Does this sound familiar: employee disregards a non-compete and joins a competitor; former company calls foul and initiates a lawsuit; parties fight it out, but by the time litigation has run its course, the non-compete period in the underlying contract has expired. The dispute is moot, right? Not necessarily according to the Ninth Circuit in Ocean Beauty Seafoods v. Pacific Seafood Acquisition Company. There, the Court applied the doctrine of equitable extension to tack on a non-compete period to an agreement after the original period had run.
Extension of Non-Compete Warranted
The Ninth Circuit inferred from Oregon law and equitable principles espoused by courts in a variety of jurisdictions that it had inherent equitable power to extend the term of the non-compete covenant in the agreement at issue. Specifically, the court “conclude[d] that the circumstances of this case warrant an equitable extension. A short noncompete term inures to the former employee’s benefit; the employee should not then be allowed to avoid the term altogether through dilatory tactics, or even just by taking advantage of the delays incident to litigation.” Here, Pacific Seafood had acted promptly to enforce its rights under the non-compete agreement and the former employee should not benefit from the delay imposed by the litigation process even if the former employee was not responsible for that delay.
Contractual Tolling Provisions Can Help
While this case has limited precedential value (it was an unpublished decision), it does signal to employers that all hope is not lost when the clock expires while trying to enforce a non-compete agreement, especially where the employer acted quickly to enforce its rights. It’s an important argument employers should consider making as necessary during the course of non-compete litigation that moves beyond the TRO/PI phase.
This case also serves as an excellent reminder that employers should consider adding a non-compete period tolling provision to their agreements. This provision converts the equitable extension principle discussed by the court into a binding contractual condition and allows employers to enjoy the full benefit of the non-compete period. Many courts readily enforce them; others on a more limited basis, while some refuse altogether (and have even rendered a non-compete agreement unenforceable because it included a tolling provision). Thus, before including one, be sure to check which jurisdiction’s law will apply. Typically, the language in the tolling provision will provide for the extension of the non-compete period by a period of time that equals the time the employee was in violation.