Saturday, January 3, 2009

Fifth Circuit Interprets Meaning of "Termination" In Non-Compete Dispute (Specialty Rental Tools & Supply v. Shoemaker)

The new year starts with a rare, published federal appellate court decision interpreting a non-compete agreement. This decision, rendered two weeks ago, comes from the State of Mississippi, and it opines on a fairly significant issue of contract interpretation.

The case of Specialty Rental Tools & Supply v. Shoemaker arose out of a sale of business transaction, and it concerned a rather common problem of separate non-compete clauses in the business purchase agreement and a corresponding employment agreement executed at the closing. As is common in many such transactions, the selling party - here, William Shoemaker - went to work for the buyer pursuant to a long-term employment agreement.

The Purchase Agreement contained a non-compete clause barring Shoemaker from working for a competitive business within two years from the date of the closing, or two years from the date his employment with SRT was "terminated", whichever was later. His employment agreement was for a five-year term and contained no non-compete clause. Shoemaker did, however, sign a third document at closing - a Non-Competition Agreement. However, that agreement purported to expire two years after closing.

Exactly five years after closing, SRT gave Shoemaker notice that it was not renewing his employment agreement. The notice delivered to him expressly stated that Shoemaker was not being "terminated." Within days, Shoemaker began working for a direct competitor, and SRT filed suit.

At the trial court level, Shoemaker prevailed on summary judgment, and the Fifth Circuit had no trouble affirming the decision. The court first dispensed with the Non-Competition Agreement, noting that it expired by its own terms - in March of 2004 - and was not tied to Shoemaker's employment. The Purchase Agreement's non-compete clause, therefore, was the only contract potentially applicable.

The key question became whether Shoemaker was "terminated." It was clear he served his entire five-year employment term with SRT, and SRT even admitted his contract expired. He was not terminated with cause, or without cause. Does expiration equal termination? Illinois appellate courts have addressed this issue twice, both times holding it does not. In this case, the Fifth Circuit agreed.

The court noted that the interplay of the closing documents showed the parties clearly did not intend for expiration to equal termination. Termination required an affirmative act to end Shoemaker's employment, not the mere lapse of his five-year contract. The court concluded by noting that SRT's notice of non-renewal was significant with respect to how the parties intended the word "terminate" to apply.


Court: United States Court of Appeals for the Fifth Circuit
Opinion Date: 12/17/08
Cite: Specialty Rental Tools & Supply v. Shoemaker, 553 F.3d 415 (5th Cir. 2008)
Favors: Employee
Law: Mississippi

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