Non-Competition "In Any Capacity": Broad Scope Can Sink Your Non-Compete

A recent opinion from the Calvert County Circuit Court in Maryland highlights a common drafting error which can undermine the enforceability of non-compete agreements. In Electronic Security Servs., Inc. v. Higgs, Judge Chandlee ruled that a non-compete which precluded the former employee from working for a competitor “in any capacity” was overly broad and thus unenforceable. See Case No. 04-C-15-304 (Calvert Cnty. Cir. Ct. Md. Sept. 2, 2015) (hereafter “Higgs”). 

In Higgs, a company sued a former employee and the former employee’s new employer, alleging that the employee breached a non-compete agreement and the employee’s employment with the new employer was prohibited by a confidentiality agreement.  The non-compete agreement forbade Mr. Higgs from “compet[ing] directly or indirectly with the company by serving as an officer, partner, director, agent, employee, or consultant with any firm or entities substantially engaged in a business similar to or competitive to the business of the company or an active client of the company in the last 2 years with the company.” It “extend[ed] to the geographic area for the entire states of Maryland and Virginia, The District of Columbia, and any other area that falls within a 150 mile radius of Upper Marlboro.”  Notwithstanding these restrictions, the employee went to work for a competitor in a neighboring county.

The court found the agreement overbroad and unenforceable as a matter of law, noting that it “effectively restricts [the former employee] from obtaining employment from a competitor . . . in any role conceivable.”  The court further held that, even if such a broad restriction were somehow necessary to protect the company’s legitimate business interests, the “need [was] not remotely demonstrated in the complaint.” As a result, the court severed the clause from the non-compete agreement, which “render[ed] the entirety of the agreement void.”

The decision in Higgs reflects a trend in non-compete litigation in favor of scrutinizing the scope of the restrictions to which employees are subject. Several other states have held that language similar to that present in Higgs is overly broad and therefore unenforceable – though some courts have applied blue-penciling rules to save the agreement in a less restrictive form.

In CopyPro, Inc. v. Musgrove, the North Carolina Court of Appeals held that a non-compete agreement that prohibited a former sales representative from working at a competitor in any capacity, “even as a custodian,” was overly broad and unenforceable. 754 S.E.2d 188 (N.C. App. 2014).  In CopyPro the defendant, former employee, Mr. Musgrove, had signed a non-compete agreement that precluded affiliation with a competitor of CopyPro, a purveyor of office equipment systems, for three years following the termination of his employment.  The substantive scope of the agreement was limited to “any business of the type and character of the business engaged in by the Employer at the time of such termination.”  Id. at 192.

During his employment with CopyPro, Mr. Musgrove primarily worked in Pender and Onslow County.  After he resigned, Mr. Musgrove joined a competitor to work in a different county, and he refrained from contacting CopyPro’s customers in the two counties he had covered for CopyPro.  Further, his new employer forbade him from contacting CopyPro’s customers in said counties.

CopyPro nevertheless brought suit against Mr. Musgrove seeking, among other things, a permanent injunction to enforce the terms of the non-compete agreement that he had signed.  CopyPro prevailed in the Superior Court and obtained an injunction preventing Mr. Musgrove, in pertinent part, from working for the allegedly competitive entity.  The Court of Appeals reversed, explaining that “[a]s our decisions reflect, we have held on numerous occasions that covenants restricting an employee from working in a capacity unrelated to that in which he or she worked for the employer are generally overbroad and unenforceable.” CopyPro, 754 S.E.2d at 192 (citing VisionAIR, Inc. v. James, 167 N.C. App. 504, 508-09, 606 S.E.2d 359, 362-63 (2004) (holding that a covenant that prohibited an employee from “own[ing], manag[ing], be[ing] employed by or otherwise participat[ing] in, directly or indirectly, any business similar to” the employer’s business was overly broad and unenforceable)).  The Court went on to hold that “such overly broad restrictions are generally not enforceable in the employer-employee context on the grounds that the scope of the restrictions contained in such agreements far exceeds those necessary to protect an employer’s legitimate business interests.” CopyPro, 754 S.E.2d at 193.

The Court noted that its decision here was distinguishable from prior holdings:

Aside from the fact that the restriction at issue in Precision Walls was to remain in effect for only one year while the noncompetition agreement at issue here will remain in effect for three years, the present record contains no indication that Defendant ever had either the same level of responsibility or the same level of access to competitively sensitive information as the defendant whose conduct was at issue in Precision Walls. Simply put, the record developed in this case, unlike the record developed in Precision Walls, contains no evidence that Defendant had the responsibility for developing client-specific pricing proposals or adjusting prices for competitive reasons or that Defendant was involved in the development and operation of his employer’s bidding or pricing strategies. Although Plaintiff contended in the court below that Defendant might share vital information even if he were hired by a competing business as a custodian, nothing in the present record indicates that Defendant actually possessed sufficiently important information to render him a competitive threat regardless of the position he held with a subsequent employer.”   

See Precision Walls, Inc. v. Servie, 568 S.E.2d 267 (N.C. App. 2002).

Of course, it is well established that non-competes such as those described above are unenforceable in Virginia under the so-called “Janitor Rule.”  In Home Paramount Pest Control Cos., Inc. v. Shaffer, the Supreme Court of Virginia found a non-compete provision in an employment agreement overbroad on its face and therefore unenforceable. 718 S.E.2d 762 (Va. 2011).  Mr. Shaffer, the Plaintiff, was an employee of Home Paramount Pest Control Companies, Inc. In January 2009, he signed an employment agreement containing the following provision:

The Employee will not engage directly or indirectly or concern himself/herself in any manner whatsoever in the carrying on or conducting the business of exterminating, pest control, termite control and/or fumigation services as an owner, agent, servant, representative, or employee, and/or as a member of a partnership and/or as an officer, director or stockholder of any corporation, or in any manner whatsoever, in any city, cities, county or counties in the state(s) in which the Employee works and/or in which the Employee was assigned during the two (2) years next preceding the termination of the Employment Agreement and for a period of two (2) years from and after the date upon which he/she shall cease for any reason whatsoever to be an employee of [Home Paramount].

Id. at 414-415.

The Court explained that, in Virginia, a provision that restricts competition “is enforceable if it is narrowly drawn to protect the employer’s legitimate business interest, is not unduly burdensome on the employee’s ability to earn a living, and is not against public policy.” Id. at 415. The burden of proving each factor rests with the employer seeking court enforcement of the restriction. Id. “When evaluating whether the employer has met that burden, we consider the function, geographic scope, and duration elements of the restriction.  These elements are considered together rather than as three separate and distinct issues.” Id.  In Home Paramount,  the Court held that the provision was unenforceable, noting that “[o]n its face, it prohibits Shaffer from working for Connor's or any other business in the pest control industry in any capacity. It bars him from engaging even indirectly, or concerning himself in any manner whatsoever, in the pest control business, even as a passive stockholder of a publicly traded international conglomerate with a pest control subsidiary. The circuit court therefore did not err in requiring Home Paramount to prove it had a legitimate business interest in such a sweeping prohibition.” Id. at 418.

In NanoMech, Inc. v. Suresh, U.S. Court of Appeals for the Eighth Circuit, applying Arkansas law, affirmed the district court’s decision that a non-compete agreement which prevented the employee from performing any work for any competitor anywhere in the world was overbroad and unenforceable under Arkansas law.  777 F.3d 1020 (8th Cir. 2015) (Colloton, J.).  In NanoMech, defendant, former employee Ms. Suresh, had signed a non-compete agreement before being hired at NanoMech, a company involved in the research and development of nanotechnology.  The non-compete agreement prohibited her from “directly or indirectly” entering into, being employed by or consulting “in any business which competes with the Company” for two years after her departure.  The covenant contained no geographic limitation and did not define “any business which competes with” NanoMech.  Ms. Suresh eventually left NanoMech and joined a competitor as a chemist within the two-year departure term.  NanoMech sued to enjoin her from working there for the remainder of the term of the non-compete and to prevent her from disclosing any of NanoMech’s confidential information.

Generally, a non-compete agreement is enforceable under Arkansas law if the employer has a valid interest to protect, the geographical restriction is not overly broad and a reasonable time limit is imposed. The covenant’s plain language prohibited the employee from working for any competitor of NanoMech, in any capacity, worldwide. The Court rejected NanoMech’s argument that the covenant was reasonable due to the global nature of the business and the employee’s broad access to trade secrets, and refused to enforce the covenant, finding it was overbroad.  The Court held that global non-compete agreements may be permissible if the prohibitions on employee activities are narrowly drawn.

Finally, in Clark’s Sales and Service, Inc. v. Smith and Ferguson Enterprises, Mr. Smith, Defendant, was required to sign a non-compete agreement by employer Clark's Sales & Service, Inc. after several years of employment as a salesman.  4 N.E.3d 772  (Ind. Ct. App. 2014)

The key provisions of the agreement stated that for two years after the employee’s termination from employment, he was prohibited from, in any capacity:

[S]oliciting or providing services competitive to those offered by his employer to any business account or customer who was a business account or customer at any point in time during his employment;” and “working in a competitive capacity with a named competitor of the employer in the state of Indiana, in any city or state in which the competitor conducts business, or to work for any business that provides services similar or competitive to those offered by the employer during the term of his employment, including but not limited to within the state of Indiana, Marion County, the counties surrounding Marion County, or within a 50 mile radius of his principal office with the employer.

Id. at 780.  After the employee resigned and went to go work for one a competitor, the employer filed suit to enforce the non-compete and sought injunctive relief. The Court noted that its Supreme Court has “long held that noncompetition covenants in employment contracts are disfavored in the law, and we will construe these covenants strictly against the employer and will not enforce an unreasonable restriction.” Id.

The Court of Appeals took issue with several parts of the agreement. First, the Court found that the restriction on contacting or serving customers was overbroad and unreasonable because it prohibited the employee from servicing anyone who had been a customer at any point in time during his employment. Id. at 782.  Second, the Court viewed the scope of prohibited activities as too broad because it went beyond the sales job he had with his prior employer and prohibited him from engaging in any service that offered but which he personally never performed during his employment-- i.e., drafted so as to prohibit “seemingly harmless conduct.” Id.   Third, the Court viewed the geographic restriction as “unquestionabl[ly] unreasonable as written”, and stated that the 50-mile restriction alone might have been acceptable, as “it is reasonable for individuals in the community to travel up to 50 miles to visit Clark's.” Id.

If you’re considering having your employees sign a non-compete, you should ensure that the restrictions are narrowly drawn to address legitimate business needs.  In other words, the primary inquiry should be what relationships and knowledge the employee gained while employed by your organization and what legitimate business concerns about the use of the knowledge and relationships you hope to address.  The more you can tailor your non-compete so that it addresses your concerns but isn’t overly broad, the greater the chances that it will be enforceable in most jurisdictions.

While much could be said about the appropriate duration and scope of a restrictive covenant, those are subjects for another day.  What the decisions above make clear is that, in drafting the substantive restrictions in a non-compete agreement – or any other restrictive covenant – you should focus on areas of actual concern.  These might include preventing an employee from working for a specific list of competitors, preventing an employee from performing a specific job or function for entities in similar line(s) of business, and soliciting current customers, vendors, or employees.  As demonstrated above, courts are skeptical of sweeping language which prevents an individual from working for a competitor “in any capacity.”  Including such language, especially in states which do not blue-pencil agreements, raises the very real possibility that the entire clause or agreement will be stricken.  Regardless of a state’s blue-penciling rules, it is never advisable to gamble on how a court might re-write your agreement. Instead, you should use language such as “in any position or performing any function substantially similar to any position held or function performed by the employee during the twelve-month period prior to the termination of her employment.”

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The Enforceability of Physician Non-Competes

It is worth noting, as an initial matter, that the American Medical Association has stated that "covenants not to compete restrict competition, disrupt continuity of care, and potentially deprive the public of medical services.” AMA Opinion 9.02, "Restrictive Covenants and the Practice of Medicine", AMA Code of Medical Ethics (Updated June 1998) (available at http://www.ama-assn.org/ama/pub/physician-resources/medical-ethics/code-medical-ethics/opinion902.page).  The opinion goes on to note that restrictive covenants are unethical “if they are excessive in geographic scope or duration in the circumstances presented, or if they fail to make reasonable accommodation of patients’ choice of physician.”  Id.

There is little precedent regarding the treatment of physician non-competes (or of non-competes in general) in the District of Columbia.  In Deutsch v. Barsky, the D.C. Court of Appeals was called upon to review a trial court's determination that a non-compete between a dentist and his former employer was void as against public policy.  795 A.2d 669 (D.C. 2002).  After finding that there was no per se bar to medical (or at least, dental) non-competes, the Court went on to set forth the proper inquiry, and held that, assuming the contract not to compete was otherwise valid, "it must plainly appear that it contravenes public policy before the courts will declare it void upon that ground." Id. at 674 (quoting Godfrey v. Roessle, 5 App. D.C. 299, 303-04 (D.C. 1895).   While the Court did not further address the special circumstances of non-competes in the medical field, its reliance on case law from other professions in reaching its decision that summary judgment in favor of the defendant-dentist was inappropriate reveals that such concerns are muted, at best.  E.g. Erikson v. Hawley, 12 F.2d 491 (D.C. 1926) (Court enforced ten year non-compete agreement enjoining defendant from practicing orthodontia within D.C.). 

That said, there is little precedent in the District of Columbia on this point, and - especially given the lack of specific attention to this issue in Deutsch, the enforceability of physician non-competes can fairly be considered an open question.  See Zulima Farber, et al., “Are Physician Post-Employment Noncompete Agreements Enforceable?”, Metropolitan Corporate Counsel (March 1, 2004) (available at: http://www.metrocorpcounsel.com/articles/3746/are-physician-post-employment-noncompete-agreements-enforceable) (“jurisdictions such as the District of Columbia…have no definitive case law regarding physician-noncompete agreements.”).  This is particularly true when the physician practices in a highly specialized field of medicine if it may be difficult for patients to find an alternate healthcare provider.  D.C. is somewhat unique in that many otherwise reasonable geographic restrictions (e.g. restrictions of a 10, 25, or 50 mile radius) would include the entirety of the District of Columbia, and, in many cases, the vast majority of the D.C. metropolitan area.  To the extent that the physician at issue practices in a sub-specialty with few other practitioners, the difficulty in obtaining alternative treatment may weigh in favor of blue penciling – or voiding – the non-compete provisions on public policy grounds.  See Wheeler v. Fredericksburg Orthopaedic Assocs., 44 Va. Cir. 399 (Va. Cir. Ct. 1998) (finding non-compete unenforceable based, in part, on fact that no other surgeons in plaintiff’s sub-specialty practiced in the area and patients would need to travel 50 miles for next nearest doctor).  Of course, some courts have found that "unique" or "extraordinary" skills possessed by a doctor may, on a case-by-case basis, actually support the enforcement of a reasonable restrictive covenant.  See BDO Seidman v. Hirshberg, 12 N.E.2d 1220 (N.Y. 1999).  

In the absence of D.C. law on point, a D.C. court may turn to Maryland law.  Under Maryland law, covenants not to compete may be enforced “only against those employees who provide unique services, or to prevent the future misuse of trade secrets, routes or lists of clients, or solicitation of customers.”  Becker v. Bailey, 268 Md. 93, 97, 299 A.2d 835 (1973).  Unfortunately, much like in D.C. – though to a slightly lesser extent – there is “a general paucity of Maryland case law regarding covenants not to compete specifically in the healthcare industry, and no Maryland court has conducted a thorough analysis of such covenants or explicitly defined their scope.”  Robert Niccolini, Esq., “Covenants Not To Compete in Healthcare: A Maryland Primer”, Maryland State Bar Association (2007) (available at: http://www.msba.org/sec_comm/sections/health/docs/homepage/noncompetes/CovNottoCompeteRobN.pdf).  Despite this, the Maryland Court of Special Appeals, in Holloway v. Faw, Casson & Co., strongly implied that some level of special protection was appropriate for physicians.  572 A.2d 510 (Md. Ct. Spec. App. 1989).  In Holloway, the Court addressed whether accountants deserved special protection from restrictive covenants as a matter of public policy.  In reaching its conclusion that they did, the Court noted that accountants, like lawyers and physicians, had a special relationship with their clients deserving of protection.  Id. at 517; See also Niccolini, “Covenants Not to Compete in Healthcare: A Maryland Primar” at p.9. 

Nationally, there is great deal of disagreement among courts as to whether, and how, physicians should receive special protection from non-competes.  E.g. S. Elizabeth Wilborn Malloy, “Physician Restrictive Covenants: The Neglect of Incumbent Patient Interests”, 41 Wake Forest L. Rev. 189 (Spring 2006); Robert W. Horton, “Restrictive Covenants in Physician Employment Relationships”, American Health Lawyers Assoc. Member Briefing (April 2013) (available at: http://www.bassberry.com/files/upload/AHLA_Article_Horton_and_Padgett_April_2013.pdf).  By way of example, Illinois has repeatedly upheld physician non-competes.  In a typical case, Canfield v. Spear, the Illinois Supreme Court reasoned that: "[i]t cannot be said that the public interest is adversely affected if a physician decides to move from one community to another, nor does it become so if the move results from some agreement made in advance. If a severe shortage exists in any particular place young doctors will tend to move there, thus alleviating the shortage."  44 Ill. 2d 49, 52 (1969).  Wyoming appears to follow a similar approach.  See Oliver v. Quynn, 2013 WY 70 (2013) (quoting Canfield).  

The majority rule, however, seems to afford at least some protection to physicians.  In Cmty. Hosp. Group, Inc. v. More, 869 A.2d 884 (N.J. 2005), the New Jersey Supreme Court reversed the decision of a lower court to enforce just such an agreement because the lower court had “failed to focus on the adverse impact the geographic restriction [in the non-compete agreement] would have on neurological patients seeking treatment at [defendant’s employer’s] emergency room.  Without [defendant]…necessary neurological treatment to an emergency room patient could be compromised.”  Id. at 899.  Accordingly, the Court found that there was “overwhelming” evidence that prohibiting Defendant from attending neurological patients in the geographical area specified would injure the public interest.  The Court, while prepared to accept a non-compete covering a limited geographical distance “less than thirteen miles”, specifically instructed the lower court, on remand, that any geographical restriction should exclude defendant’s current employer.  Id. at 900.  See also Duneland Emergency Physicians Med. Group v. Brunk, 723 N.E.2d 963 (Ind. Ct. App. 2000) (restrictive covenant unenforceable when it would compromise emergency room care); Premier Health Care Servs., Inc. v. Schneiderman, 2001 Ohio 7087 (Ohio Ct. App. Dec. 28, 2001) (public interest weighed against granting injunction against physician-defendant); Emergicare Sys. Corp. v. Bourdon, 942 S.W.2d 201 (Tex. Ct. App. 1997) (refusing to enforce covenant that would have prevented doctor from serving public as emergency doctor);

Non-competes with regard to physicians also face regulatory hurdles.  For example, the Federal Trade Commission recently relieved a group of cardiologists from a non-compete agreement which it determined implicated antitrust concerns.  See Karen Cheung-Larivee, “FTC Antitrust Agreement Frees Cardiologists From Non-Compete Contract”, FierceHealthcare (Dec. 6, 2012) (available at: http://www.fiercehealthcare.com/story/ftc-antitrust-agreement-frees-cardiologists-non-compete-contract/2012-12-06).  Furthermore non-compete agreements in the context of physician recruitment can implicate, and be barred by, the Stark Laws.  In particular under 42 C.F.R. 411.357(e)(4)(vi), physicians and physician practices are prohibited from placing restrictions on the practice of physicians which they recruit that would “unreasonably restrict the recruited physician’s ability to practice medicine in the geographic area served by the hospital.”  Between 2004 and 2007 the Centers for Medicare & Medicaid Services (“CMS”) took the position that imposing a non-compete agreement on a recruited physician would violate the Stark Law.  See I. Paul Mandelkern & Jason S. Rimes, “CMS Rules That Non-Compete Provision Complies With Stark Laws Physician Recruitment Exception”, National Law Review (Nov. 3, 2011) (available at: http://www.lowndes-law.com/publications-presentations-blogs/1085-cms-rules-that-non-compete-provision-complies-stark-laws-physician-recruitment).  However, in 2007 CMS issued an advisory opinion which found that a proposed physician recruitment arrangement, which included a non-competition provision, met the requirements of the Stark Law.  See CMS Advisory Opinion AO-2011-01 (available at: http://www.cms.gov/Medicare/Fraud-and-Abuse/PhysicianSelfReferral/downloads/CMS-AO-2011-01.pdf).  Although properly drafted non-compete agreements can comport with the Stark Law, it does present another avenue of attack, even to otherwise reasonable non-compete agreements, which would prohibit a physician from practicing within the geographic area covered by a hospital. 

 


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Second Circuit, Like the First Circuit, Finds an Expired Restrictive Covenant to be Unenforceable

On September 19, 2011, we reported about a First Circuit opinion, authored by retired justice Souter, in EMC Corp. v. Arturi, No. 11-1001, 2011 U.S. App. LEXIS 17834 (1st Cir. Aug. 26, 2011), in which the Court found the non-compete to no longer be enforceable because more than a year had elapsed since plaintiff’s departure from the company and the non-compete was for one year’s duration.  In that case, Justice Souter noted that the non-compete could have been more carefully drafted to account for the delays in obtaining enforcement attendant to litigation.  Recently, the Second Circuit addressed the same drafting problem in Aladdin Capital Holdings, LLC v. Donoyan, 2011 U.S. App. LEXIS, 19083, 2011 Westlaw 4063012 (2d Cir. Sept. 14, 2011).  In Aladdin, the Court stated that the expiration of a restrictive employment covenant renders an employer’s request for injunctive relief moot, as the employer did not include language in the non-compete that provides for an extension of the restrictive covenant during the period of breach, the court was unable to enforce what otherwise might have been an enforceable restrictive covenant.  See also the District Court’s opinion authored by Judge Kravitz at 2011 U.S. Dist. LEXIS 61095 (D. Conn. June 8, 2011) and Van Dyck Printing Co. v. DiNicola, 648 A.2d 877 (Conn. 1994) (finding claim for injunctive relief to be moot).

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