New Jersey Lawyer & Attorney : Stark & Stark Law Firm : New Jersey Law Blog

The Community Hospital Group, Inc. v. More

The New Jersey Supreme Court recently decided the case of The Community Hospital Group, Inc. v. More, finding that a restrictive covenant in an employment contract between a hospital and a physician is not per se unreasonable and unenforceable.

The general test of whether a physcian's restrictive covenant should be enforced are (1) whether the covenant is necessary to protect the legitimate interests of the employer, (2) whether enforcement of the covenant would cause an undue hardship on the employee, and (3) whether enforcement of the covenant woudl not be unduly injurious to the public.

Most cases come down to the determination of whether the covenant is necessary to protect the legitimate interests of the employer.

The court in More found that, in addition ot the protection of the employer's trade secrets, confidential information and customer relationships, protecting referral bases and investment in the training of a physician are considered legitimate interests of the employer worthy of protection through a restrictive covenant.

This expansion will necessarily lead to an expansion in the enforcement of physician restrictive covenants. It will also possibly carry over to restrictive covenants in other businesses.

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Travelodge Hotels, Inc. v. Honeysuckle Enterprises., Inc.

In Travelodge Hotels, Inc. v. Honeysuckle Enterprises., Inc., 2005 WL 356958 (D.N.J.), the plaintiff, franchisor Travelodge Hotels, Inc. sued the defendant, franchisee Honeysuckle Enterprises, to collect liquidated damages and unpaid royalties under the License Agreement between Travelodge and Honeysuckle.

The franchisee argued that the franchisor fraudulently induced him into entered into the license agreement by telling him, among other things, that by being part of the Travelodge reservation system, his reservations would increase by at least fifteen percent. The franchisee also argued that, after entering into the license agreement, he was not put onto the reservation system so the franchisor breached the license agreement.

The franchisor argued that the evidence relating to any discussions between the franchisor and the franchisee prior to entering into the license agreement are barred by the parol evidence rule.

The Franchisor's motion for summary judgment was denied, with the court finding that the parol evidence rule did not bar evidence revealing that the license agreement was fraudulently induced or materially breached by the franchisor.

This case reminds franchisors that disclaimer language in the franchise agreement will not protect them from sloppy sales techniques. Franchisors should be weary of making any specific earnings statements or guarantees, since franchisees could use those statements against the franchisors to make an argument to get out of an unsuccessful franchise.

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One of the most critical components of business survival, but yet most often overlooked, is the planning for the internal succession of your business. Most business owners, from sole-proprietorships to large corporations, are more concerned with the daily operations, growth and success of the business rather than who will take over when they are gone. While some business owners may have an "idea" in their head of a succession plan, those business owners do not realize that their "ideas" do not benefit the company unless they are written down.

The legal document that is commonly prepared to memorialize the "ideas" is the Buy-Sell Agreement. Simply put, the Buy-Sell Agreement provides for the continuation of a business upon a "triggering event." A "triggering event" could include death and retirement at a certain age and may include disability, early retirement, involuntary or voluntary termination from employment, or some sort of a force-out situation of a shareholder or partner. The Buy-Sell Agreement, much like the Last Will and Testament, is the controlling document that details the succession of the company in accordance with the owner's wishes. A properly drafted Buy-Sell Agreement should cover in detail the who, what, when why, and how of the succession. Who the successor or successors of the company will be; what aspects or part of the company will be transferred; when the transfer or succession will occur; why the succession plan is necessary; and how the succession will occur.

Although all Buy-Sell Agreements should cover all these issues, no two Buy-Sell Agreements are the same. Again, similar to the Last Will and Testament, each Buy-Sell Agreement needs to be individually prepared for each company in order to properly address each company's uniqueness and circumstances. However, unlike a Will, the Buy-Sell Agreement could be triggered while the business owner is still actively employed or working in the company. Depending on the circumstances of the company, if the company's growth and success are largely dependent on the owner's or principal's relationships with the company's customers or clients, the Buy-Sell Agreement should provide for a transitioning plan whereby a time period (ie. three to five years) is set aside prior to the owner's retirement or withdrawal from employment in order for the owner to have sufficient time to transition the company's clients or customers to the successor of the company. Otherwise, without such a "transition plan", businesses that are dependent on the owner's continued relationships with the company's clients will experience difficulty in maintaining success once the owner leaves.

In addition to addressing the transitioning of clients to the successor, where applicable, the Buy-Sell Agreement should also address the transfer of ownership or stock, as the case maybe, to the successor. This would entail the owner considering the various options in determining the purchase price for the transfer, valuation of the company, and the various payment options depending on the "triggering event."

Obviously, there are many elements to consider in preparing the appropriate Buy-Sell Agreement for your company. A properly structured succession plan takes time, effort, and some creativity, but once properly completed, your succession plan should ensure the continued growth and success of the company that you leave behind.

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Hasson v. Board of Review

New Jersey Court of Appeals finds that a corporation is still responsible for unemployment compensation purposes until it is dissolved or files for bankruptcy. In this matter, the corporation of which plaintiff was the sole shareholder, director, and officer, was not dissolved until more than a year after he filed his claim for unemployment compensation, and three years after he ceased operations. As such, the plaintiff's claim was properly denied.

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Stefaneli v. DFG Staffing Consultants, Inc.

The plaintiff in this case was a 1/3 equal stockholder in the defendant corporation. Plaintiff was terminated and filed an oppressed stockholder action even though he never relinquished his shares to the defendants in accordance with the stockholder agreement. The defendant contended the plaintiff breached his non-compete and confidentiality agreements.

The New Jersey Court of Appeals dismissed both suits and agreed with the trial judge that the defendant's termination was made as a good faith business decision, and the plaintiff did not violate the confidentiality agreement because the defendant's customers were publically known. Since the defendant's customers were not a trade secret, the non-compete agreement was unenforceable.

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