LEGAL: Severing Employer Ties

After a long employement dry spell, Vernon McKinney (not his real name) took a job with a mid-sized waste firm in "State X" as a salesman. On his first day, the company's human resources officer asked him to sign a confidentiality agreement, which included a covenant not to compete, explaining that all members of the sales force were obliged to make the same commitment.

Under the agreement, McKinney could not accept employment with a solid waste hauling company or landfill business for one year after leaving his current employer and within a 150-mile radius. He also was forbidden from divulging any of the company's trade secrets, as defined in the agreement.

As necessary, the company would disclose its pricing structure, marketing strategy and other business secrets, which it considered proprietary. Such information has independent economic value because it's not known or discoverable by outsiders who could benefit from its disclosure or use. Misappropriation of trade secrets could severely undercut a company's ability to compete profitably and successfully.

Thrilled to be employed and receiving benefits once again, McKinney signed the papers without giving much thought to how the restriction might affect future job prospects. He seemed to have a knack for selling waste services, and he quickly became one of the most successful members of the sales team. But after two years with the company, he resigned and left for a six-month vacation.

After his hiatus, McKinney was working again in sales for a waste services firm based a mere 75 miles from the headquarters of his former employer, but in "State Y." He and his new employer filed a lawsuit against his former employer, asking the court in State Y to invalidate the noncompete clause in the agreement at his old job.

Not to be outdone, the former employer promptly filed suit in State X and obtained a temporary restraining order preventing McKinney from violating the noncompete covenant and from pursuing his lawsuit. The former employer later asked the court in State Y to dismiss McKinney's lawsuit, pending the outcome the suit in State X, but the court declined.

Indeed, the court in State Y issued an order preventing the former employer from taking any action to enforce its noncompete covenant. When the former employer informed the court in State X about this ruling, the court ordered McKinney to ask the State Y court to rescind its restraining order, which the State Y court refused to do.

If you're confused, you're in good company.

Some states, for example California and Colorado, do not acknowledge noncompetition agreements, except in particular circumstances, such as when an executive or senior manager departs. In most states, however, courts will enforce covenants not to compete only if geographical and time limits are reasonable, where a former employer's legitimate interests will be protected or where the departing employee's services or skills are unique.

So what's an employer to do when a valued employee quits to take a job with a competitor in a state that does not recognize covenants not to compete? Chances are, the former employee's future will depend on the outcome of battles between courts over jurisdiction: that is, which court gets to hear the case and issue a ruling.

McKinney eventually won his case in State Y where the court ruled that, although State X had a significant relationship to the parties, the law in State X was contrary to a fundamental public policy in State Y. Not surprisingly, the court in State X ruled that "comity," the legal principle that allows a court in one jurisdiction to stay its proceedings in deference to those in another jurisdiction, favored its own jurisdiction, which upheld the restraining order against McKinney.

Ironically, the case was eventually settled on the condition that neither party would disclose any details that might identify who participated in the donny-brook and how much money changed hands.