Ferrofluidics v. Advanced Vacuum
U.S. Court of Appeals for the First Circuit
Ferrofluidics v. Advanced Vacuum
Opinion
USCA1 Opinion
August 6, 1992 ____________________
August 6, 1992 ____________________
No. 92-1594
No. 92-1594
FERROFLUIDICS CORPORATION,
FERROFLUIDICS CORPORATION,
Plaintiff, Appellee,
Plaintiff, Appellee,
v.
v.
ADVANCED VACUUM COMPONENTS, INC., ET ALS.,
ADVANCED VACUUM COMPONENTS, INC., ET ALS.,
Defendants, Appellants.
Defendants, Appellants.
____________________
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Martin F. Loughlin, U.S. District Judge]
[Hon. Martin F. Loughlin, U.S. District Judge]
___________________
____________________
____________________
Before
Before
Cyr, Circuit Judge,
Cyr, Circuit Judge,
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Roney,* Senior Circuit Judge,
Roney,* Senior Circuit Judge,
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and Pieras,** District Judge.
and Pieras,** District Judge.
______________
____________________
____________________
Edward W. Smithers, with whom Merrill & Broderick and Gibson,
Edward W. Smithers, with whom Merrill & Broderick and Gibson,
__________________ ____________________ _______
Dunn & Crutcher were on brief for appellants.
Dunn & Crutcher were on brief for appellants.
_______________
E. Donald Dufresne, with whom George R. Moore and Devine, Mil-
E. Donald Dufresne, with whom George R. Moore and Devine, Mil-
___________________ _______________ ____________
limet & Branch were on brief for appellee.
limet & Branch were on brief for appellee.
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____________________
____________________
____________________
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*Of the Eleventh Circuit, sitting by designation.
*Of the Eleventh Circuit, sitting by designation.
**Of the District of Puerto Rico, sitting by designation.
**Of the District of Puerto Rico, sitting by designation.
CYR, Circuit Judge. Plaintiff Ferrofluidics Corpora-
CYR, Circuit Judge.
_____________
tion (Ferro) is a Massachusetts corporation which has its princi-
pal place of business in New Hampshire. Ferro developed, and now
makes and markets, an item called a magnetic fluid rotary seal
for use in the manufacture of semiconductor chips. The magnetic
fluid rotary seal is a state-of-the-art gadget, and Ferro invests
upwards of a million dollars a year to refine the technology and
diversify its applications. Ferro dominates the American market,
accounting for about ninety-five percent of the magnetic fluid
rotary seals sold in the United States.
At one time, Nippon Ferrofluidics Corporation (NFC) was
Ferro's Japanese subsidiary. In 1987, Ferro sold NFC to Japanese
investors. Akira Yamamura is NFC's chief executive officer.
Ferro gave NFC a license to manufacture and sell its magnetic
fluid rotary seals, and has since delivered to NFC updated
product formulas. The license appears to limit NFC's territory
to Japan and Asia. NFC, however, has disputed that territorial
restriction and evidenced a desire to sell in the United States.
Ferro hired defendant Todd Sickles in December 1985 as
a product manager in its "Seals Division," which handled the
manufacture and marketing of magnetic fluid rotary seals. On his
first day at work, Sickles signed a document that contained both
a nondisclosure agreement and a covenant prohibiting him from
competing with Ferro for five years after he left the company's
2
employ (the "restrictive covenant" or the "covenant not to
compete"). According to the document, both the nondisclosure
provision and the restrictive covenant were to "be governed by
the laws of Massachusetts," and the parties were to submit any
disputes for arbitration in Boston.
Sickles prospered in his work, and Ferro eventually
promoted him to general manager of the Seals Division. By 1990,
however, Ferro was suffering, along with much of the New England
high-tech industry, from a downturn in the economy. The company
had laid off employees and cut back salaries and other benefits.
Morale was low, and many employees were looking for work else-
where. Sickles was among them. His duties as general manager
included maintenance of corporate relations with NFC, and on two
occasions he had been told by representatives of the Japanese
company that if he ever decided to leave Ferro and wanted another
job, he should get in touch with them.
Now, in 1990, Sickles took up the offer, although he
had not yet left Ferro's employ. He met with Akira Yamamura, and
with Yamamura's lieutenant, Dr. Goto, and began to work out a
plan under which he would set up a company to market magnetic
fluid rotary seals in the United States. NFC would provide both
the financing and the seals seals manufactured, it should be
noted, according to the formulas supplied to NFC by Ferro itself.
In other words, Sickles intended not merely to compete with his
soon-to-be-formeremployer,butto competewithitusingits ownproduct.
3
Sickles did not scheme alone. At one time or another,
four other Ferro employees were members of the cabal: Timothy
Barton, the Northeast Regional Sales Manager of the Seals Divi-
sion; defendant Perry Barker, Regional Sales Manager for the
Southeast, Southwest and Rocky Mountain regions; Mark Granoff,
Product Manager of the Seals Division; and Robert Kuster, then
manager of Ferro's customer service department. At length,
however, Granoff, afflicted by his conscience, dropped out of the
group and quit his job at Ferro; Sickles rescinded the invita-
tions to Barton and Kuster; and only Sickles and Perry Barker
remained.
The planning was marked by a number of underhanded
tactics. A few examples will illustrate. Sickles did much of
the groundwork for the new venture on Ferro's company time using
company resources, including business trips to California and
Japan at Ferro's expense. In deciding where to trim his depart-
ment's payroll during a second round of layoffs, Sickles spared
Barton, Barker and Granoff and let the axe fall on two employees
who had shown no interest in leaving Ferro and who were not
involved in the new venture. Finally, the district court found,
and we have no reason to doubt, that when Sickles left Ferro he
carried with him two copies of the company's customer list.
Sickles's machinations also reflect his awareness of
the covenant not to compete and his concern that it might inter-
fere with his ambitions. He received advice from lawyers on
4
several occasions, some of which he in turn related to NFC,
including the nugget that "[l]egal complications will be greatly
reduced by incorporating [the new venture] in California since
this state strongly protects the entrepreneur and, in general,
does not recognize non-compete agreements. . . ." Not surpris-
ingly, then, when the new venture finally took shape in April
1991 as Advanced Vacuum Components, Inc. (AVC), it was incorpo-
rated and headquartered in California. Sickles owned 75% of the
voting stock in AVC; Barker the remaining 25%.
Advanced Vacuum Components dwells in NFC's shadow,
though there is no direct link between the companies. AVC
obtains its magnetic fluid rotary seals from NFC through a second
Japanese company, Advanced Vacuum Seals. A Hong Kong firm called
Advanced Materials Research Limited, termed a "front" for NFC by
the district court, is AVC's source of financing. It has paid
AVC's legal fees and provided it with several hundred thousand
dollars in financing; in return, Advanced Materials Research
Limited receives 70% of AVC's operating income and owns preferred
stock which it can convert into a controlling percentage of
voting stock were AVC to go public.
Sickles and Barker quit Ferro in late May 1991 and AVC
began operating soon after. Between May 1991 and the trial of
this case in April 1992, AVC sold only about $34,000 worth of
magnetic fluid rotary seals, a minuscule amount compared with
Ferro's $7,400,000 in rotary seal sales during 1991. The dis-
5
trict court found, however, that "AVC is a definite threat to
Ferrofluidics," noting that AVC eventually expects to capture
54% of a market in which Ferro currently enjoys a 95% share.
Under the circumstances, litigation probably was
inevitable. Ignoring the arbitration clause in the document
containing the restrictive covenant, both sides filed lawsuits.
Seemingly, AVC and Sickles won the race to the courthouse, by
filing a declaratory judgment action in the United States Dis-
trict Court for the Northern District of California in November
1991. The complaint requested a judicial declaration invalidat-
ing the restrictive covenant under California law.
After initiating the California declaratory judgment
action, however, AVC and Sickles hung fire. They did not serve
the complaint on Ferro until after Ferro had filed the instant
lawsuit in the United States District Court for the District of
New Hampshire. Ferro's complaint, naming AVC, Sickles, Barker
and Akira Yamamura as defendants, contained six counts: (1)
misappropriation of trade secrets by Sickles and Barker, (2)
breach of Sickles's nondisclosure agreement and covenant not to
compete, (3) breach of Sickles's and Barker's fiduciary duties to
Ferro, (4) false representations to Ferro customers in violation
of the Lanham Act, 15 U.S.C. 1125(a), (5) unfair competition,
and (6) tortious interference, by Yamamura and AVC, with Ferro's
employment contracts with Sickles and Barker, and by Yamamura,
6
AVC, Sickles and Barker, with the employment contracts of Barton,
Kuster and Granoff.
The district court heard Ferro's motion for a prelimi-
nary injunction on March 16, 1992. Rather than rule on the
motion, the court set trial for March 25. As service of process
could not be obtained on Yamamura during the short interval prior
to trial, he was dropped as a defendant. At the same time, the
defendants moved to dismiss under Fed. R. Civ. P. 19 for failure
to join an indispensable party (identified not as Yamamura but as
NFC).
The trial began on March 25 and lasted five days. On
April 22, the district court issued its findings of fact and
conclusions of law. Briefly put, the court ruled (1) that NFC
was not an indispensable party under Rule 19, (2) that the
enforceability of the restrictive covenant should be determined
under New Hampshire law, rather than either Massachusetts law, as
specified in the document, or California law, as urged by the
defendants, (3) that the five-year term of the covenant was
excessive, but that the covenant should be enforced for a three-
year term, (4) that Sickles had violated the covenant, and (5)
that both Sickles and Barker had violated their fiduciary duties
to Ferro. The court granted Ferro no relief on its other claims,
but issued a permanent injunction prohibiting the defendants from
engaging in the magnetic fluid rotary seal business until June
7
1994. This appeal followed; we expedited the hearing, and now
affirm.
8
DISCUSSION
DISCUSSION
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The defendants assert three claims on appeal: first,
that the district court erred when it decided to apply New
Hampshire law; second, that it erroneously modified the term of
the restrictive covenant; and third, that it abused its discre-
tion by denying defendants' motion to dismiss for failure to join
an indispensable party.
1. Choice of Law
1. Choice of Law
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The district court actually made two choices concerning
the law governing the restrictive covenant. First, it chose to
nullify the parties' contractual choice of Massachusetts law,
then to apply New Hampshire law, rather than California law as
the defendants had urged. As we will explain, the first ruling
probably was erroneous, but any error was harmless; the second
ruling likely was unnecessary, but in any event entirely correct.
Where the contracting parties select the law of a
particular jurisdiction to govern their affairs, as a rule New
Hampshire courts will honor their choice "if the contract bears
any significant relationship to that jurisdiction." Allied
______
Adjustment Service v. Heney, 484 A.2d 1189, 1191 (N.H. 1984).
__________________ _____
The Allied Adjustment Service court cited, and the New Hampshire
_________________________
rule echoes, the Restatement (Second) of Conflict of Laws 187-
(2)(a), which favors enforcing the parties' contractual choice
unless "the chosen state has no substantial relationship to the
9
parties or the transaction and there is no other reasonable basis
for the parties' choice. . . ."
The district court opinion did not address the issue
head-on, but suggests that the court decided to nullify the
parties' choice of Massachusetts law because New Hampshire bore a
more significant relationship to the parties and their contract
than Massachusetts. New Hampshire undeniably has stronger links
to the transaction than Massachusetts: Ferro has its headquar-
ters in New Hampshire, the contract was executed and performed
there, and Sickles lived there while he worked for Ferro. The
more significant relationship to New Hampshire nevertheless is
not an adequate reason to nullify the parties' contractual choice
of Massachusetts law. Absent a mutual choice of law by the
parties, the law of the jurisdiction with the most significant
relationship to the contract normally applies. Consolidated Mut.
_________________
Ins. Co. v. Radio Foods Corp., 240 A.2d 47, 49 (N.H. 1968). When
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the parties take the trouble to make a contractual choice of law,
often it is because they do not want to have applied, by opera-
tion of the general rule, the law of some other jurisdiction with
the "most significant" relationship to the contract. If a court
can nullify a contractual choice of law merely on the ground that
another jurisdiction has a more significant relationship to the
transaction than the chosen jurisdiction, the courts can nullify
virtually any contractual choice and do so for the very reason
the parties chose to do otherwise.
10
The nullification analysis, as noted earlier, properly
focuses on the nexus between the chosen jurisdiction and the
parties or their contract; we inquire whether the chosen juris-
diction has any significant relationship, rather than whether
___
another jurisdiction has a more significant relationship. Ferro
____
was incorporated in Massachusetts and did a substantial amount of
business there. The cases indicate that this is a sufficient
bond to sustain the contractual choice of law. "A party's
incorporation in a state is a contact sufficient to allow the
parties to choose that state's law to govern their contract."
Carlock v. Pillsbury Co., 719 F. Supp. 791, 807 (D. Minn. 1989).
_______ _____________
See also Gray v. American Express Co., 743 F.2d 10, 17 (D.C. Cir.
___ ____ ____ ____________________
1984); Hale v. Co-Mar Offshore Corp., 588 F. Supp. 1212, 1215
____ ______________________
(W.D. La. 1984); Restatement (Second) of Conflict of Laws, 187
comment f (fact that one party is domiciled in chosen jurisdic-
tion provides "reasonable basis" for their choice).
Although the preceding exposition suggests that it may
have been appropriate to enforce the contractual choice of Massa-
chusetts law, we need not determine the matter definitively if,
as the district court found, New Hampshire is the jurisdiction
with the most significant relationship to the transaction. As
explained below, this is so because both Massachusetts and New
Hampshire law lead to the same result in the instant case.
The defendants argue, however, that even though the
district court correctly cast off from the mooring of the par-
11
ties' contractual choice, the currents of the "most significant
relationship" test should have carried it to California, not New
Hampshire. Unlike the courts of New Hampshire and Massachusetts,
California courts almost invariably refuse to enforce restrictive
covenants. See Scott v. Snelling and Snelling, Inc., 732 F.
___ _____ ____________________________
Supp. 1034, 1042-43 (N.D. Cal. 1990). Thus, were California,
rather than New Hampshire, the appropriate alternative under the
"most significant relationship" test, it would be necessary to
determine whether the district court correctly nullified the
contractual choice-of-law provision.
It is very clear, however, that California does not
trump New Hampshire. Since the "most significant relationship"
test is intended to give "effect to the intention of the parties
and their reasonably justified expectations," Consolidated Mut.
_________________
Ins. Co., 240 A.2d at 49, the court applying it must examine the
________
jurisdiction/contract relationship at the time the contract was
executed. In this case, Ferro and Sickles could have had no
reasonably justifiable expectation in December 1985 that their
agreement would be governed by California law, as California bore
no relationship to the contract at that time, and continued to
have none until Sickles breached the restrictive covenant there
in 1991. New Hampshire, on the other hand, was both the place of
execution and the place of anticipated performance. If the
parties had any reasonably justified expectation in December 1985
(other than that their choice of Massachusetts law be enforced),
12
it would have been that the covenant be governed by New Hampshire
law.
Viewed in the best light, the defendants' argument is
that since Sickles presently lives and works there, California
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has an interest in how his rights are interpreted and enforced.
Quite true, but of course such an interest hardly suggests that
California had a more significant relationship than New Hampshire
with an employment contract performed in New Hampshire by a New
Hampshire employer and a New Hampshire employee throughout the
employment period. See Restatement (Second) of Conflict of Law
___
196 (contracts for rendition of services usually governed by
law of state where the contract requires that the services be
rendered). "While [California] certainly has a strong interest
in monitoring effects on in-state competition, [New Hampshire]
has an equally strong interest in protecting [New Hampshire]
businesses from breaches of employment agreements and consequent
losses of good will." Shipley Co. v. Clark, 728 F. Supp. 818,
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826 (D. Mass. 1990). In sum, even assuming the district court
properly could have nullified the contractual choice of law, in
these circumstances it could have done so only in favor of New
Hampshire law.
2. Enforcement of Restrictive Covenant
2. Enforcement of Restrictive Covenant
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Massachusetts and New Hampshire will enforce reasonable
restrictive covenants in employment contracts under essentially
13
the same reasonableness standard. In Massachusetts, a restric-
tive covenant "is not invalid and may be enforced in equity
provided it is necessary for the protection of the employer, is
reasonably limited in time and space, and is consonant with the
public interest." Novelty Bias Binding Co. v. Shevrin, 175
__________________________ _______
N.E.2d 374, 375 (Mass. 1961). In New Hampshire, a restrictive
covenant is considered reasonable so long as it is "no greater
than necessary for the protection of the employer's legitimate
interest, does not impose undue hardship on the employee, and is
not injurious to the public interest." Moore v. Dover Veterinary
_____ ________________
Hospital, Inc., 367 A.2d 1044, 1047 (N.H. 1976).
______________
The district court ruled that the restrictive covenant
in Sickles's employment contract was enforceable in all but one
respect; the five-year term was found excessive. The reasonable-
ness of a covenant presents a question of law, see Technical Aid
___ _____________
Corp. v. Allen, 591 A.2d 262, 265 (N.H. 1991), but insofar as it
_____ _____
entails the resolution of issues of fact, a "mixed" question is
presented which we review only for "clear error." See DeGuio v.
___ ______
United States, 920 F.2d 103, 105 (1st Cir. 1990).
_____________
We agree with the district court's assessment that the
restrictive covenant was reasonable in the circumstances, except
for its five-year term. The closer question is whether the
district court permissibly modified the term of the covenant.
Courts presented with restrictive covenants containing
unenforceable provisions have taken three approaches: (1) the
14
"all or nothing" approach, which would void the restrictive
covenant entirely if any part is unenforceable, (2) the "blue
pencil" approach, which enables the court to enforce the reason-
able terms provided the covenant remains grammatically coherent
once its unreasonable provisions are excised, and (3) the "par-
tial enforcement" approach, which reforms and enforces the
restrictive covenant to the extent it is reasonable, unless the
__ ___ ______ __ __ __________
"circumstances indicate bad faith or deliberate overreaching" on
the part of the employer. Durapin, Inc. v. American Products,
_____________ __________________
Inc., 559 A.2d 1051, 1058 (R.I. 1989).
____
Massachusetts and New Hampshire are firmly in the
"partial enforcement" camp. "Massachusetts courts will not
invalidate an unreasonable noncompete covenant completely but
will enforce it to the extent that it is reasonable." L.G.
____
Balfour Co. v. McGinnis, 759 F. Supp. 840, 845 (D.D.C. 1991). In
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New Hampshire, "[e]ven if the trial court determines that the
covenant is unreasonable, the employer nonetheless may be enti-
tled to equitable relief in the form of reformation or partial
enforcement of an overly broad covenant upon a showing of his
exercise of good faith in the execution of the employment con-
tract." Smith, Batchelder & Rugg v. Foster, 406 A.2d 1310, 1311
________________________ ______
(N.H. 1979).
The defendants argue that the district court impermis-
sibly reformed the restrictive covenant in Sickles's contract
since the prerequisite "good faith" had not been established.
15
Defendants cite the Smith, Batchelder and Technical Aid cases for
_________________ _____________
the proposition that good faith cannot be found where, "as here,
the employee was presented with and required to sign the restric-
tive covenant only after he had accepted the new position and
left his former job in reliance on an earlier oral agreement for
employment containing no such term." In other words, the defend-
ants contend that the lack of advance notice to Sickles so
tainted the restrictive covenant as to preclude a finding of good
faith.
The district court did find, however, that Ferro had
given Sickles advance notice of the restrictive covenant. We may
disturb its finding only if "clearly erroneous." According to
the defendants, the finding of advance notice was clearly errone-
ous because (1) it was based on a letter sent to Sickles by Ferro
on November 18, 1985 (three weeks before he began work at Ferro
and executed the restrictive covenant), (2) the November 18
letter merely informed Sickles that he would be required to "sign
a nondisclosure agreement covering the proprietary activities of
the corporation," and (3) the letter made no explicit mention
that the "nondisclosure agreement" would contain a clause re-
stricting Sickles's ability to compete with Ferro. Although
defendants' argument is not without some force, we need not
determine whether we are, "on the entire evidence[,] . . . left
with the definite and firm conviction that a mistake has been
committed." United States v. United States Gypsum Co., 333 U.S.
_____________ ________________________
16
364, 395 (1948). The defendants' perspective, we think, is
altogether too limited.
In this juridical cranny, "[p]recedents are of little
value." Reddy v. Community Health Foundation of Man, 298 S.E.2d
_____ __________________________________
906, 913 n.4 (W. Va. 1982) (quoting 54 Am.Jur.2d, Monopolies,
___________
Restraints of Trade, and Unfair Trade Practices, 543). See
_________________________________________________ ___
also Novelty Bias Binding Co., 175 N.E.2d at 376 ("What is
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reasonable depends on the facts in each case."). In urging that
we cleave reflexively to the narrow holdings of two New Hampshire
cases, which turned on the presence or absence of advance notice,
defendants ignore the breadth of the "good faith" concept, the
variety of factors (including, but not only, advance notice)
which may be material to the "good faith" determination, and the
deference due a district court order for partial enforcement of a
restrictive covenant.
The New Hampshire courts have adopted the "good faith"
requirement in the Restatement (Second) of Contracts 184(2),
and such cases as Raimonde v. Van Vlerah, 325 N.E.2d 544 (Ohio
________ __________
1975), Insurance Center, Inc. v. Taylor, 499 P.2d 1252 (Idaho
_______________________ ______
1972), and Solari Indus., Inc. v. Malady, 264 A.2d 53 (N.J.
____________________ ______
1970). See Smith, Batchelder & Rugg, 406 A.2d at 1313 (citing
___ _________________________
cases). These sources tell us that "good faith" and "advance
notice" are not coextensive concepts, but rather that "good
faith" denotes a broader and more complex principle reflecting
the reformation doctrine's origin in the courts' "inherent equity
17
powers to modify and enforce covenants." Durapin, Inc., 559 A.2d
_____________
at 1058. In order to give form to this principle, the trial
courts are charged to examine and consider all relevant circum-
___
stances, and only then to determine whether, in light of all
those circumstances, it would be equitable to enforce the cove-
nant in modified form. See Raimonde, 325 N.E.2d at 547. The aim
___ ________
in each case must be to determine whether partial enforcement is
"the fair and reasonable course." Solari Indus., 264 A.2d at 56.
_____________
To be sure, the timing of the initial presentation of
the restrictive covenant to the employee may bear on the employ-
er's good faith. The absence of notice may suggest overreaching
and bad faith, insofar as it places the employee in a weaker
bargaining position with respect to the covenant than he might
have enjoyed had he known of the proposed restriction earlier;
for example, before he left his previous job. Thus, in the
Technical Aid case, the New Hampshire Supreme Court found no
______________
error in the trial court determination that an employer lacked
good faith where the employer had presented the covenant to the
employee on his first day on the job, and the employer insisted
that the employee sign immediately. 591 A.2d at 271. See also
___ ____
American Credit Bureau, Inc. v. Carter, 462 P.2d 838 (Ariz. App.
_____________________________ ______
1969) (no abuse of discretion in trial court refusal to enforce
restrictive covenant where employer had not told employee about
covenant until after employee quit former job).
18
These cases say that the lack of advance notice may
justify a finding of bad faith, but not that the trial court
cannot find good faith absent advance notice. An exclusive
preoccupation with the timing of the presentation of the restric-
tive covenant, and more precisely with its effect on the bargain-
ing-power balance between employer and employee, would limit
unrealistically the broad equitable inquiry contemplated in these
matters. The fact is, of course, that restrictive covenants,
whenever and however presented to the employee, "often are not
arrived at by bargaining between equals . . . [t]he employer
normally presents the terms on a 'take it or leave it' basis."
Cheney v. Automatic Sprinkler Corp., 385 N.E.2d 961, 965 (Mass.
______ __________________________
1979).
The object of the appropriate inquiry, therefore, is
not so much whether the employer has upset the balance in bar-
gaining power, as whether the employer has exploited an inherent
imbalance by placing "deliberately unreasonable and oppressive"
restraints on the employee. Solari Indus., 264 A.2d at 57. In
_____________
their pursuit of that inquiry, the courts may, and in appropriate
circumstances should, examine and weigh other relevant consider-
ations. These other considerations include whether the employ-
er's general practice with respect to employee restraints "is
fair and designed only to protect legitimate interests," Blake,
Employee Agreements Not to Compete, 73 Harv. L. Rev. 625, 683
___________________________________
(1960); whether the employer gave the particular employee a
19
reasonable opportunity to read and understand the covenant;
whether the employer allowed (or, if asked, would have allowed)
the employee to obtain modifications of the covenant, or to
decline to execute it altogether; and whether the terms of the
restrictive covenant are so "savage . . . that their overbreadth
operates, by in terrorem effect, to subjugate employees unaware
__ ________
of the tentative nature of such a covenant," Reddy, 298 S.E.2d at
_____
916, or, conversely, whether the terms are merely marginally
overbearing so as to suggest that the employer simply miscalcu-
lated the extent of the restrictions required for its reasonable
protection.
Intrinsic to any appellate assessment of these factors
is the standard of review. As a trial court decision to modify
and enforce a restrictive covenant is undertaken in the exercise
of its equitable powers, we review only for abuse of discretion.
Morgan v. Kerrigan, 523 F.2d 917, 921 (1st Cir. 1975). Under
______ ________
this deferential standard, we conclude that the district court
decision to modify Sickles's restrictive covenant is sustainable
on the following grounds. First, were we to assume that the
district court made a mistake when it found that explicit advance
notice of the covenant not to compete was contained in the
November 18 letter, we nonetheless think it indisputable that the
letter alerted Sickles that Ferro would expect some restriction
____
upon his post-employment freedom. Second, Ferro's general
practice with respect to restrictive covenants does not display
20
the kind of "grasping or negligent" behavior that may cause
courts to decline partial enforcement. Blake, supra, 73 Harv. L.
_____
Rev. at 684. Ferro regularly requests new employees to accept
restrictive covenants similar to the one Sickles executed. It
invariably gives the employee, as in Sickles's case, an opportu-
nity to read and to understand the document before signing it.
Furthermore, Ferro has, on request, proven willing to consider
and accept modifications. At least once in the case of
defendant Perry Barker Ferro hired and continued to employ a
worker who pocketed the document and never signed it. In at
least one other instance, Ferro waived its rights under a re-
strictive covenant and allowed a former employee to join a
competitor where the employee in marked contrast to Sickles
was forthright in his dealings and made no attempt to deceive
Ferro about his intentions. Finally, and perhaps most important-
ly, 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.
Considerations of "reasonableness" and "balance"
pervade the caselaw in "partial enforcement" jurisdictions. See,
___
e.g., Reddy, 298 S.E.2d at 911 (discussing "rule of reason"); see
____ _____ ___
also Arthur A. Corbin, Contracts, 1394 at 89 (1962) ("It is the
____ _________
function of the law to maintain a reasonable balance"). Courts
in these jurisdictions must be vigilant to protect employees
21
against overbroad and oppressive restrictions on their ability to
work and earn a living, but must temper their vigilance with an
awareness that employers, too, work for a living and are entitled
to reasonable protection against the predations of unscrupulous
former employees. See id. at 1394; see also Raimonde, 325
___ ___ ___ ____ ________
N.E.2d at 547 ("Most employers who enter contracts do so in good
faith, and seek only to protect legitimate interests"). Notwith-
standing the serious question defendants raise concerning advance
notice, and regardless whether Massachusetts or New Hampshire law
governs, we conclude, in the circumstances of this case and in
light of its considerable discretion to mold equitable relief,
that the district court decision must stand.
3. Joinder
3. Joinder
_______
We need not linger over the defendants' final claim.
Defendants contend that the present action should have been
dismissed because NFC was a necessary and indispensable party
under Fed. R. Civ. P. 19. First, defendants argue that NFC was a
"necessary party" under Rule 19(A)(2)(i) that is, that NFC
"claims an interest relating to the subject of the action and is
so situated that the disposition of the action in [its] absence
may . . . as a practical matter impair or impede [its] ability to
protect that interest. . . ." They insist that an injunction
against AVC would deprive NFC of the ability to sell magnetic
fluid rotary seals to its American protege: "NFC claims a right
22
to market seals [in the United States] under the license agree-
ment [with Ferro], which has been 'impaired or impeded' by
Ferro's lawsuit . . . NFC's ability to market seals would be
greatly curtailed by enjoining AVC."
Whatever abstract appeal it may have, their argument
breeds an incongruity in the present case. If NFC actually was a
"necessary party" under Rule 19(a)(2)(i) that is, if its
practical ability to protect an interest was at stake, and it
could not be adequately represented by AVC then there would
have been no need to resort to joinder, as NFC would also have
been entitled to intervene as a matter of right under Fed. R.
Civ. P. 24(a). See Pujol v. Shearson/American Express, Inc., 877
___ _____ _______________________________
F.2d 132, 135 (1st Cir. 1989), and cases cited therein (Rule
24(a)(2) is a "counterpart" to Rule 19(a)(2)(i)). Yet NFC made
no attempt to intervene. See Boston Car Co. v. Acura Automobile
___ _______________ ________________
Division, American Honda Motor Co., 127 F.R.D. 434, 435 (D. Mass.
__________________________________
1989) (party is not "necessary" where it "has not claimed an
interest" in outcome of action).
In any event, NFC's potential economic exposure did not
qualify it as an "indispensable party" under Rule 19(b). "[I]t
is generally recognized that a person does not become indispens-
able to an action to determine rights under a contract simply
because that person's rights or obligations under an entirely
separate contract will be affected by the result of the action."
Helzberg's Diamond Shops, Inc. v. Valley West Des Moines Shopping
______________________________ _______________________________
23
Center, Inc., 564 F.2d 816, 820 (8th Cir. 1977). See also Boston
____________ ___ ____ ______
Car Co., 127 F.R.D. at 435.
_______
Affirmed.
________
24
Reference
- Status
- Published