By Ustina Ibrahim
The New Jersey Basketball Association (“Association”) filed a complaint to the Superior Court of New Jersey alleging that certain Board of Directors (“Board”) not only violated the non-compete and the non-disclosure restrictive covenants, but they also acted “maliciously, wantonly, intentionally, in bad faith and for the express purpose” of harming the Association. The Court, however, rejected the Association’s claims concerning breach of the restrictive covenants and dismissed and remanded the other claims for further proceedings.
By way of background, the Association was founded as a limited liability company by six individuals also serving as Board members. Each Board member signed an operating agreement that included restrictive covenants, a non-compete and a non-disclosure. Collectively, the restrictive covenants restrained the Board members from doing business that would impede the Association’s current or future participants. Of notable importance is the Court’s assessment of restrictive covenants.
Genuine Dispute as to Enforceability of Restrictive Covenants
Restrictive covenants are to be reasonable and drafted with lawful purpose. To determine the reasonability of restrictive covenants, the Court applies the Solari/Whitmyer test (“Test”). The Test requires the Court to analyze whether the language of a restrictive covenant (1) protects the legitimate interests of the party seeking to enforce the covenant, (2) imposes undue hardship on the party being restricted, and (3) is injurious to the public.
Upon reviewing the Association’s restrictive covenants against the three prongs noted above, the Court determined that the language was overbroad and excessive. The Association’s non-compete prohibited Board members, for five years, from starting or operating and assisting a sports league of any kind. The Court found that the language on duration failed to expressly limit the period in which the Board members were barred from conducting any business with the Association’s participants. In other words, the language alluded that the Board members were barred from “considering any business with existing participants, indefinitely.” Thus, it was deemed invalid. Further, the non-compete barred any Board member from initiating a “sports league of any kind or [assisting] any sports league by adding new participants.” The Court found that the scope of “sport” was illegitimate as it restrained Board members from taking on or participating in any capacity associated with any sport other than specifically basketball. Thus, it failed to protect legitimate business interests. The non-disclosure provision extended to “any information already known to [Board members].” Such language not only lacked a finite temporal application, but it also failed to limit the scope of information covered within. Consequently, both of the restrictive covenants were deficient as a matter of law.
If the Court had found the restrictive covenants reasonable, both the non-compete and non-disclosure would still have been unenforceable. That is because the Court has held that restrictive covenants will not be enforced if their purpose is to limit or prevent competition, as seen here.
The Takeaway
For restrictive covenants to be enforceable, they must meet the Solari/Whitmyer test and contain language protecting legitimate business interests.
