MERRIMACK, SS

SUPERIOR COURT

Granite Investment Advisors, Inc. v. Michael L. Timm NO. 2013-CV-00094 ORDER The Petitioner, Granite Investment Advisers Inc. ("Granite") seeks preliminary injunctive relief, seeking to enjoin Michael L. Timm ("Timm"), its former employee, from violating a noncompetition agreement it entered into with him during the time he was employed by Granite. For the reasons stated in this Order, Granite’s request for preliminary injunctive relief is DENIED. I The Court heard argument on Granite's Petition for a Preliminary Injunction on March 13, 2013. The parties proceeded by offers of proof. The facts recited in this Order are based upon the offers of proof and affidavits and are therefore not binding upon the parties, but subject to proof at trial.1

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The noncompete Timm executed provides that any dispute arising under the agreement will be resolved by arbitration. Both parties, however, have asserted that this Court should decide the request for preliminary injunction, and by doing so have waived that portion of the arbitration agreement.

Many of the facts are not in serious dispute. Granite is a Delaware corporation with a principal place of business in Concord, New Hampshire. It is a registered investment adviser under the Investment Advisers Act, 15 U.S.C. 80b-1 et seq. It provides portfolio management for individuals, corporations and nonprofit institutions, including public and private employee retirement funds. Timm is an individual who resides in Hopkinton, New Hampshire. He holds an MBA from the Tuck School of Business at Dartmouth College. In February 2008, he was hired as a portfolio manager by Boston Private Value Investors ("BPVI"), which Granite acquired on April 1, 2009. Timm asserts that during his time at Granite he was not in a sales role. He asserts that he did not recruit, solicit, or negotiate rates for Granite customers or clients. His affidavit states that in the fall of 2009 the CEO and Managing Partner of Granite, Scott Schermerhorn ("Schermerhorn"), encouraged him to partner with a Granite sales employee, Dudley Milliken ("Milliken"). Timm Aff. ¶ 7. Milliken was responsible for soliciting clients and managing the relationships. Timm was responsible for managing the clients’ portfolios once Milliken obtained the account for Granite. According to Timm's affidavit, he had very little interaction with clients, and he and Milliken operated in this arrangement for three years. According to Granite’s Petition, one of the clients that Timm did work for while employed by Granite was an investment firm called Aurora Financial Advisors, LLC ("Aurora”). Granite does not appear to dispute Timm's characterization of his job function. According to Schermerhorn's affidavit: 9. While employed by Granite, Timm worked exclusively with Dudley ("Tripp") Milliken ("Milliken") on the same Granite client accounts. 10. Milliken was the "relationship" person and Timm provided financial investment advice. They worked as a team servicing the same Granite 2

clients, including those associated with Aurora. Schermerhorn Aff. ¶¶ 9–10. When BPVI hired Timm, he received a flat salary. His offer of employment included a nondisclosure agreement which stated in relevant part that: In consideration for this offer of employment, you agree that, except in performing your services for BPVI, you shall not, either during your employment with BPVI or thereafter, use for your own benefit or disclose to for use for the benefit of any person outside of BPVI, any confidential or proprietary information of BPVI, including without limitation client lists, information about past clients, potential clients, financial reports and regulatory filings, whether you have such information in your memory or embodied in writing or other tangible form . . . . The employment agreement did not contain a noncompetition agreement. According to the Timm Affidavit, and the documents appended to it, Timm negotiated the confidentiality agreement with BPVI prior to his employment with the company. Five months after Granite's acquisition of BPVI, in September 2009, Timm was asked to sign a noncompete. He states that Granite never told him he would be asked to sign a noncompete agreement when he began his employment. Timm Aff. ¶ 11. He further states that when he signed the agreement, he did so with the understanding that his job duties and compensation structure would remain the same throughout his employment. Id. ¶ 12. However, he avers in paragraphs 13–14 of his affidavit that after he signed the noncompete, Granite made unilateral changes to his compensation structure, requiring him to work on a straight commission basis. While initially Granite took steps to provide him approximately the same compensation he had received as a salaried employee, the commission structure had the effect of reducing his compensation. Id. ¶ 14. Granite does not directly refute these allegations. The Schermerhorn affidavit 3

simply states, “on September 17, 2009, Granite and Timm executed [the noncompete agreement] when Timm was awarded a percentage of the fees for the accounts he was managing and was given an incentive for bringing in new clients.” Schermerhorn Aff. ¶ 8. Granite does not directly refute Timm's claim that this agreement was imposed unilaterally and had the effect of reducing his compensation. The parties apparently agree that this compensation structure continued until January 2012, when Timm was again paid on a salaried basis. The noncompete recites in relevant part that: In consideration of Employee’s continued employment by the Company during such time as may be mutually agreeable to Company and Employee, and in consideration of the company providing Employee with continued access to training, Company clients and Proprietary or Confidential information, this Agreement being a condition thereof and ancillary thereto, the Company and Employee hereby agree as follows . . . .2 In relevant part, the document provides: 2. Prohibition on Solicitation of Customers. During the employment of Employee by the Company, and for a period of two (2) years thereafter, Employee shall not, directly or indirectly, either for Employee or for any other person or entity, solicit or provide investment adviser services to any client or prospective client of the Company, or attempt to induce any client to terminate such client's relationship with the Company, nor shall Employee interfere with or disrupt or attempt to interfere with or disrupt any such relationship ... 4. Non-compete. During the term of Employee's employment with the Company, and for a period of two (2) years following the termination of Employee’s employment with the Company, Employee will not in any way, directly or indirectly, either (a) be employed by or serve as a consultant or adviser to, (b) serve as a principal, proprietor, partner, member, manager, officer, or director of, or (c) invest in or have any other ownership interest Timm claims that the noncompete would be illegal under recently enacted RSA 275:70, which requires that prior to or concurrent with making an offer of change in job classification or an offer of one, every employer shall provide a copy of the noncompete and non-piracy as part of the employment agreement to the employee or potential. However, the relevant events occurred before the effective date of the statute.

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in or right with respect to, any enterprise which is located in Concord, New Hampshire or within a seventy-five (75) mile radius thereof, and which is directly or indirectly engaging in a business which is competitive with Company's business. (Emphasis added). On January 2, 2013, Timm and Milliken abruptly tendered their resignations and went to work for Aurora, which is located in Wellesley, Massachusetts. According to the Schermerhorn affidavit, Aurora's offices are 63 miles from Concord, New Hampshire. Granite asserts that it established the 75 mile radius for the restriction because it wanted to be sure it included the Boston area which is a prime location for many competitors. Granite also alleges that Timm works from his home in Hopkinton, New Hampshire two days a week and that Timm's home is 7.5 miles from Granite's office in Concord. Timm asserts that the Wellesley office is actually 79 miles from Concord, but does not deny that he works out of his home in Hopkinton, New Hampshire two days a week. The parties appear to dispute whether Aurora is a competitor within the meaning of the noncompete. According to Timm's affidavit, Aurora is a wealth management firm, and Granite, by contrast, is an investment management firm. Granite’s revenues result almost entirely from investments on behalf of institutional and high net worth clients. According to Timm, Aurora provides financial advisory services while Granite provides investment management services. However, Timm admits that, at the very least, “there is some overlap in the services the two companies provide.” Timm Aff. ¶ 21. For purposes of this Order, the Court finds that Aurora does, in fact, compete with Granite. See e.g., Technical Aid Corp. v. Allen, 134 N.H. 1, 20 (1991) (holding a distinction between a company that found employment for construction laborers and one that placed primarily technical personnel was "semantic at best"). 5

Although Milliken also left Granite to work for Aurora, Granite brought no action against him. He signed a noncompete with Granite in 2009, which extended to a geographic radius of 30 miles from Concord, New Hampshire. Milliken Aff. ¶ 6. He also negotiated a carve out to the nonsolicitation provision in this agreement, making it clear that he was free to solicit and contact certain clients he had brought to the company. Id. ¶ 7. Of the fourteen clients Granite's Petition claims that Timm is working for, Milliken claims nine of them are either close personal friends or family members. Id. ¶ 19. For reasons not clear, Milliken apparently terminated his employment in April 2011 and then was rehired as an independent consultant in October 2011. The 2011 offer letter, appended to his affidavit does not contain a noncompete or nonsolicitation provision. III The public policy of the State of New Hampshire encourages free trade and discourages covenants not to compete. Concord Orthopaedics Prof’l Ass’n v. Forbes, 142 N.H. 440, 443 (1997). Such agreements are narrowly construed. Merrimack Valley Wood Prods. v. Near, 152 N.H. 192, 197 (2005). However, restrictive covenants are valid and enforceable if they are supported by consideration and if the restraint is reasonable, given the particular circumstances of the case. Id. The New Hampshire Supreme Court has specifically held that continued employment constitutes consideration for a covenant not to compete. Smith, Batchelder & Rugg v. Foster, 119 N.H. 679, 683 (1979). Here, however, Timm has provided an affidavit that asserts his noncompete was unilaterally imposed, and that it reduced his compensation. Granite does not specifically deny this averment. Granite has the burden of persuading the Court that the restrictive covenant is valid and enforceable, and it has not provided an adequate basis from which

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the Court could make such a finding. Moreover, the Court finds that the restraint imposed is not reasonable, given the particular circumstances of the case. Merrimack Valley Wood Products, 152 N.H. at 197. To determine the reasonableness of a covenant not to compete, the New Hampshire Supreme Court has applied a three-pronged test: (1) whether the restriction is greater than necessary to protect the legitimate interests of the employer; (2) whether the restriction imposes an undue hardship upon the employee; and (3) whether the restriction is injurious to the public interest. Syncom Indus., Inc. v. Wood, 155 N.H. 73, 79 (2007). This three-part test originated from the RESTATEMENT (SECOND) OF CONTRACTS section 188.3 Technical Aid, 134 N.H. at 8. The first step in determining the reasonableness of a restrictive covenant is to identify the legitimate interests of the employer and determine whether the restraint is narrowly tailored to protect those interests. Merrimack Valley, 152 N.H. at 197. The New Hampshire Supreme Court has stated: Legitimate interests of an employer that may be protected from competition include: the employer's trade secrets that have been communicated to the employee during the course of employment; confidential information communicated by the employer to the employee, but not involving trade secrets, such as information on a unique business method; an employee's special influence over the employer's customers, obtained during the course of employment; contacts developed during the employment; and the employer's development of goodwill and a positive image.

The RESTATEMENT takes the position that: (1) A promise to refrain from competition that imposes a restraint that is ancillary to an otherwise valid transaction or relationship is unreasonably in restraint of trade if (a) the restraint is greater than is needed to protect the promisee's legitimate interest, or (b) the promisee's need is outweighed by the hardship to the promisor and the likely injury to the public. RESTATEMENT (SECOND ) CONTRACTS §188(1).

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Syncom, 155 N.H. 79, (citing Nat’l Empl. Serv.Corp. v. Olsten Staffing Serv., 145 N.H. 158, 160 (2000)). Employers also have a legitimate interest in protecting information about their customers gained by employees during the course of their employment. Technical Aid, 134 N.H. at 9. The noncompete at issue in this case purports to restrict Timm from providing "investment adviser services to any client or prospective client” of the Petitioner. (Emphasis added). The New Hampshire Supreme Court has held that when the employer seeks to protect its goodwill with customers, a covenant that restricts the former employee from soliciting business from prospective customers sweeps too broadly. See Syncom,155 N.H. at 80; Concord Orthopaedics, 142 N.H. at 443 (holding that restrictive covenant prohibiting physician from competing with former practice for new patients was overbroad). However, the fact that the noncompete is overbroad is not the end of the matter in New Hampshire. A noncompetition agreement that is overbroad, may, in some circumstances, be enforced. A few courts take the strict view that an overbroad restriction is not enforceable, reasoning that courts should not rewrite contracts, and the parties in the superior negotiating position would then have incentive to exercise restraint in drafting noncompete provisions in the first place. See e.g., Poynter Invs. v. Century Builders of Piedmont, 694 S.E.2d 15, 17–18 (S.C. 2010) (quotation omitted) (“The Court of Appeals has held that it would be impermissible to extend the noncompete period contained in the agreement as a remedy for its breach, since such an extension would essentially rewrite the parties' contract, a service the courts of South Carolina do not perform.”); Paragon Techs. v. InfoSmart Techs., 718 S.E.2d 357, 358

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(Ga. App. 2011) (discussing respective bargaining power). A few jurisdictions simply delete the offending provision and enforce the rest. Ackerman v. Kimball Int’l., Inc., 652 N.E.2d 507 (Ind. 1995).4 The majority view—based upon the RESTATEMENT (SECOND) OF CONTRACTS section 184(2) —appears to be accepted by the New Hampshire Supreme Court. See Smith, Batchelder & Rugg, 119 N.H. at 685 (holding that the plaintiff was not entitled to reformation of its unreasonably broad restrictive covenant because the trial court found that it failed to meet its burden of proving good faith in the execution of the contract); Technical Aid, 134 N.H. at 17 (holding that the trial court did not err in its finding of the lack of good faith and refusal to partially enforce a restrictive covenant). To give the employer an incentive to avoid overreaching, courts adopting this approach impose a general requirement of good faith on the employer. ROTHSTEIN, CRAVER, SCHROEDER & SHOBEN, EMPLOYMENT LAW § 8.5 (West 4th ed. 2009). As the RESTATEMENT notes, “[p]ost-employment restraints are scrutinized with particular care because they are often the product of unequal bargaining power and because the employee is likely to give scant attention to the hardship he may later suffer through loss of his livelihood.” RESTATEMENT (SECOND) OF CONTRACTS § 188 cmt. g (1981). This approach has been applied in an unbroken line of New Hampshire cases. In Smith, the Court held a noncompetition agreement was overbroad where it prohibited the employee from representing any person, firm, or corporation who was a client of the employer at any time prior to the termination of the employment without the express written approval of the employer. Id. at 683. In the absence of a defined geographical

One respected commentator has suggested that New Hampshire belongs to this group. ROTHSTEIN, CRAVER, SCHROEDER AND SHOBEN, EMPLOYMENT LAW § (West 4th ed. 2009). The Court disagrees, based upon the cases discussed infra. 4

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coverage within the covenants, the two-state region of New Hampshire and Vermont was established as the area covered, which was unreasonably large. The class of clients protected by the covenant was too broad because the class included all clients served by the plaintiff during its existence regardless whether they were current clients. Id. The noncompete was presented to the defendants only after they had substantially changed their positions and after they had accepted employment with the plaintiff. The Court held that an employer may be entitled 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 agreement, but upheld the trial court's finding that the plaintiff had not made such a showing. Id. at 686. The Court noted that the defendants signed the covenants after they were hired by the plaintiff under oral employment agreements and were employed for three years before they signed the agreement containing the noncompete. Id. at 683. Similarly in Technical Aid, the Court held that a noncompete was overbroad where it prohibited the defendant from engaging in a business similar to that of the plaintiff within 100 miles of any office to which the defendant had been assigned in the preceding year, soliciting accounts and personnel, or engaging in any other competitive activities within such an area for a period of 18 months following his termination. 134 N.H. at 10. The New Hampshire Supreme Court upheld the trial court's refusal to modify the contract because the plaintiff did not establish that it acted in good faith. Id. at 18. The Court noted: This finding was evidently based on Technical Aid's presentation of the contract to Allen on his first day of employment, after Allen had given notice to his previous employer in reliance on an oral agreement with Technical Aid, and on Technical Aid's insistence that he sign the contract 10

immediately. These facts closely track those in Smith, Batchelder & Rugg, where we upheld a master's denial of a finding of good faith on the part of the employer. Id. In Merrimack Valley, the Court found that a noncompete was unreasonable where it purported to prohibit the defendant from selling materials to any customers that the plaintiffs had sold to within 12 months prior to the date of termination for a period of one year from the date of termination. 152 N.H. at 198. The Court found reformation unwarranted because the plaintiff had not acted in good faith. Id. at 200. The trial court emphasized that the defendant was not asked to sign a noncompetition agreement until after he had begun work. Id. The plaintiff argued on appeal that good faith and advance notice are not the same. Id. The Supreme Court agreed: [T]he plaintiffs did not discuss the salesman agreement or the restrictive covenants with the [defendant] during his interview, and that the defendant was not presented with the agreement until six months after he started working for the plaintiffs. Further, when the salesman agreement was finally presented to him, he was informed his ability to retain his position was contingent upon signing the agreement, which, in its first order in 1999, the trial court found he was in no position to decline. Upon reviewing the record, we find evidence to support the trial court's determination that the plaintiffs acted in bad faith in executing the salesman agreement. Id. at 200–01 (quotations omitted). In Syncom, the Court held that a noncompete was overbroad where it would have prohibited the former employees from soliciting business from any of the plaintiff company’s customers located in any territory serviced by the company while they were employed by the company. 155 N.H. at 80. Recognizing that the plaintiff company had a legitimate interest in protecting information the defendant employees may have obtained while employed by it, the Court held that “it is difficult to imagine how the 11

defendants, had they terminated their employment within several weeks of being hired, could have gained the kind of inside information contemplated by Technical Aid with regard to all of Syncom’s customers, in all of its territories.” Id. One of the defendants argued that the restrictive covenant was unenforceable because he was first shown the contract and required to sign it on the first day of work, after he had left his previous employment. Id. at 84. The trial court did not consider this issue, and the Supreme Court remanded, noting that “duress of the sort claimed by [the defendant] is the kind of bad faith that would allow the trial court to decline to reform the restrictive covenant.” Id. at 84–85. The federal courts considering overbroad restrictive covenants under New Hampshire law have been disinclined to narrow them. See e.g., Maddog Software v. Sklader, 382 F. Supp. 2d 268, 282–83 (D.N.H. 2005) (“Even if the court had the equitable discretion to enlarge a party’s contractual obligations as a penalty for its breach in this way, the court would decline to exercise its discretion to that effect here.”) The New Hampshire Supreme Court did uphold a trial court’s ruling narrowing an overbroad restrictive covenant in Concord Orthopaedics in circumstances quite different from those here. In that case, the Court upheld the narrowing of a covenant, which provided that the former employee physician could not treat any patients within a 25 mile radius of the plaintiff’s location for two years, and it provided that the physician could not treat existing Concord Orthopaedics patients, except for emergency surgery, for two years. 142 N.H. at 444 (emphasis added). However, the agreement had not been imposed on the defendant physician, who apparently had been a director of the plaintiff, and who had resigned when the compensation system was changed. Id. at 441–42. The

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Court noted while employed by Concord Orthopedics, the defendant physician “enjoyed the protections the covenant afforded him in the event that other physicians terminated their employment with [plaintiff].” Id. at 445. Consideration of these cases leads inexorably to the conclusion that, on the record here, the covenant cannot be reformed. In the first place, it is far broader than the other covenants considered by the Court in Smith, Batchelder & Rugg, Technical Aid, Merrimack Valley, and Syncom. It purports to prohibit Timm from working in an enterprise, “which is directly or indirectly engaged in a business which is competitive with [Granite’s] business within a 75 mile radius of Concord, New Hampshire.” While Granite has a legitimate interest in preventing Timm from appropriating its goodwill developed in part by his contact with its existing clients, it has no legitimate interest in preventing Timm from competing with non-clients. In light of settled New Hampshire law, such a covenant could not be supported in good faith. The substance of the noncompete constitutes a restraint of trade and is unenforceable. For these reasons, the court finds that Granite did not act in good faith. See RESTATEMENT (SECOND) OF CONTRACTS § 184(2). Second, Apart from the issue of good faith, the manner in which the noncompete was negotiated indicates it was unsupported by consideration. Granite presented the agreement to Timm five months after Granite acquired his former employer. Timm avers that when he agreed to sign the noncompete, he was assured his salary and compensation structure would remain the same throughout his employment. Timm Aff. ¶ 12. However, he avers that after he signed the agreement, Granite unilaterally changed his compensation system from salary to commission, which resulted in a loss of

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income. Id. at ¶¶ 13–14. While the New Hampshire Supreme Court has held that continued employment may constitute adequate consideration for a noncompete, Smith, Batchelder and Rugg, 119 N.H. at 683, on the facts here, the Court finds there was no consideration. Granite offered Timm continued employment on certain terms—one of which was that Timm signed the noncompete—but then Granite breached the agreement when— after Timm signed the noncompete—Granite altered his compensation system. Granite does not dispute any of Timm’s allegations. An employer who seeks equitable relief in reformation of an overly broad covenant bears the burden of showing his exercise of good faith. Smith, Batchelder & Rugg, 119 N.H. at 682. An employer may not merely assert that it did not act in bad faith “for the absence of bad faith does not equal good faith for the purpose of this inquiry.” Maddog Software, 362 F. Supp. 2d at 283. Granite has not carried this burden. Therefore, based upon the offers of proof presented, the covenant is overbroad and cannot be reformed. Since this finding disposes of Timm’s request for preliminary injunctive relief, and because the parties have agreed to arbitrate the merits of this dispute, the Court need not address the other claims Granite has made. It follows that the Motion for a Preliminary Injunction must be DENIED.

SO ORDERED.

3/28/13 __________________ DATE

s/Richard B. McNamara _________________________ Richard B. McNamara, Presiding Justice 14