DON’T LET THE METER RUN ON YOUR NON-COMPETE AGREEMENT

When a key employee resigns, the question always asked is “what are your plans?” If the employee is subject to a non-compete agreement, the answer may not always be truthful, particularly if the employee plans to work for a competitor in violation of a non-compete restriction. This is why many employers wisely include a provision in their non-compete agreements which requires employees to disclose the fact that they are going (or intend to go) to work for a competitor.  But even with such a provision many departing employees do not disclose their intentions. noncompete-150x150

In fact, it is common for a former employer not to learn that the employee is violating a non-compete for weeks – or even months – after the employee has been working for the competition.   If the employer does not learn about the violation until months later, the question then becomes, for enforcement purposes, when does the restricted period begin to run?  In other words, does it begin from when the employer found out about the violation or does it begin to run as soon as the employee went to work for the competition?  The answer depends largely upon the agreement itself.

If the non-compete agreement includes a properly drafted tolling provision the answer, at least in Delaware, seems clear – the restricted period will not include any time during which the former employee violated the restriction – assuming that the restricted period itself is held to be reasonable.  In such case, the employer gets the benefit of what it bargained for, i.e., a full restrictive period free from a former employee’s breach.

If there is no tolling provision, however, it is unlikely the employer will get credit for “time served” during the violation, and the employer may be limited to enforcing the restrictive period for whatever amount of time remains.  While this issue has yet to be directly addressed in a written decision by a Delaware court, this issue has been addressed in other jurisdictions.

For instance, in EMC Corporation v. Arturi, 655 F.3d 75 (1st Cir. Aug. 26, 2011), the employer requested a preliminary injunction prohibiting a former employee from competing with it and from soliciting its customers. The trial court refused to issue the injunction because the one-year time period contained in the non-compete agreement had already elapsed and there was no tolling provision to extend it. On appeal, the First Circuit affirmed the trial court’s decision.  The First Circuit explained that “when the period of restraint has expired, even when the delay was substantially caused by the time consumed in legal appeals, specific relief is inappropriate and the injured party is left to his damages remedy.”  The court went on to note that the employer “could have contracted . . . for tolling the term of the restriction during litigation, or for a period of restriction to commence upon preliminary finding of breach. But it did not.”

While the issue of whether the delay was caused by fraud or concealment was not addressed in the First Circuit case, its commentary provides words to the wise.  Make sure your non-compete agreements have adequate tolling provisions.  This includes language to the effect that the term of the restriction will commence upon a preliminary finding of a breach, and that the restrictions will be tolled during any litigation.

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