BLOGS: Womble Carlyle Non-Compete and Restrictive Covenants Blog
Tuesday, April 6, 2010, 3:34 PM
Wednesday, March 24, 2010, 11:20 PM
Georgia House Passes Proposed Constitutional Amendment On Non-Compete Agreements
Thursday, February 18, 2010, 2:17 PM
Tuesday, October 27, 2009, 9:48 AM
Friday, October 23, 2009, 9:29 AM
But the part of the First Circuit's opinion that interested us most was an argument posed by the former employee and his new employer: if a covenant not to compete is deemed too broad to be enforced and is judically modified by the trial court to make it enforceable, can the employee be liable for breach of the original covenant BEFORE the covenant is judicially reformed or fixed? Employee was essentially asking: "how can I be liable in damages for breach of a promise the court says can't be enforced unless it is modified?" The employee acknowledged that he could be liable AFTER the trial court fixed the covenant - but he vehemently argued that he couldn't be liable for breach BEFORE the trial court fixed the covenant (which just happened to be when he engaged in all his breaching behavior).
The trial court found that he COULD be liable for his conduct that occurred before the judicial fixing and the First Circuit agreed. Here is their reasoning:
Defendants’ contention does not withstand analysis. Their logic would give the promisor in a non-competition agreement one free breach, requiring a prior judicial order before the provision could be said to have been violated. Such a proposition, the validity of which is without authority, would eviscerate all but the most narrowly tailored non-competition agreements, since a
modification of any term of the provision would justify a breach of all its terms. Further, because most breaching employees gain the full benefit of the breach the first time they compete with their former employer, a second breach after judicial warning would in most cases be cumulative. Also, once a court restricts the scope of the non-competition agreement, the breaching party is being held to a more narrowly circumscribed agreement than the one he signed, and the more restrictive terms of the agreement remain as effective
as the day they were agreed to.
We are not particularly persuaded by this logic and we think the Court had to craft a rule here so that this crafty litigant wouldn't get away with his plan to breach that covenant not to compete. The Court is essentially saying: "if you weren't liable for breach in the BEFORE MODIFICATION period, you'd be getting a free pass and we can't have that" and also "you were always obligated under the geographically reasonable restriction that the trial court modified the agreement to provide, you just weren't obligated under the geographically unreasonable parts."
There might be law review articles out there discussing this argument - you're bound by a geographic scope that is reasonable even though your's is unreasonable and if you run afoul of that reasonable provision, you're in trouble - and we'll keep an eye out for them. This is an interesting issue.
Tuesday, September 22, 2009, 10:31 AM
Todd Sullivan Interviewed in Technology Transfer Publication
The article focuses on intellectual property disputes between research universities and inventors, and how proactive measures can prevent such disputes from becoming major headaches. The article was prompted in large part by a recent court battle between the Mayo Clinic and former employee Dr. Peter Elkin, who developed a software program for bioinformatics. The two sides now are battle over who controls the rights and revenues from the software.
Sullivan is quoted extensively on how companies and inventors can prevent such disputes. "Disputes essentially arise like a phoenix from the ashes of poorly drafted agreements," Sullivan tells Technology Transfer Tactics.
Todd Sullivan is a trade secrets litigation attorney in Womble Carlyle's Raleigh office. He is a co-author of the Womble Carlyle Trade Secrets Blog.
Wednesday, September 9, 2009, 11:46 PM
North Carolina Court of Appeals Finds Restricted Stock To Be Insufficient Consideration
In the case of MSC Industrial Direct Co. v. Steele, the employee worked for the company for 12 years before he was asked to sign an agreement with a non-compete provision. In consideration for the agreement, the employee was offered 85 restricted shares of the company’s stock. (Remember, in North Carolina, continued employment is insufficient consideration to support a non-compete agreement entered into after the employment relationship has begun.) The first 50% of the stock would not vest for three years, and the remaining 50% would vest over the two years following that. If the employee was terminated at any time before vesting, the shares were forfeited. In addition, before the shares vested, the employee had none of the attendant rights usually associated with stock, such as the ability to transfer the shares, receive dividends, or to vote the shares.
Under these facts, the Court of Appeals held that the award of shares was illusory consideration, and ruled that the non-compete agreement was not enforceable. The court reasoned that the company could divest the employee of the shares by terminating him “only moments after signing" the agreement. On that basis, the court found the restricted shares were insufficient consideration to support a non-compete.
As a final point, the Court of Appeals also noted that since the employee had worked for the company for 12 years, the company could not rely on the fact that it continued to provide him with access to confidential information as consideration to support the agreement. The court concluded that since he already had access to the information prior to the agreement, the company was not providing anything new of value to the employee.
This case serves as a good reminder that where it is critical to bind current employees to a non-compete agreement, the better course is to tie the agreement to an increase in compensation, a promotion, a signing bonus, or some other type of consideration that is of immediate benefit to the employee.