Eighth Circuit Affirms Judgment on the Pleadings in Arkansas Non-Compete Case
The Eighth Circuit Court of Appeals has affirmed a lower court decision granting judgment on the pleadings to defendant in non-compete dispute based on Arkansas law. The decision in NanoMech, Inc. v. Suresh rested in part on the fact that the non-compete did not include a geographic limitation and was otherwise overbroad as it would have prohibited defendant from “working in any capacity for any business that competes with the company” anywhere in the world. The district court found that the provision was unreasonable on its face, and therefore unenforceable as a matter of law.
The Appellate court noted that Arkansas does not allow blue-penciling, which may have saved plaintiff from dismissal in a different jurisdiction (“Under Arkansas law, a non-compete agreement must be valid as written; a court may not narrow it.”)
The result in this case was not necessarily obvious, for a few reasons. First, Plaintiff, a nano-technology company, pointed out that the Arkansas Court of Appeals has upheld non-compete agreements without any geographic restriction on at least two occasions. The Eighth Circuit distinguished those decisions, however, because the restrictions were otherwise limited to solicitation of certain customers. (Courts in several other states have held that a customer-based restriction can substitute for a geographic restriction.) Here, however, the agreement stated:
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, without or without cause; or for a period of two (2) years following a termination of this Agreement 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.
Second, the decision runs contrary to a trend among at least a few courts to place reduced importance on geographic restrictions in cases involving global or national competition in light of modern technology and transportation. Indeed, the Court in NanoMech quoted the Third Circuit in Victaulic Co. v. Tieman, 499 F.3d 227 (3d Cir. 2007) which observed, “[i]n this Information Age, a per se rule against broad geographic restrictions would seem hopelessly antiquated.” But, the Court still found the provision overbroad under Arkansas law.
Third, the dismissal of the action under Rule 12 of the Federal Rules of Civil Procedure, without the benefit of discovery, was somewhat aggressive, considering the parties were involved in cutting-edge research and development.
Enforcement of non-competes usually turns on the application of state law. In Arkansas, a non-compete must be “reasonable” as to geographic and temporal scope and based on a valid interest to protect. Considering the lack of blue-penciling authority in Arkansas, employers in that state should be careful when crafting restrictions of this kind.