In unrelated decisions, two federal courts recently refused to enforce non-compete covenants in employment agreements that lack reasonable geographic limits.
Status of the cases. In one of the two lawsuits, the employment agreement included a Tennessee choice of law provision. Louisiana courts are more protective of employees than courts in Tennessee. Since the parties had contacts with both states, naturally the ex-employee contended that Louisiana law applied and the former employer disagreed. A Louisiana district court judge sided with the ex-employee, held that the non-compete violated Louisiana law, and granted summary judgment to the ex-employee. Bell v. L.P. Brown Co., Civ. Ac. No. 14-2772 (W.D. La., Feb. 2, 2015).
In the other case, an Arkansas district court judge ruled that the non-compete provision in the parties’ employment agreement violated Arkansas law. The former employer sued to enforce the non-compete, but the Eighth Circuit Court of Appeals affirmed the district court’s order dismissing the lawsuit. NanoMech, Inc. v. Suresh, No. 13-3671 (8th Cir. Feb. 6, 2015).
The covenants. Both companies’ covenants purported to be applicable during the employment period and for two years after termination. The temporal limits were not significant issues in either case.
- L.P. Brown Co.’s covenant. It prohibited, “within any U.S. cotton market,” (a) competing, directly or indirectly with the company (which was in the cotton and fiber industry), or (b) “becom[ing] employed by or perform[ing] services in any capacity for” any of its competitors.
- NanoMech’s covenant. This corporation “researches and develops nanotechnologies.” Its non-compete contained the employee’s commitment not to “be employed by, or consult in any business which competes with” NanoMech.
L.P. Brown Co.’s choice of law provision. Brown Co.’s principal place of business is in Memphis. Bell, a salesman, lives in Louisiana. He delivered the signed employment agreement to Brown Co. in Memphis, attended several sales meetings there, and picked up his company car and computer in Tennessee. His company-issued cell phone was shipped to him from Memphis. However, he worked out of his home, and his business cards showed his Louisiana address. He was Brown Co.’s only employee in Louisiana. His territory included parts of Louisiana, Tennessee, and two other states.
The court observed that Tennessee “generally upholds what it deems to be reasonable non-competition agreements, viewing [them] as promoting stable business and employment relationships.” By contrast, “Louisiana has long had a strong public policy in protecting its employees from restrictions on the common law right to work.” Analogizing to a Louisiana judicial ruling relating to a contractual forum selection clause in an employment agreement, the court inBrown Co. held that Tennessee law would apply to Bell only if, after the event giving rise to the litigation, he “expressly, knowingly, and voluntarily agreed to and ratified” the choice of law provision.
Contemporaneous with his delivery to Brown Co. of his resignation, Bell asked the company twice to release him from the non-compete (the company refused both requests). In addition, he executed an acknowledgement confirming that he had been reminded of the non-compete. The court held, however, that these acts failed to meet the Louisiana standard for application of Tennessee law because the parties did not discuss explicitly, and Bell did not unequivocally consent to, the choice of law provision.
Nano-Mech’s covenant. The Court of Appeals noted that under Arkansas law, which admittedly applied to the covenant, restraints in employment agreements are enforced only if they are “reasonably necessary to secure the interest of the” protected party and are “not so broad as to be injurious to the public interest.” NanoMech insisted that Suresh had had extensive access to the company’s trade secrets, that it competes with nanotechnology companies around the world, and that there was a risk she would disclose the confidential information if she worked for a NanoMech competitor. The appellate tribunal concluded, however, that an Arkansas court would not enforce a non-compete that contained neither a geographic nor a customer-specific restriction.
Takeaways. These opinions illustrate the importance of drafting employment agreement restrictive covenants that will be enforceable under whatever law is applicable. There is considerable variation among different states’ views regarding such provisions. So, a company with operations in a number of jurisdictions should tailor the wording to fit the locale. As these cases demonstrate, “one-size-fits-all” covenants may not be enforceable in every state where litigation concerning them might be filed. Seyfarth Shaw can provide state-by-state guidance regarding the language to use in employment agreements to maximize the likelihood that non-compete, non-solicitation and confidentiality provisions will be enforced.