There is a new Fourth Circuit Court of Appeals case, in which the Court held a non-compete was unenforceable: Lapman v. DeWolf Boberg & Associates, Inc., 2009 WL 757368 (4th Cir. 2009). In Lapman, the plaintiff, a former employee and shareholder, had been terminated and had went to work for Synergetics, a direct competitor of his former employer. Defendant brought a counterclaim to enforce the non-compete. Applying South Carolina law, the District Court granted summary judgment in favoring for defendant-employer, finding the non-compete to be enforceable because it “only prohibited [Lapman] from working for a direct competitor in positions similar to the ones he held at DBA.” Id. at *3.
On appeal, the Fourth Circuit began by noting that the non-compete explicitly stated that the plaintiff “will not, directly or indirectly, engage in Competition with [DBA]….” Id. at *6 (emphasis in original). However, the Fourth Circuit unanimously disagreed with the District Court and reversed:
The district court’s construction of the non-competition clause conflicts with its plain language. The clause specifically prevents a shareholder from “directly or indirectly [ ] engag[ing] in Competition with” DBA. Nothing in the non-competition clause limits its scope to the eight “direct competitors,” including Synergetics, identified in the Shareholders’ Agreement. Id. at *7. The court held that “the plain language of the non- competition clause compels us to conclude it that it is void under South Carolina law and therefore unenforceable.” Id.
The Fourth Circuit found additional grounds for finding over breadth: “Moreover, the clause’s definition of ‘competition’ has a much broader scope than the narrow restrictions envisioned by the district court.” Id. The court found because the non-compete defined competition to mean “competitive with or similar to those [he] rendered during his” employment with DBA, the court noted that “the clause would prohibit Lapman from working for many entities that do not compete in the marketplace with DBA, even accepting the ‘market’ as defined by DBA.” The court considered a theoretical circumstance in which strictly construing the language of the contract could have such an effect and concluded that the “clause is therefore broader than necessary to achieve protection of DBA’s legitimate interests.” Id.
Good case. I come across more than a few non-competes that use the language “directly and indirectly” to expand the scope of activities prohibited by a non-compete. This case will help. Unfortunately, this case is not reported, but if you need a copy and can’t find one online, email me. I will be glad to send you one.