3 minute read | April.10.2015
Businesses that compete globally are once again reminded of the need to avoid overreaching when requiring employees to sign non-compete agreements. Earlier this year, the Court of Appeals for the Eighth Circuit affirmed a ruling that a non-compete agreement was unreasonable on its face and thus enforceable because it imposed a blanket prohibition on the employee’s ability to seek employment of any kind with a competitor worldwide. While the Eighth Circuit recognized that non-compete agreements had been upheld in the past despite containing no geographic limitations, the court distinguished those agreements on the basis that they contained narrowly circumscribed prohibitions. The Eighth Circuit’s analysis provides a valuable “lesson learned” for businesses crafting or considering an effective non-compete.
NanoMech, Inc. (“NanoMech”), a manufacturer of nanotechnology, sued its former employee, Arunya Suresh, in May 2013 in federal court in the Western District of Arkansas for alleged breach of Suresh’s non-disclosure agreement and covenant not to compete. Suresh had worked on the research and development of NanoMech’s multi-component lubrication product, but resigned in May 2012 under the premise that she was planning to pursue full-time doctoral studies. NanoMech subsequently learned that Suresh in fact was employed as a chemist with a worldwide chemical company that develops engine lubricants. After learning this, NanoMech initiated litigation to: (1) enjoin Suresh’s employment for the remainder of the term of her non-compete; and (2) enjoin her from disclosing any of NanoMech’s confidential information.
The district court granted judgment in Suresh’s favor, finding that the non-compete was overbroad and unenforceable under Arkansas law because it lacked a geographic scope and purported to restrict Suresh from working for an undefined set of competitors in any capacity. The district court held that in order for a non-compete to be enforceable under Arkansas law, three requirements must be met: the employer must have a valid interest to protect; the geographical restriction must not be overly broad; and a reasonable time limit must be imposed.
The Eighth Circuit agreed with the district court, rejecting NanoMech’s assertion that a broad covenant not to compete, not limited by geography, was reasonable since Suresh had broad access to NanoMech’s trade secrets while employed with the company, including its chemical formulas, manufacturing processes, and business strategies. The Appeals Court acknowledged that trade secrets warrant increased protection under Arkansas law, but nonetheless held that the agreement was overbroad because it would amount to a global ban on working for a competitor.
What can a business operating globally do to adequately protect its rights against employees who go to work for a global competitor, yet also not be left with an overbroad and unenforceable non-compete? If it’s necessary to require employees to sign non-competes that apply on a worldwide basis, then look for ways to narrowly tailor the scope of the prohibited activities. One possibility is to make the prohibitions specific as to particular customers, products, or job function. Another is to include in the agreement a monitoring function that is updated, for example, by keeping a record of the particular technologies that the employee works on and conducting regular audits to limit exposure to trade secrets. Any restrictions should be tailored to those technologies and trade secret information. Last but certainly not least, research the particularities of the applicable laws before drafting a new non-compete and examine existing agreements in light of those laws. Of course, there is no one-size solution, but a non-compete containing reasonable restrictions is far more likely to be satisfactory to both the employer and employee, and far more likely to be enforced, than an agreement that is unbounded in geography or capacity.