Opinion ID: 2215595
Heading Depth: 1
Heading Rank: 6

Heading: Strict Scrutiny for Employee Restraints

Text: As first suggested in the landmark Mitchel opinion, supra, the reasonableness of a covenant not to compete incident to the sale of a business has been generally scrutinized less rigorously than the reasonableness of such a covenant when incident to an employment contract. [6] The greater deference granted a covenant not to compete incident to a sale of a business is rooted primarily in the recognition of the substantially equal bargaining power of freely contracting parties in such cases. [7] As stated in Beal v Chase, 31 Mich 490, 523 (1875):    where such a contract is the result of fair bargaining, the reasonable presumption is that each party, in view of all the circumstances which were within his own intimate knowledge, was able to see how the bargain was to result to his advantage, and that the party resigning the business did not do so without being fully satisfied that he was receiving full equivalent, which would be more advantageous to him than the property and the business sold. And where a man has fully decided to sell his business to take up another, can there be any reason of state policy why he should be precluded from bargaining for the additional consideration he can obtain by agreeing not to engage in the same business?    If there be any sufficient reason, it was not presented on the argument, and is not hinted at in any of the cases to which our attention has been directed. Moreover, there must be some form of restraint on the transferor of good will in order for the transferee to get the full value of what is being acquired. [8] An employee subject to a covenant not to compete included in his employment contract is in a much different situation from the seller of a business who binds himself or herself to such a covenant in exchange for consideration. The difference in the two situations, well-described in a scholarly opinion, Arthur Murray Dance Studios of Cleveland, Inc v Witter, 62 Ohio L Abs 17; 105 NE2d 685, 703-704 (Common Pleas, 1952), has led courts to scrutinize the reasonableness of the employee restraint more closely: [T]he snow-balling weight of authority in England and the United States recognizes a distinction. In contrasting the employee covenant with the sale covenant, some of the typical pronouncements are  the employee covenant is more critically examined, more strictly construed   . The following are some of the reasons given for making the above distinction. The average, individual employee has little but his labor to sell or to use to make a living. He is often in urgent need of selling it and in no position to object to boiler plate restrictive covenants placed before him to sign. To him, the right to work and support his family is the most important right he possesses. His individual bargaining power is seldom equal to that of his employer.    He is more apt than the seller to be coerced into an oppressive agreement. Under pressure of need and with little opportunity for choice, he is more likely than the seller to make a rash, improvident promise that, for the sake of present gain, may tend to impair his power to earn a living, impoverish him, render him a public charge or deprive the community of his skill and training. The seller has the proceeds of sale on which to live during his period of readjustment. A seller is usually paid an increased price for agreeing to a period of abstention. The abstention is a part of the thing sold and is often absolutely necessary in order to secure to the buyer the things he has bought. Usually the employee gets no increased compensation for agreeing to the abstention; it is usually based on no other consideration than the employment itself. The reasons for the application of strict scrutiny to an employee restraint in the form of a noncompetition forfeiture clause are at least as compelling. First, in the establishment of a retirement plan and, specifically, a non-competitive forfeiture clause, there is often an imbalance in the bargaining power which invites employer over-reaching. In many instances, including the case before us, the retirement plan is not negotiated at all, being unilaterally established by the employer. This is particularly the case where the retirement plan contains a non-competition forfeiture clause, for such plans tend to cover higher level employees who tend not to be unionized. Second, the forfeiture clause is not necessary for the employer to get the value of the thing primarily being acquired by the employment contract and retirement plan, i.e., the continued services of the employee. Third, the non-competition forfeiture clause usually affects a far wider range of people, including employees who are not before the court, than does a covenant not to compete ancillary to the sale of a business where only the buyer and seller are directly involved. [9] In passing, we should recognize that the United States Congress after much consideration enacted the Employee Retirement Income Security Act of 1974, 29 USC 1001 et seq., and established a Federal policy regarding non-competition forfeiture clauses. The central thrust of the new act is to encourage the creation of private retirement programs through tax incentives and to protect the employee's rights under these plans. [10] Under the act, benefits must vest within certain prescribed time limitations. 29 USC 1053(a). Once the right to benefits vests, it cannot be forfeited, with certain exceptions not applicable to this case. Specifically, Congress provided that under the act a vested right is not to be forfeited because the employee later went to work for a competitor. United States Code Cong and Admin News, House Report No 93-807, pp 4724-4726 (1974). For all of these reasons, we conclude that the reasonableness of non-competition forfeiture clauses must be strictly scrutinized. On the basis of this conclusion, we specifically reject the employee's choice test often used by courts opting for less than strict scrutiny of these clauses. [11] Under this test, a court in determining the reasonableness of the clause focuses on what is termed the voluntariness of the employee's choice to forfeit retirement benefits, without balancing the interests of the employer, the employees and the public to determine the fairness of the alternatives. Chief Justice, then Judge, Warren Burger sharply criticized the use of such a test in Neuffer v Bakery & Confectionery Workers International Union, 113 US App DC 334; 307 F2d 671 (1962). In his well and strongly stated dissent, he first objected that the majority opinion construes the contract most strictly against the employee when the law requires we construe it strictly against the employer who seeks to exact the forfeiture. 307 F2d 671, 673-674. But Judge Burger's central concern was that the majority's approach ignored the harshness or unfairness of the employee's forfeiture. Noting the harshness of the application of the forfeiture clause in that case, he stated as follows: I can scarcely believe these factors are irrelevant when we deal with legal policy, for the law relating to forfeitures is essentially a policy matter in which equitable considerations have the dominant role. 307 F2d 671, 674-675. A similar objection was made by the authors of a recent law review article: [12] This [Neuffer] test seems to imply, however, that the employee has a choice: He may remain restricted, no matter how traditionally unfair the restrictions are, or he may compete and lose whatever interests he may have had, regardless of how innocuous such competition may be and insubstantial the interest foregone. The Neuffer court apparently assumed only that the contractual restrictions were reasonable and not against public policy, reaching its decision without weighing the equities of the parties. 57 Iowa L Rev 75, 87 (1971). In essence, the employee's choice test would make every non-competition forfeiture clause reasonable, no matter how harsh or unfair, because the employee is always free to take the consequences of breaching the clause.