ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Tuesday, August 2, 2016

Covenants Not to Compete: Be Careful Not to Get Greedy

One of the things I caution my students about is the danger of being greedy in a covenant not to compete. If you are in a jurisdiction that enforces such covenants, you still must be aware that courts frequently subject them to close examination. It might be true that in many cases, the employee subject to the over-restrictive covenant might simply accept it without challenging it, but a recent case out of the Fourth Circuit, RLM Communications, Inc. v. Tuschen, No. 14-2351 (you can listen to the case's oral argument here), serves as a reminder that a court can knock a covenant not to compete out of a contract and leave no protection at all in its place.

Tuschen was an employee of RLM who had the following non-compete in her employment contract:

While I, the Employee, am employed by Employer, and for 1 years/months afterward, I will not directly or indirectly participate in a business that is similar to a business now or later operated by Employer in the same geographical area. This includes participating in my own business or as a co-owner, director, officer, consultant, independent contractor, employee, or agent of another business.

Tuschen eventually resigned from RLM and went to work for a competitor, eScience, and RLM alleged that Tuschen had thereby breached her non-compete.

The Fourth Circuit, however, found that the non-compete was overbroad and therefore unenforceable. First it noted that it prohibited direct and indirect participation, which the court found inherently problematic, because it theoretically prevented Tuschen from, say, acting as eScience's realtor, landscaper, or caterer. Nor was the only problem with the covenant its use of the word "indirectly," which RLM argued could just be struck from the clause, leaving the rest of the clause enforceable and in place. The breadth of prohibition on Tuschen's actions, including to businesses that might be operated by RLM in the future, wasn't justified by RLM's business concerns. The non-compete's focus on the identity of the new employer, rather than on Tuschen's behavior in the new employment, was misplaced: RLM should have been more concerned about the risk that Tuschen would use secret RLM knowledge detrimentally, rather than concerned about who she was working for (directly or indirectly).

An interesting case, with some interesting things to say about non-competes (and also trade secret misappropriation). When you read the case, it becomes clear that the court thought Tuschen was in many ways a good employee for RLM who was not engaging in sketchy behavior. In fact, in the court's characterization, one of the things RLM complains about was that Tuschen took steps to make the transition within RLM for her replacement easier and more streamlined without seeking permission first. This whole case stands as a warning not to be overly aggressive with enforcement in situations where a court will find it inappropriate.  

https://lawprofessors.typepad.com/contractsprof_blog/2016/08/covenants-not-to-compete-be-careful-not-to-get-greedy.html

Commentary, Labor Contracts, Recent Cases, True Contracts | Permalink

Comments

Thankfully, it seems that courts are beginning to better realize the need to prevent companies from strong-arming employees quite so much.

Posted by: Myanna Dellinger | Aug 2, 2016 8:56:17 PM

Reminds me of the overbroad Amy's Baking Co. employment contract where the head chef, waiter or even dishwasher couldn't go work for a local competitor in any capacity. http://www.eater.com/2013/6/28/6411889/amys-baking-co-makes-employees-sign-a-crazy-contract

Posted by: Christopher Ng | Aug 25, 2016 2:37:13 AM

Post a comment

If you do not complete your comment within 15 minutes, it will be lost. For longer comments, you may want to draft them in Word or another program and then copy them into this comment box.