While conceding the case was a close one, the U.S. Court of Appeals for the First Circuit could not say that the court below abused its discretion in denying an employer a preliminary injunction to prohibit its ex-employee from working for its competitor. ANSYS, Inc. v. Computational Dynamics N. America, Ltd., Case No. 09-2634 (1st Cir. Feb. 12, 2010) (Lynch, J.).
Dr. Doru Caraeni’s employment agreement with ANSYS included the following “poorly drafted” clause: “I agree that for a period of one (1) year following termination of my employment with [ANSYS], I will not become an employee … or in any way engage in or contribute my knowledge to a competitor of [ANSYS].” Shortly after leaving ANSYS, Dr. Caraeni joined Computational Dynamics North America, Ltd. (CDNA), with which ANSYS shares 80 percent of the market for a type of simulation software.
ANSYS sued Dr. Caraeni and CDNA, seeking a preliminary injunction to enforce the non-competition clause. After the district court denied the preliminary injunction, ANSYS lodged an expedited appeal. The First Circuit upheld the district court’s denial of preliminary injunction, explaining that in order to demonstrate a likelihood of success on the merits, a factor to consider when deciding motions for preliminary injunction, ANSYS had argued that Dr. Caraeni’s subsequent employment was a breach of contract and that this breach was sufficient to demonstrate irreparable harm (i.e.,, another preliminary injunction factor that must be considered).
However, the First Circuit explained that these assertions presuppose that the clause is enforceable. The court sidestepped the argument that requiring ANSYS to show more than a breach of the clause would “effectively eliminate” the non-competition clause from the contract, forcing ANSYS to resort solely to common law trade secret protections. Instead, the court focused on New Hampshire’s general public policy disfavoring covenants not to compete. Although it identified the test for measuring the enforceability of such provisions, the court noted the lack of guidance in the law to decide this particular case. Without any guidance, the court was unable to reverse the denial of the motion below and could not find that ANSYS clearly demonstrated a likelihood of success as to breach of contract.
As to irreparable injury, the court also could not set aside the district court’s finding that Dr. Caraeni was unlikely to use ANSYS’s confidential information, presuming he acquired any, in his new employment. There was no clear error in the lower court’s finding credible CDNA’s general manager’s statements that CDNA prevents its employees, including Dr. Caraeni, from using confidential and trade secret information potentially acquired elsewhere.
Practice Note: To ensure the enforceability of noncompetition and confidentiality clauses in employment contracts, employers must ensure that their provisions are consistent with the relevant state public policy considerations in terms of duration, scope, etc.