In most jurisdictions, including Texas, to be enforceable a noncompete agreement must be reasonable in the scope of its geographic limitation and in the scope of activity restrained. Much litigation has arisen concerning whether specific geographic and/or activity limitations were reasonable under certain circumstances. But what if the noncompete agreement is silent?
A recent 8th Circuit decision, applying Arkansas law, upheld judgment on the pleadings against an employer whose noncompete agreement failed to set forth its geographic scope or the scope of activities proscribed. The noncompete agreement provided:
COVENANT NOT TO COMPETE: The Employee agrees that during the term of this Agreement, and for two (2) years following termination of this Agreement by the Company, with or without cause; or, for a period of two (2) years following a termination of this Agreement by the Employee, the Employee will not directly or indirectly enter into, be employed by or consult in any business which competes with the Company
The 8th Circuit agreed with the district court that this noncompete agreement was overbroad and unenforceable. The Court concluded that “a blanket prohibition on [the employee]’s ability to seek employment of any kind with an employer in the nanotechnology industry anywhere in the world is unreasonable and thus unenforceable.” Moreover, it made this determination on the employee’s motion for judgment on the pleadings, before any discovery had been taken by either side.
In its opinion, the appellate court was troubled that the noncompete agreement included no express limitation whatsoever on either the geographic scope or the type of activities restricted. Even recognizing the possibility that a worldwide geographic scope could be reasonable in certain contexts (here, the employer argued it engages in global business and competes with nanotechnology companies around the world), this noncompete on its face still fails because it “prohibits [the employee] from working in any capacity for any business that competes with the company.”
Employers should take the time on the front end to consider their needs with respect to trade secrets and employee competition, and draft noncompete agreements that reflect those needs. Doing so, with language in the noncompete agreement specifying the activities restrained (e.g., soliciting clients, using confidential information or trade secrets, etc.) and the geographic scope, puts employers in a far better position to judicially enforce the agreements and protect their legitimate interests. Overreaching in either respect is likely to fail.
And employees subject to such agreements should hone in on the actual language used and compare that to the employer’s legitimate needs. There is certainly ample room to maneuver with respect to arguing what constitutes an unreasonable restriction.
NanoMech, Inc. v. Suresh, No. 13-3671 (8th Cir. Feb. 6, 2015)