Brief Fact Summary. Data Management, Inc. (Plaintiff) sued James H. Greene (Defendant) and Richard Van Camp (Defendant) for violating an anti-competition clause in their employment contracts. The court granted Defendant’s summary judgment, from which judgment the Defendant appeals.
Synopsis of Rule of Law. An overbroad anti-competition covenant can be reasonably altered to render it enforceable as long as the covenant was drafted in good faith.
Our rule is that when a restriction such as this one is too far-reaching to be valid, the court will not make a new contract for the parties by reducing the restriction to a shorter time or to a smaller area.View Full Point of Law
Issue. Whether an overly broad covenant not to compete can be altered to render it legal?
Held. Remanded to determine whether Plaintiff acted in good faith and if so whether the anti-competition covenant can be reasonably altered.
The court surveyed three different approaches. The first held that a covenant which is overbroad and hence unconscionable will not be enforced. When a restriction is too far reaching to be valid, the court will not make a new contract for the parties by reducing the restriction to a shorter time or to a smaller area. However, the court rejected this approach because the courts should respect the rights of parties to enter into contracts and should not interfere with their contractual relationships. The second approach held that if words in an overbroad covenant not to compete can be deleted in such a way as to render it enforceable then the court may do so. If the covenant is clearly separated into parts and some parts are reasonable and others are not the contract may be held divisible. The court also rejected this approach as too mechanical because it values the wording of the contract over the substance. The third approach held that if an overbroad covenant not to compete can be
reasonably altered to render it enforceable then the court shall do so unless it determines that the covenant was not written in good faith. The burden to prove that the covenant was written in good faith is on the employer. The factors to be considered are absence or presence of limitations as to time and space, whether the employee is the sole contact with the customer, whether the employee is possessed with confidential information or trade secrets, whether the covenant seeks to eliminate the competition which would be unfair to the employer or merely seeks to eliminate the competition, whether the covenant seeks to stifle the skills of the employee, whether the benefit to the employer is disproportional to the employee, whether covenant operates as a bar to employee’s means of support, whether the employee’s talent was developed during the period of employment, and whether the forbidden employment is merely incidental to the main employment.
Case is remanded to the court to determine whether Plaintiff acted in good faith when drafting the anti-competition covenant and if so whether the covenant can be reasonably altered.
Discussion. A large source of illegality cases has been the covenant not to compete involving the promise of a vendor of a business not to compete with the purchaser or the promise of an employee not to compete with his or her employer after termination of the employment.