Court Limits Preliminary Injunction in Non-Compete Case Based on Indefinite Contractual Term - EXFO America, Inc. v. Herman

800px-Netwhawk_Headqtrs_Oulu_2007_03_18.JPGA communications company sought to enjoin a former employee from working for a competitor or divulging any trade secrets, pursuant to a non-competition agreement signed by the parties. The employee contended that the agreement was unenforceable because it failed to define a key term. The U.S. District Court for the Eastern District of Texas, in EXFO America, Inc. v. Herman, granted a limited preliminary injunction against the employee, finding the non-competition agreement to be indefinite, but still enforceable.

The plaintiff, EXFO America, Inc., manufactures and sells products under the brand name NetHawk. The company formerly employed the defendant, Dan Herman, under a contract that included a non-competition agreement. The court’s opinion does not describe the circumstances of Herman’s departure from EXFO, but Herman subsequently took a job with Spirent Communications, a competitor of EXFO. EXFO filed a complaint in federal court in April 2012 and requested a preliminary injunction prohibiting Herman from working for Spirent for a six-month period, and prohibiting him from revealing any trade secrets or other confidential information belonging to EXFO for at least five years, beginning on his termination date.

The non-competition agreement between EXFO and Herman purported to prohibit Herman, upon the termination of his employment with EXFO, from working or participating in any way in the “Business” for a period of six months anywhere within the United States. Where a definition of the term “Business” would normally appear, however, the clause merely contained the form language “{describe products or attach a list as an exhibit}.” Herman argued to the court that this lack of definition of a clearly essential term rendered the non-competition agreement unenforceable.

The court, in rendering its order, considered two possible results of an undefined contract term, “indefiniteness” and “ambiguity.” Ambiguity, the court said, results when all of part of a contract may reasonably have more than one meaning. Indefiniteness results when a contract does not clearly identify a party’s obligations. The court found that the meaning of “Business” in the non-competition agreement was indefinite.

If a court cannot determine a party’s obligations under a contract because of indefinite terms, according to the court, Texas law says the contract is unenforceable. If a court can draw a reasonable inference, based on the common meaning of words, as to the intended meaning of an indefinite term, it can still make a ruling on a contract. It may not, however, re-write provisions of a contract or expand a contract’s scope.

Based on plain meanings of words and the parties’ own history, the court concluded that “Business” referred to products in existence at the time Herman signed the non-compete agreement. It therefore ruled that the non-compete agreement was enforceable, but only as to certain aspects of EXFO’s business. The court also found that EXFO had met the remaining requirements for a preliminary injunction: likelihood of eventual success on the merits, and irreparable harm in the absence of injunctive relief. It granted a preliminary injunction that prohibited Herman from competing with products that existed when he joined the company. Interestingly, the court never addressed the non-compete agreement’s nationwide geographic scope.

The business litigation attorneys at DiTommaso Lubin represent business owners and professionals regarding non-competition agreements and other claims throughout the Chicagoland area, including Cook, DuPage, Lake, Kane, McHenry and Will Counties; and in the Mid-West region, including Indiana, Wisconsin and Iowa. To schedule a confidential consultation with one of our attorneys, please contact us online, at (630) 333-0000, or at (877) 990-4990.

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Photo credit: 'Netwhawk Headqtrs Oulu 2007 03 18' by —Estormiz 15:15, 21 April 2007 (UTC) (Own work) [Public domain], via Wikimedia Commons