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Can an Employer Enforce a Non-Compete Agreement When it Terminates an Employee?

Posted in Labor & Employment, Uncategorized

In Florida, as with other states, non-compete litigation results when an employee leaves his or her employer to go work for a new company.  The old employer deems the new employer a competitor and seeks to enforce various provisions in the employee’s non-compete agreement (aka restrictive covenant).  Many of my prior posts address the employer and employee’s rights when the employee voluntarily leaves for new employment.  This post looks at a 2011 decision by the Montana Supreme Court addressing whether an employer can enforce a non-compete agreement when the employer, not the employee, terminates the employment relationship.  See Wrigg, CPA v. Junkermier, Clark, Campanella, Stevens, P.C., 265 P.3d 646 (Mont. 2011). 

It is important to point out that Montana applies a far more restrictive approach to non-compete agreements than Florida.  Florida’s non-compete statute is comprehensive, providing employers with a broad range of protections that are simply not available in other states.  See, e.g., Fla. Stat. § 542.335.  Montana, on the other hand, “strongly disfavors covenants not to compete.”  Wrigg v. Junkermier, 265 P.3d 648, citing Access Organics, Inc. v. Hernandez, 175 P.3d 899 (Mont. 2008).  Unlike Florida, courts in Montana strictly construe non-compete agreements against the employer, reading the terms of the agreements “in a light most favorable to the employee.”  Wrigg, 265 P.3d at 649, citing Dumont v. Tucker, 822 P.2d 96, 98 (Mont. 1991).  Even though Montana takes a far more narrow approach to non-compete agreements, the Wrigg decision is worth review as it provides an excellent state summary of decisions addressing whether an employer can enforce a non-compete agreement when the employer terminates the employment relationship.

The employee in Wrigg was a certified public accountant who began working for the employer in 1987.  During the course of her employment, the employee signed several non-compete agreements provided by the employer.  In 2009, the employer informed the employee that it was not renewing the employee’s employment agreement.  The employer stated that its decision not to renew the agreement was best “[g]iven the culture in the Helena office.”  Wrigg, 265 P.3d 648.  Once the employee’s contract expired, she began working for a competing accounting firm where she solicited business from clients of her former employer.  Id.  The employer sent the employee a letter demanding compensation for violating the non-compete agreement.  The employee filed a declaratory judgment action to determine whether the employer could enforce the non-compete agreement.  Id.

When considering a non-compete agreement, Montana balances the competing interests of the public, the employer and the employee.  Id. at 649-50, citing Dobbins, De Guire & Tucker, P.C. v. Rutherford, MacDonald & Olson, 708 P.2d 577 (Mont. 1985).  Montana courts void covenants that act as a full restraint on trade unless there is an express statutory exception.  Wrigg, 265 P.3d at 649, citing § 28-2-703, MCA.  A non-compete agreement that only partially restrains trade must satisfy three requirements in order to be considered reasonable:

            (1)        The non-compete should be limited in operation either as to time or place;

            (2)        the non-compete should be based on good consideration; and,

            (3)        the non-compete should afford reasonable protection and not impose an  unreasonable burden on the employer, the employee or the public.

Wrigg, 265 P.3d at 649, citing Dobbins, 708 P.2d at 580. 

Montana, like Florida, requires that a legitimate business interest exist in order to enforce a non-compete agreement.  It is widely recognized that a non-compete agreement that serves no legitimate business interest is oppressive and invalid.  Wrigg, 265 P.3d at 650, citing Richard A. Lord, Williston on Contracts Vol. 6, § 30:4, 164-75 (4th ed., West 2009).  A key issue in Wrigg was whether the employer could establish a legitimate business interest in enforcing a non-compete agreement against a terminated employee. 

The court noted that an employee working under a non-compete that contemplates terminating his employment has a choice.  The employee can continue his employment and not compete with the employer, or the employee may risk losing his livelihood by leaving his employment voluntarily to go work for a competitor.  Wrigg, 265 P.3d at 652, citing Morris v. Schroder Capital Management, Intl., 859 N.E.2d 503, 506-07 (N.Y. 2006).  In such circumstances, an employee makes an informed decision.  However, no such decision exists when an employee leaves his employer involuntarily.  Id.  In those circumstances, courts have recognized that enforcement of a non-compete agreement could impoverish an employee who has done nothing to warrant his termination.  Id. , citing Ma & Pa., Inc., v. Kelly, 342 N.W.2d 500, 503 (Iowa 1984).  When an employee’s departure from the company is involuntary, there is a “consensus among various jurisdictions that courts should scrutinize highly a covenant’s enforcement …”  Id. at 652 (further citations omitted).

The court in Wriggs, agreeing with other jurisdictions, recognized that an employer normally lacks a legitimate business interest in a non-compete agreement when the employer chooses to terminate the employment relationship.  Id. at 653.  If the employer wanted to protect its business interests, it could continue to employ the employee.  The Wriggs court also recognized, however, that an employee’s conduct, or misconduct, would provide it with a legitimate business interest to enforce a non-compete agreement.  Under those circumstances, the employer would have to show the legitimate interests and the risks to those interests by the employee’s competition.  Id. at 653. 

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Jason Cornell is an equity partner with the law firm Fox Rothschild LLP. Jason practices in Fox Rothschild’s Litigation and Financial Services departments in West Palm Beach, Florida. Jason focuses his practice on commercial and employment litigation throughout Florida and Delaware, with an emphasis on non-compete litigation. You can reach Jason at (561) 804-4415 or jcornell@foxrothschild.com.

Below are some recent posts Jason has written on Florida non-compete litigation:

Common Defenses to Enforcement of a Non-Compete Agreement

Are Non-Compete Agreements Enforceable Against Third Parties?

What Are the Burdens of Proof When Enforcing a Non-Compete Agreement?

Florida’s Fifth District Narrowly Construes Geographic Scope Provision in Non-Compete Agreement