorneys are likely to refer to it for non-physician clients as the expression of a Connecticut public policy limiting non-competition covenants to situations where a legitimate business interest is at risk.

Connecticut law is evolving toward a more robust protection of competition through a heightened focus on the agreements restricting competition in employment. And as this evolution continues, it also would be a good idea for attorneys to help clients clearly understand the fine print before signing life-changing documents.

Attorney David M. Cohen is a partner with Wofsey, Rosen, Kweskin & Kuriansky, LLP in Stamford. His area of concentration includes civil litigation, particularly personal injury, civil rights, employment law, and immigration and naturalization. He can be reached at 203-327-2300 or by email at dcohen@wrkk.com.

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