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Court Finds Non-Compete Provision Unenforceable Based on Wage/Hour Violations

In SpaceAge Consulting Corp. v. Vizconde, No. L-1196-14, 2017 WL 4183281 (Sup. Ct. App. Div. N.J. Sept. 22, 2017), a New Jersey appellate court concluded that the non-compete provision of the contract the company sought to enforce was void and unenforceable because the company violated wage/hour regulations with respect to the employee against whom enforcement was sought.

SpaceAge Consulting Corp. (“SpaceAge”) is a software services company that trains employees and assigns them to clients to provide software development, application integration, and technology training services. In 2003, the United States Department of Labor (“DOL”) commenced an investigation of SpaceAge for alleged violations of regulations covering employees with H-1B visas. To this end, SpaceAge did not compensate H-1B employees at the commencement of the employment relationship when those employees were in training. In March 2006, DOL issued a letter finding that SpaceAge willfully violated applicable regulations by failing to pay its H-1B employees prevailing wages during periods in which employees were training.

During the DOL investigation, in January 2004, Maria Vizconde, who resided in the Philippines at the time, applied for a job with SpaceAge as an information technology professional. SpaceAge ultimately offered Vizconde a job in June 2004 and entered into a “train-to-hire” employment agreement with Vizconde that provided she would be hired for a three-year term under an H-1B visa and that her employment would begin “when I begin work at a project on [a] SpaceAge site or at one of its client sites and it does not include any training period.” The employment agreement also included a non-compete provision that prohibited Vizconde “from working for a client for whom she rendered services during the contract term and for one year after employment terminated.” The contract further provided that, if Vizconde ended her employment before the end of the term or she otherwise breached the agreement, she would pay SpaceAge all training and recruitment fees as well as other damages and litigation costs.

In June 2006, Vizconde entered into a new “train-to-hire” employment agreement with SpaceAge’s “sister company,” SpaceLabs Software Services, Inc. (“SpaceLabs”). The new agreement had a five-year term, with a similar non-compete provision and the repayment of training costs and other losses in the event of a breach. The agreement also stated it “superseded all proposals, oral or written, [and] all other communications between them related [to the agreement].”

In June 2007, SpaceAge entered into a contract with Computer Generated Solutions, Inc. (“CGS”) to provide information technology services to CGS. Vizconde was assigned to CGS and CGS in turn assigned Vizconde to work as a computer programmer at Home Box Office, Inc. (“HBO”). The contract between CGS and HBO provided that HBO would not hire Vizconde without CGS’s consent within the first year, but HBO could hire Vizconde after the one-year period expired. In November, HBO inquired into the possibility of hiring Vizconde, but, in light of the contract provision prohibiting such a hire, it did not pursue the matter further.

At the end of April 2008, Surender Malhan, owner of SpaceAge and SpaceLabs, learned that CGS’s contract for Vizconde to work at HBO would end on May 5, 2008. He then told Vizconde that her employment would be “transferred from SpaceLabs to SpaceAge.” Malhan later confirmed this transfer in an email, but Vizconde declined the offer of employment with SpaceAge.

HBO sought to verify that Vizconde’s employment with SpaceLabs ended and Vizconde’s attorney confirmed that fact. Vizconde’s attorney also gave his/her opinion that Vizconde’s employment contract did not preclude her from pursuing employment with HBO at that time. HBO then hired Vizconde and SpaceAge later sued Vizconde for breach of contract, including the non-compete provision, and unjust enrichment. The lawsuit also included HBO as a defendant allegedly for tortious interference. The trial court granted Vizconde’s and HBO’s motion to dismiss. SpaceAge filed a second amended complaint, which Vizconde had dismissed in response to a motion for summary judgment. SpaceAge filed a motion for reconsideration, which was denied. SpaceAge then filed an appeal.

The appellate court affirmed the decision of the trial court. The appellate court noted that federal law requires an employer to pay a non-immigrant worker with an H-1B visa starting when the worker commences employment, which includes time in training. The court cited 20 C.F.R. § 655.731(c)(6)(i), which provides in relevant part that an H-1B worker commences employment “when he/she first makes him/herself available for work or otherwise comes under the control of the employer, such as by waiting for an assignment, reporting for orientation or training, going to an interview or meeting with a customer, or studying for a licensing examination, and includes all activities thereafter.” The court then found that Vizconde was employed as of February 1, 2006, but was unpaid through June 18, 2006 during her period of training. The court also noted that Vizconde was not paid wages at the commencement of her contract with SpaceLabs either. Under New Jersey law, courts “refuse to enforce contracts that are unconscionable or violate public policy.” The court ultimately held that, “[b]ecause both agreements violated federal law, they were void and unenforceable ab initio” and, thus, “summary judgment dismissing all claims against Vizconde was properly granted.”

The court’s decision in SpaceAge Consulting is significant because it is an important reminder for companies seeking to enforce non-compete or non-solicitation agreements that such agreements are susceptible to non-enforcement if the company is not in compliance with laws applicable to other aspects of the employment relationship. Indeed, it is noteworthy that the court in SpaceAge Consulting did not even examine the specific language in the non-compete provision or whether SpaceAge or SpaceLabs even sought to protect a legitimate, protectable, business interest. Rather, it solely considered violations of applicable law that governed other aspects of the employment relationship. Thus, before seeking to enforce a non-compete or non-solicitation agreement, companies should evaluate whether the employee against whom enforcement is sought may be able to defend an action based on other violations of applicable law.

If you have any questions regarding this post, please contact Stephen B. Stern at or (410) 260-6585 or Amitis Darabnia at or (410) 260-6592.

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