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Topic: "Non-compete clause" | Main

Non-compete provision was overbroad and unenforceable (6-1)
November 07, 2011 by Ross Runkel at LawMemo

Just a reminder to be careful when drafting a non-compete agreement.

If a court concludes the agreement is "overbroad," the agreement may be unenforceable. Sometimes a court will narrow it down (wow, judicial re-drafting), sometimes not.

In Home Paramount v. Shaffer (Virginia 11/04/2011) the Virginia Supreme Court found that a non-compete agreement was overbroad, refused to narrow it, and refused to enforce it.

Shaffer's former employer sued him for violation of the non-compete provision of his employment agreement. The trial court granted Shaffer's plea in bar asserting the non-compete provision was overbroad and unenforceable. The Virginia Supreme Court affirmed.

The non-compete provision provided in part:

The Employee will not engage directly or indirectly or concern himself/herself in any manner whatsoever in the carrying on or conducting the business of exterminating, pest control, termite control and/or fumigation services as an owner, agent, servant, representative, or employee, and/or as a member of a partnership and/or as an officer, director or stockholder of any corporation, or in any manner whatsoever, in any city, cities, county or counties in the state(s) in which the Employee works and/or in which the Employee was assigned during the two (2) years next preceding the termination of the Employment Agreement and for a period of two (2) years from and after the date upon which he/she shall cease for any reason whatsoever to be an employee of [Home Paramount].

The court concluded that the clear overbreadth of the function in this case could not be saved by narrow tailoring of geographic scope and duration.

The DISSENT argued that the court had approved this language in 1989 involving the very same company; adherence to the doctrine of stare decisis demanded reversal.

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Restrictive covenants, Canada style
January 24, 2009 by Ross Runkel at LawMemo

Yesterday the Supreme Court of Canada decided a restrictive covenant case involving an employer and a former employee.

The covenant restricted the former employee from becoming employed in the business of insurance brokerage within the “Metropolitan City of Vancouver”.

This was both ambiguous and geographically unreasonable, so the court had to determine what to do about that: (1) refuse to enforce, (2) re-write it to be reasonable [they call it "notional severance"], or (3) apply the "blue pencil" doctrine. The court refused to enforce the covenant. Shafron v. KRG Insurance Brokers (Western) Inc (Supreme Court of Canada 01/23/2009.

Here is some of the court's analysis:

Notional severance, reading down a contractual provision so as to make it legal and enforceable, is not an appropriate mechanism to cure a defective restrictive covenant. Notional severance may be available where an objective bright line test exists to distinguish what is legal from what is not. There is no objective bright-line test for reasonableness and applying notional severance simply amounts to a court rewriting a covenant in a manner that it subjectively considers reasonable. Employers should not be invited to draft overly broad restrictive covenants with the prospect that the court will sever the unreasonable parts or read down the covenant to what the courts consider reasonable. This would change the risks assumed by the parties and inappropriately increase the risk that an employee will be forced to abide by an unreasonable covenant. The Court of Appeal should not have attempted to resolve the ambiguity in this case by reading down the restrictive covenant according to its own notion of reasonableness and what it thought that the parties might have intended.

Blue-pencil severance, removing part of a contractual provision, may be resorted to sparingly and only in cases where the part being removed is clearly severable, trivial and not part of the main purport of the restrictive covenant. Blue-pencil severance cannot be applied to remove the word “Metropolitan” from the restrictive covenant in this case because it is not merely a trivial part of the covenant agreed to by the parties. There is no evidence that the parties unquestioningly would have agreed to remove the word “Metropolitan” without varying any other terms of the contract or otherwise changing the bargain.

I learned about this from Michael Fitzgibbon's Thoughts from a Management Lawyer - "Blue Pencil" and Restrictive Covenants.

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Non-competition agreements for in-house counsel
December 19, 2005 by Ross Runkel at LawMemo

Employees often agree that they won't compete with the employer after the termination of employment. But is this ethical for lawyers? Specifically, for in-house counsel?

According to an article in today's New Jersey Law Journal, the New Jersey Supreme Court's Advisory Committee on Professional Ethics is investigating whether it is ethical for lawyers employed by BASF Corporation to sign a non-competition agreement that the company requires of all employees.

The answer is, of course, a no-brainer. It is unethical under the provisions of the code of ethics that has been adopted in practically every state.

Rule of Professional Conduct 5.6:

"A lawyer shall not participate in offering or making: (a) a partnership or employment agreement that restricts the rights of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement."

There is always room for debate about what the law should be in this area. Employees in other professions can ethically make such agreements, and lawyers seem to be in a class by themselves.

But there can be no legitimate debate that Rule 5.6 forbids lawyers to make such agreements.

So, according to the article, BASF has backed off pending the investigation.

I suppose the next step will be an attempt to change the law for in-house counsel. It might also be time for the ethical experts to re-examine whether it really makes sense as a general matter for lawyers to be absolutely barred from agreeing not to compete against their former employers and partners.

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Physicians' non-compete clause OK in New Jersey
April 05, 2005 by Ross Runkel at LawMemo

Although lawyers' non-compete agreements are per se unreasonable and unenforceable, the same arrangements for physicians are OK. "Disfavored," said the New Jersey top court, but still enforceable.

The Community Hospital Group v. More (New Jersey 04/05/2005).

The court applied a fairly typical analysis to the reasonableness of the restrictive covenants, but with a heavy reliance on protecting the public interest.

The court found that it was reasonable for the covenant to prohibit the practice of neurosurgery for a period of two years. However, the court wanted the geographic area narrowed to no more than 13 miles. Most notably, the court found that there was a shortage of neurosurgeons in one emergency room, so in order to protect the public's interest the covenant could not include that emergency room.

My view: Nice job of balancing interests. Poor job of explaining why such restrictions are per se illegal for lawyers and not for physicians.

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