Other than to protect good will or trade secrets, a non-compete provision intended to prevent a former employee from acquiring an interest in, or becoming an officer or director of, a competitor of the ex-employer may not be enforceable.

Summary of the case:  A stand-alone agreement executed by employee-participants vested in their employer’s profit-sharing plan contained an unusual non-compete provision. It prohibited participants, for five years after termination, from owning or becoming an official of a “similar” trade or business located within 25 miles of the employer’s facility in Columbus, Nebraska. A participant resigned his employment and sought from a Nebraska state court a declaration that the provision was an unreasonable restraint. The trial court entered the requested judgment order, and the employer appealed. A few weeks ago, the Nebraska Supreme Court affirmed. Gaver v. Schneider’s O.K. Tire Co., 289 Neb. 491 (Nov. 14, 2014).

The covenant. The express purpose of the non-compete provision was to assure that profit-sharing plan participants did not use plan benefits “to the detriment of the Employer.” Participants were permitted to become mere employees of a competitor but not to be officers, directors, or owners of a financial interest. 

The decision below. The trial court reasoned that the provision would prevent ex-employees from engaging in any form of competition. In that court’s view, the covenant provided greater protection to the employer than was necessary.

The decision on appeal. The appellate tribunal affirmed. It held that while an employer may legitimately seek to preserve its good will and confidential information, that was not the goal of this restrictive covenant. Instead, it was intended to limit the use employees could make of their own funds, earned and already received. 

Takeaways. This decision conceivably could have broad implications for future lawsuits involving non-competes and profit-sharing plans at least in Nebraska, but more likely it will be limited to its peculiar facts. For example, the appellate tribunal declined to decide whether the employer could have enforced the non-compete provision if it had been included in the profit-sharing agreement rather than in a stand-alone document. Nor did that court state whether what it called the “time and space” of the non-compete, five years and 25 miles from the employer’s place of business, were valid (however, the court did include a citation to a Nebraska deferred compensation case holding that a “4- to 5-year time restriction contained in [a] forfeiture-for-competition clause” was unreasonably long). Finally, there was no ruling as to the meaning, much less the legality, of the prohibition’s purported scope (restrictions applicable to businesses “similar to” that of the employer).