The fact that restrictive covenants are widely used does not mean, as NanoMech, Inc. v. Suresh...

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The fact that restrictive covenants are widely used does not mean, as NanoMech, Inc. v. Suresh shows, that they are always enforceable. NanoMech, Inc. v. Suresh 777 F.3d 1020 (8th Cir. 2015) OPINION BY CIRCUIT JUDGE COLLOTON NanoMech, Inc. sued a former employee, Arunya Suresh, for breach of her noncompete agreement. The district court granted judgment on the pleadings for Suresh, ruling that the noncompete agreement was unenforceable under Arkansas law. NanoMech appeals, and we affirm. NanoMech, a Delaware corporation with its prin- cipal place of business in Arkansas, researches and develops nanotechnologies. The company specializes in creating nanotechnology products in the areas of nano-machining, manufacturing, lubrication, energy, biomedical coatings, and strategic military applications. Before NanoMech hired Suresh, she signed a non- disclosure agreement in which she agreed to protect NanoMech's interest in any information that was dis- closed to her for the purpose of evaluating a potential employment relationship. NanoMech then hired Suresh in March 2010. As a condition of her employment, Suresh signed an employment agreement, which by its terms is governed by Arkansas law. The agreement con- tains the following noncompete provision: COVENANT NOT TO COMPETE: The Employee agrees that during the term of this Agreement, and for two (2) years following termination of this Agreement by the Company, with or without cause; or, for a period of two (2) years following a termination of this Agree- ment by the Employee, the Employee will not directly or indirectly enter into, be employed by or consult in any business which competes with the Company. During her employment with NanoMech, Suresh participated in projects involving nano-integrated mate- rials and the manufacturing processes for nanoparticle- based products. Among other things, Suresh researched and developed NanoMech's multi-component lubrica- tion product, nGlide, which is the subject of a pending U.S. patent application. Suresh resigned from NanoMech on May 2, 2012, stating that she was planning to pursue doctoral stud- ies full-time. In March 2013, however, NanoMech dis- covered that Suresh had accepted employment as an Application Chemist with BASF, a worldwide chemical company that develops engine lubricants. In May 2013, Nano Mech sued Suresh, alleging breach of her non-disclosure agreement and breach of her cov- enant not to compete on the ground that BASF directly competes with NanoMech and its nGlide technology. The company sought to enjoin Suresh from employ- ment with BASF for the remainder of the term of the noncompete and to enjoin her from disclosing any of NanoMech's confidential information. NanoMech also sought compensatory damages. Suresh answered the complaint, asserting that NanoMech failed to state a claim. The district court granted Suresh's motion, concluding that the noncompete agreement was overbroad and unenforce- able because it lacked a geographic scope and prevented Suresh from working for an undefined set of NanoMech's competitors in any capacity. *** NanoMech appeals only the district court's ruling on the enforceability of the noncompete agreement. *Covenants not to compete are reviewed on a case-by-case basis in Arkansas, and reasonableness is "determined under the particular circumstances," of each case. But this approach does not mean that judgment on the pleadings is never permissible. A court may dismiss an action to enforce a noncompete agreement where the facts adduced in the pleadings show that an evidentiary hearing is not necessary to make the reasonableness determina- tion. NanoMech was required to allege facts sufficient to support a claim for relief that is plausible on its face. NanoMech argues that the district court erred in hold- ing the noncompete agreement unreasonable and therefore unenforceable under Arkansas law. A restraint of trade is reasonable only when it is "no greater than what is reason- ably necessary to secure the interest of the party protected by the contract and is not so broad as to be injurious to the public interest." In general, a noncompete agreement must meet three requirements to be enforceable under Arkansas law: "(1) the [employer] must have a valid interest to pro- tect; (2) the geographical restriction must not be overly broad; and (3) a reasonable time limit must be imposed." The district court held that Suresh's noncompete was overbroad, and thus unenforceable, because it lacked a geographic restriction and failed to define what activities Suresh was prohibited from performing for NanoMech's competitors. NanoMech asserts that the success of its research, development, and commercialization depends on its ability to protect the confidentiality of its proprietary information. The company argues that during Suresh's employment with NanoMech, she had broad access to the company's trade secrets, including its chemical for- mulas, manufacturing processes, and business strate- gies. NanoMech thus contends that a broad covenant not to compete is reasonable because there is a risk that Suresh would disclose trade secrets if she were permit- ted to work for a competing nanotechnology company. While it is true that trade secrets warrant increased protection under Arkansas law, a noncompete agreement that protects trade secrets will not be enforced if it is over- broad. Suresh's agreement contains no geographic limita- tion and imposes no restrictions on the activities Suresh is prohibited from performing for other nanotechnology companies. Under the plain language of the agreement, Suresh would be prohibited from working for any com- pany that is a competitor of NanoMech, in any capacity, anywhere in the world. Even though Nano Mech's propri- etary interests warrant protection, the leading Arkansas authorities suggest that Suresh's noncompete agreement unduly infringes on her ability to pursue work in her cho- sen field, and is therefore overbroad. NanoMech contends that a lack of a geographic restriction in a noncompete agreement is not fatal under 736 Part 5: Terminating Employment Arkansas law. It directs our attention to [two previous Arkansas cases] where the Arkansas Court of Appeals upheld noncompete agreements that contained no geo- graphic limitation. In both cases, however, the agree- ments narrowly circumscribed the prohibitions on the employees. The employees were permitted to engage in the same business as their former employers, in any geo- graphic location, but they were prohibited from solicit- ing any customers with whom they had contact while working for their former employers. In [one of these cases], the noncompete still permitted the employee "to solicit and accept business from 95% of the overall insur- ance market." The employee... was therefore free to pursue his trade in any area of the country, provided he did not solicit former clients. Suresh's noncompete agreement is more analo- gous to the agreement at issue in Bendinger, where the Arkansas court held unenforceable a noncompete agreement between a trowel company and its former employee because the agreement failed to provide a geo- graphic limitation. The Bendinger court... concluded that without a geographic limitation, the noncompete lacked any "inherent limitation" that functioned like the customer-specific restriction in [the above-mentioned case]. Suresh's noncompete agreement also is not customer-specific, so without a geographic scope to limit its application, the Arkansas courts are likely to deem the agreement overbroad. NanoMech argues that an unlimited geographic scope is reasonable in this case because the company engages in global business and competes with nanotech- nology companies around the world. The Third Circuit in Victaulic Co., observed that "[i]n this Information Age, a per se rule against broad geographic restrictions would seem hopelessly antiquated," and NanoMech advances a similar theme here. But even assuming that the Arkansas court would accept a worldwide geographic scope as reasonable in this context, Suresh's agreement is still overbroad because this agreement-unlike those approved in [other cases]-prohibits her from working in any capacity for any business that competes with the company. Under Arkansas law, a noncompete agreement must be valid as written; a court may not narrow it. As we understand Arkansas law, a blanket prohibition on Suresh's ability to seek employment of any kind with an employer in the nanotechnology industry anywhere in the world is unreasonable and thus unenforceable. *** CASE QUESTIONS 1. What was the legal issue in this case? What did the court decide? 2. What did the noncompetition agreement call for? Why does the court conclude that this agreement is unenforceable? 3. What, if any, restrictions might have been reasonable and enforceable in this case? Why? 4. The district court decision in this case mentions that the former employee Suresh was terminated by her new employer. What do you think happened? How does the existence of restrictive covenants complicate post-employment life for both the former employee and prospective new employers? 5. What should NanoMech have done differently? Which alternative means are at employers' disposal to achieve some of the same ends as intended by the use of noncompetition agreements? The fact that restrictive covenants are widely used does not mean, as NanoMech, Inc. v. Suresh shows, that they are always enforceable. NanoMech, Inc. v. Suresh 777 F.3d 1020 (8th Cir. 2015) OPINION BY CIRCUIT JUDGE COLLOTON NanoMech, Inc. sued a former employee, Arunya Suresh, for breach of her noncompete agreement. The district court granted judgment on the pleadings for Suresh, ruling that the noncompete agreement was unenforceable under Arkansas law. NanoMech appeals, and we affirm. NanoMech, a Delaware corporation with its prin- cipal place of business in Arkansas, researches and develops nanotechnologies. The company specializes in creating nanotechnology products in the areas of nano-machining, manufacturing, lubrication, energy, biomedical coatings, and strategic military applications. Before NanoMech hired Suresh, she signed a non- disclosure agreement in which she agreed to protect NanoMech's interest in any information that was dis- closed to her for the purpose of evaluating a potential employment relationship. NanoMech then hired Suresh in March 2010. As a condition of her employment, Suresh signed an employment agreement, which by its terms is governed by Arkansas law. The agreement con- tains the following noncompete provision: COVENANT NOT TO COMPETE: The Employee agrees that during the term of this Agreement, and for two (2) years following termination of this Agreement by the Company, with or without cause; or, for a period of two (2) years following a termination of this Agree- ment by the Employee, the Employee will not directly or indirectly enter into, be employed by or consult in any business which competes with the Company. During her employment with NanoMech, Suresh participated in projects involving nano-integrated mate- rials and the manufacturing processes for nanoparticle- based products. Among other things, Suresh researched and developed NanoMech's multi-component lubrica- tion product, nGlide, which is the subject of a pending U.S. patent application. Suresh resigned from NanoMech on May 2, 2012, stating that she was planning to pursue doctoral stud- ies full-time. In March 2013, however, NanoMech dis- covered that Suresh had accepted employment as an Application Chemist with BASF, a worldwide chemical company that develops engine lubricants. In May 2013, Nano Mech sued Suresh, alleging breach of her non-disclosure agreement and breach of her cov- enant not to compete on the ground that BASF directly competes with NanoMech and its nGlide technology. The company sought to enjoin Suresh from employ- ment with BASF for the remainder of the term of the noncompete and to enjoin her from disclosing any of NanoMech's confidential information. NanoMech also sought compensatory damages. Suresh answered the complaint, asserting that NanoMech failed to state a claim. The district court granted Suresh's motion, concluding that the noncompete agreement was overbroad and unenforce- able because it lacked a geographic scope and prevented Suresh from working for an undefined set of NanoMech's competitors in any capacity. *** NanoMech appeals only the district court's ruling on the enforceability of the noncompete agreement. *Covenants not to compete are reviewed on a case-by-case basis in Arkansas, and reasonableness is "determined under the particular circumstances," of each case. But this approach does not mean that judgment on the pleadings is never permissible. A court may dismiss an action to enforce a noncompete agreement where the facts adduced in the pleadings show that an evidentiary hearing is not necessary to make the reasonableness determina- tion. NanoMech was required to allege facts sufficient to support a claim for relief that is plausible on its face. NanoMech argues that the district court erred in hold- ing the noncompete agreement unreasonable and therefore unenforceable under Arkansas law. A restraint of trade is reasonable only when it is "no greater than what is reason- ably necessary to secure the interest of the party protected by the contract and is not so broad as to be injurious to the public interest." In general, a noncompete agreement must meet three requirements to be enforceable under Arkansas law: "(1) the [employer] must have a valid interest to pro- tect; (2) the geographical restriction must not be overly broad; and (3) a reasonable time limit must be imposed." The district court held that Suresh's noncompete was overbroad, and thus unenforceable, because it lacked a geographic restriction and failed to define what activities Suresh was prohibited from performing for NanoMech's competitors. NanoMech asserts that the success of its research, development, and commercialization depends on its ability to protect the confidentiality of its proprietary information. The company argues that during Suresh's employment with NanoMech, she had broad access to the company's trade secrets, including its chemical for- mulas, manufacturing processes, and business strate- gies. NanoMech thus contends that a broad covenant not to compete is reasonable because there is a risk that Suresh would disclose trade secrets if she were permit- ted to work for a competing nanotechnology company. While it is true that trade secrets warrant increased protection under Arkansas law, a noncompete agreement that protects trade secrets will not be enforced if it is over- broad. Suresh's agreement contains no geographic limita- tion and imposes no restrictions on the activities Suresh is prohibited from performing for other nanotechnology companies. Under the plain language of the agreement, Suresh would be prohibited from working for any com- pany that is a competitor of NanoMech, in any capacity, anywhere in the world. Even though Nano Mech's propri- etary interests warrant protection, the leading Arkansas authorities suggest that Suresh's noncompete agreement unduly infringes on her ability to pursue work in her cho- sen field, and is therefore overbroad. NanoMech contends that a lack of a geographic restriction in a noncompete agreement is not fatal under 736 Part 5: Terminating Employment Arkansas law. It directs our attention to [two previous Arkansas cases] where the Arkansas Court of Appeals upheld noncompete agreements that contained no geo- graphic limitation. In both cases, however, the agree- ments narrowly circumscribed the prohibitions on the employees. The employees were permitted to engage in the same business as their former employers, in any geo- graphic location, but they were prohibited from solicit- ing any customers with whom they had contact while working for their former employers. In [one of these cases], the noncompete still permitted the employee "to solicit and accept business from 95% of the overall insur- ance market." The employee... was therefore free to pursue his trade in any area of the country, provided he did not solicit former clients. Suresh's noncompete agreement is more analo- gous to the agreement at issue in Bendinger, where the Arkansas court held unenforceable a noncompete agreement between a trowel company and its former employee because the agreement failed to provide a geo- graphic limitation. The Bendinger court... concluded that without a geographic limitation, the noncompete lacked any "inherent limitation" that functioned like the customer-specific restriction in [the above-mentioned case]. Suresh's noncompete agreement also is not customer-specific, so without a geographic scope to limit its application, the Arkansas courts are likely to deem the agreement overbroad. NanoMech argues that an unlimited geographic scope is reasonable in this case because the company engages in global business and competes with nanotech- nology companies around the world. The Third Circuit in Victaulic Co., observed that "[i]n this Information Age, a per se rule against broad geographic restrictions would seem hopelessly antiquated," and NanoMech advances a similar theme here. But even assuming that the Arkansas court would accept a worldwide geographic scope as reasonable in this context, Suresh's agreement is still overbroad because this agreement-unlike those approved in [other cases]-prohibits her from working in any capacity for any business that competes with the company. Under Arkansas law, a noncompete agreement must be valid as written; a court may not narrow it. As we understand Arkansas law, a blanket prohibition on Suresh's ability to seek employment of any kind with an employer in the nanotechnology industry anywhere in the world is unreasonable and thus unenforceable. *** CASE QUESTIONS 1. What was the legal issue in this case? What did the court decide? 2. What did the noncompetition agreement call for? Why does the court conclude that this agreement is unenforceable? 3. What, if any, restrictions might have been reasonable and enforceable in this case? Why? 4. The district court decision in this case mentions that the former employee Suresh was terminated by her new employer. What do you think happened? How does the existence of restrictive covenants complicate post-employment life for both the former employee and prospective new employers? 5. What should NanoMech have done differently? Which alternative means are at employers' disposal to achieve some of the same ends as intended by the use of noncompetition agreements?