New Development in Restrictive Covenants

It’s a real crapshoot these days trying to enforce post employment restrictive covenants with employees. It is somewhat easier, however, to enforce restrictive covenants entered into in connection with a “sale of a business.” Judge Moon in the Western District of Virginia recently held that a non-compete agreement entered into in connection with a settlement agreement with a former employee should be reviewed under a more enforcement friendly “sale of a business” standard. According to Judge Moon:

Under the circumstances presented in the instant matter, a requirement of reasonableness is adequate to afford fair protection to the interests of both parties to the contract and the public, and I decline to employ the more restrictive standard designed to review covenants contained in employment contracts. The primary purpose of the Agreement was to settle McClain’s claims of embezzlement against Carucci, not to regulate the terms of Carucci’s employment, which had ceased before the Agreement was formed. The Agreement was a result of an arms-length negotiation in which Carucci was represented by counsel. (See Agreement 18 (stating that the parties “participated jointly in the negotiation and drafting of this Agreement and that in the event that an ambiguity or [*17] question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties . . . .”.) The Agreement contained valuable consideration for both parties. In exchange for paying $250,000 and submitting to the restrictive covenants, Carucci avoided liability for his acts and benefited from a confidentiality clause, a non-disparagement clause, and a seven-day revocation clause. This was not a “take it or leave it” situation in which an employee must agree to a noncompete covenant in order to secure a job. Rather, bargaining power was more equally distributed, with Carucci allegedly in possession of over $285,000 in company funds, and McClain entitled to sue Carucci for their recovery or seek other legal remedies. Finally, the noncompete covenant is one element of an agreement settling a private dispute, which, as a highly favored agreement in the law, should not be subjected to undue limitations on its enforceability. See Crandell v. United States, 703 F.2d 74, 75 (4th Cir. 1983); Duplan Corp. v. Deering Milliken, Inc., 540 F.2d 1215, 1221 (4th Cir. 1976).

Accordingly, if you have a departing employee or executive, or are settling litigation with a former employee, it may be worthwhile to include a non-competition covenant in the settlement or severance agreement in an effort to increase the likelihood of enforcement. –Scott W. Kezman