Reasonableness of Non-Compete Agreement Requires More Consideration

August 24, 2007 ( - The 3rd U.S. Circuit Court of Appeals has determined a case in which an employee claimed his former employer's non-compete agreement was unreasonable requires more legal consideration.

Chastising a district court for its determination that the agreement is unreasonable, the appellate court said in its opinion, “Whether a covenant not to compete is unreasonable… requires balancing the employer’s need to protect its investment and disclosures against the employee’s need to earn a living in his chosen field and the public interest, and then determining whether the covenant comes reasonably close to that balance. At the pleadings stage, a court rarely knows enough about the substance of this balancing act to make a judgment as to whether the covenant is reasonable.”

The appellate court further said the district court appeared to misplace the burden of proof. The court pointed out it was the responsibility of plaintiffs Tyco Fire Products L.P and Joseph L. Tieman to prove their claim of unreasonableness, not original employer Victaulic Company’s responsibility to prove the reasonableness of the covenant not to compete.

According to the opinion, the appellate court was particularly concerned that the District Court used the Web site  to establish certain facts about Victaulic’s business without first making sure the site was properly authenticated. In addition, the court pointed out a company’s Web site is a marketing tool often “full of imprecise puffery that no one should take at face value.”

“Resolving a thorny issue like reasonableness by resorting to a party’s unauthenticated marketing material falls far short of the bar,” the court said in its opinion.

As a condition of his employment with Victaulic, Tieman signed a covenant not to compete that, in part, stated that “upon leaving Victaulic he would not sell or distribute the types of items regularly sold (or contemplated for sale) by Victaulic for 12 months within a ten-state Restricted Victaulic Sales Region, or in any area in which Victaulic products are sold on behalf of nine named competitors (of which Tyco is one),” according to the opinion.

Tieman left Victaulic and began working for Tyco selling the same types of products he sold for Victaulic. Victaulic sued for an injunction to enforce the covenant not to compete, and Tyco and Tieman countersued, claiming the covenant was unreasonable. In particular, Tyco and Tieman said Victaulic’s prohibitions on selling “the types of products regularly sold, offered for sale, or contemplated for sale by Victaulic,” and on “contact[ing] or solicit[ing] any past or present customer on behalf of any [competitor],” are overbroad and the covenant is not reasonably limited in geographic scope.

The district court agreed, ruling that Victaulic failed to explain why it is reasonable to prohibit Tieman from working in industries unrelated to fire protection. However, the appellate court pointed out that it may be, for example, that Tieman has specialized knowledge of Victaulic’s pricing structure and marketing techniques that he could use to win its customers, or access to other protected customer-specific information, and that the district court knew little about the extent of Tieman’s contacts, relative to the total number of Victaulic customers.

The court remanded the case back to the lower court for further proceedings.

The 3 rd Circuit opinion is here .