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8th Circuit Upholds Trial Court Finding that Non-Compete Agreement is too Broad and thus Enforceable due to Lack of Geographic Region and no Definition as to Capacity Employee is Barred From Competing

 

The Federal Court of Appeals for 8th Circuit —the appeals court for federal district courts in South Dakota, Minnesota, Missouri, Nebraska, North Dakota,  Iowa, and Arkansas —refused to enforce a corporate employer’s non-compete  contract.

The Parties’ Dispute.

The case arose out of the following facts.NanoMech, a Delaware corporation with its principal place of business in Arkansas, researches and develops nanotechnologies. The company specializes in creating nanotechnology products for nanomachining, manufacturing, lubrication, energy, biomedical coatings, and strategic military applications.

NanoMech hired Arunya Suresh in March of 2010. NanoMech required Suresh to sign a confidentiality/nondisclosure agreement before hiring her.  In that agreement she agreed to protect NanoMech’s interest in any information that was disclosed to her for the purpose of evaluating a potential employment relationship. As a condition of her employment, she later signed an employment agreement which she agreed would be governed by Arkansas law.

The contract’s non-compete clause stated:

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.

During her employment with NanoMech, Suresh participated in projects involving use of nanointegrated materials and in manufacturing processes for nanoparticle-based products. She researched and helped develop one of NanoMech’s multi-component lubrication products called nGlide.

On May 2, 2012, Suresh gave notice stating that she intended to pursue her doctorate full-time. Later, in March 2013, NanoMech discovered that Suresh had in fact taken a job as an application chemist with BASF, a worldwide chemical company that develops engine lubricants.

NanoMech filed suit.  It claimed that Suresh had breached both her nondisclosure agreement and the non-compete agreeement by going to work for one of its direct competitors who sold products in direct competition with nGlide and other products.  NanoMech sought an injunction and restraining order for the remainder of the two year non-compete along with an order preventing disclosure of its proprietary information.  It also claimed money damages.

Suresh filed a motion to dismiss and the trial court granted that motion.  It held that on its face the non-compete agreement was too broad in that it lacked a geographic term and prevented her from working for a competitor of NanoMech in any capacity whatsoever.

The 8th Circuit’s Appellate Ruling.

The 8th Circuit first stated that in Arkansas covenants not to compete must be reviewed on a case-by-case basis. with the reasonableness of the provision determined based on the facts and circumstances at issue in each case.

In Arkansas and in the 8th Circuit, a court may dismiss an action to enforce a non-compete provision if the facts alleged in the lawsuit demonstrate that no hearing regarding the evidence would be necessary in order to make the reasonableness determination.

NanoMech argued that the lower court erred in finding the covenant not to compete in the parties’ agreement was unreasonable and unenforceable.  An agreement restraining trade is reasonable only when it’s no greater than reasonably need to protect the employer and isnt too broad to do injury to the public.

In Arkansas, an agreement not to compete must meet three requirements to be reasonable:

  1. The employer must have a valid interest to protect.
  2. The geographical restriction must not be overly broad.
  3. A reasonable time limit must be imposed.

NanoMech argued in the appeal that the success of its research, development, and commercialization was directly tied to it being able to defend and protect the confidentiality of its proprietary confidential information. NanoMech claimed that the employee, Suresh had broad access to its trade secrets, including chemical formulas, manufacturing processes, and business strategies. It claimed that only a broad covenant could effectively protect its interests and was thus entirely reasonable because there was a great risk that the employee would inevitably disclose trade secrets if she was permitted to work for a competitor in the nanotechnology industry.

The court of appeals noted that although it’s true that trade secrets warrant increased protection under Arkansas law, a noncompete agreement that protects trade secrets will not be enforced if it is overbroad. It further noted that Suresh’s agreement contained no geographic limitation and imposed no restrictions on the activities she is prohibited from performing for other nanotechnology companies.

The court reasoned that under the plain language of the agreement, she would be prohibited from working for any company that competes with NanoMech in any capacity anywhere in the world. It also reasoned that even though NanoMech’s proprietary interests warrant protection, the leading Arkansas authorities suggest that Suresh’s noncompete agreement unduly infringes on her ability to pursue work in her chosen field, and it’s therefore overbroad.

NanoMech contended that the lack of a geographic restriction in a noncompete agreement is not fatal under Arkansas law, relying on two cases to support its argument. The court recognized, however, that the agreements in both of those cases narrowly circumscribed the prohibitions on the employees.

Both employees were permitted to engage in the same business as their former employers in any geographic location, but they were prohibited from soliciting any customers with whom they had contact while they worked for their former employers. The court of appeals concluded that Suresh’s noncompete agreement wasn’t customer-specific, so without a geographic scope to limit its application, the agreement would be considered overbroad under Arkansas law.

NanoMech also argued that an unlimited geographic scope is reasonable in this case because the company engages in global business and competes with nanotechnology companies around the world. But even assuming that Arkansas law would consider a worldwide geographic scope as reasonable in that context, the court explained that Suresh’s agreement was still overbroad because it prohibited her from working in any business that competes with the company.

The court noted that under Arkansas law, a noncompete agreement must be valid as written; a court may not narrow it. As a result, the court held that the blanket prohibition on Suresh’s ability to seek employment of any kind with an employer in the nanotechnology industry anywhere in the world was unreasonable and thus unenforceable.

What the ruling means?

In Arkansas, an agreement not to compete in restraint of trade will only be enforceable if the employer is using it to protect a valid interest, the geographical restriction must not be overly broad, and a reasonable time limit must be set.

Our Chicago and Naperville Non-Compete Agreement Lawyers Handle Covenant Not to Compete Lawsuits Throughout the Chicago Area.

Our Chicago non-compete and non-solicitation agreement attorneys have defended high level executives in covenant not to compete and trade secret lawsuits. A case in which our firm defended a former Motorola executive was covered in Crain’s Chicago business. You can view that article by clicking here.

DiTommaso-Lubin handles litigation over non-compete clauses for individuals and businesses of all sizes, including small or closely held businesses for whom competition from an ex-employee can be a serious threat. Our Chicago business dispute lawyers have substantial experience in restrictive covenant and breach of contract cases, and we are proud of our record of strong results.

DiTommas-Lubin a Chicago business dispute litigation law firm represents both plaintiffs and defendants in Dupage, Cook, Kane and Lake Counties in such cases, and can also help stop litigation before it starts by reviewing contracts to look for covenants and clauses that could create problems later. Based in Oakbrook Terrace and downtown Chicago, our Hinsdale and Lake Forest non-compete clause attorneys and lawyers take cases from Aurora and Naperville and many other cities throughout Illinois, as well as in Indiana, Wisconsin and the entire United States. To learn more or set up a free consultation, please contact one of our Chicago business dispute attorneys through the Internet or call toll-free at 1-877-990-4990 today.