Employment Law

Company’s Invalid Employment Contract Dooms Noncompete Claims

The New Jersey Appellate Division recently affirmed a lower court’s dismissal of a noncompete claim against a former employee, finding it was based on a contract that was otherwise invalid.contract

Employment Arrangement Doesn’t Compute

SpaceAge Consulting Corp. is a software services company that trains employees and assigns them to clients that need software and technology services. In February 2004, the U.S. Department of Labor (DOL) opened an investigation into SpaceAge. The DOL contended the company violated federal law by failing to pay H-1B employees during training periods.

Upon completing its investigation, the DOL determined on March 1, 2006, that SpaceAge’s employment relationship with its employees began when the training period commenced, and SpaceAge had willfully failed to pay H-1B employees during the training period. An administrative law judge affirmed the DOL’s determination on November 16, 2006, and ordered SpaceAge to pay back wages and other penalties.

Meanwhile, in January 2004, “Consuela,” a resident of the Philippines, reached out to SpaceAge for employment. On June 3, 2004, she entered into an employment agreement with the company that contained a noncompete clause prohibiting her from working for any client to which SpaceAge had assigned her for up to 1 year after her employment ended.

On June 13, 2006, after completing 19 weeks of training at SpaceAge (during which she wasn’t paid), Consuela entered into a new employment agreement with SpaceLabs Software Services Inc., a “sister company” to SpaceAge. In July 2007, she began an assignment with Home Box Office, Inc. (HBO), through an agreement SpaceAge had entered into with another entity.

In late April 2008, the owner of SpaceAge and SpaceLabs told Consuela that her employment would be transferred from SpaceLabs to SpaceAge, a move that would terminate her employment with SpaceLabs effective May 7, 2008. Rather than accepting employment at SpaceAge, Consuela took a job with HBO. On March 17, 2014, SpaceAge filed a complaint alleging breach of the noncompete provision and unjust enrichment against Consuela and contractual interference against HBO.

Spaceage’s Lawsuit Reaches Final Frontier

The trial court dismissed SpaceAge’s complaint against HBO but gave it a chance to amend the complaint. Meanwhile, the court granted Consuela’s motion for summary judgment (dismissal of the case without a trial), agreeing that SpaceAge’s contract was void and unenforceable because of its H-1B visa violations. The trial court later denied SpaceAge’s motion to amend its complaint against HBO as well. SpaceAge appealed.

Turning first to the noncompete and unjust enrichment claims against Consuela, the Appellate Division agreed with the trial court’s determination that the underlying contract between Consuela and SpaceAge was invalid. The appellate court noted that it was “undisputed” that Consuela wasn’t paid during her training period; therefore, both the June 3, 2004, agreement and the June 13, 2006, agreement were invalid. Because the employment contracts violated public policy (in this case, federal immigration law), the Appellate Division wouldn’t enforce them or the noncompete provisions.

The Appellate Division also turned aside SpaceAge’s arguments in support of its interference claims against HBO. According to the court, SpaceAge hadn’t sufficiently shown that HBO acted with “malice.” Moreover, the company was “hard-pressed to claim a protectable right in a contract [deemed] illegal under federal law,” said the court.

Bottom Line

The Appellate Division’s decision raises an interesting point about noncompete agreements. While most of you will not find yourselves in the same situation SpaceAge faced in this case, you should be aware that even valid and enforceable noncompete agreements may be invalid if they are based on an unenforceable employment agreement.

Michael Dell is a contributor to New Jersey Employment Law Letter.