Thursday, February 19, 2009

Strict Construction Rule Prevents Enforcement of Non-Compete Agreement in Washington Case (Fluke Corp. v. Milwaukee Electric Tool)

Employers should always be aware that non-compete agreements will be strictly construed against it as the party in charge of drafting the contract; presumptions regarding ambiguities almost always devolve in favor of an employee. It is here where lawyers need to be particularly scrupulous in drafting agreements that reflect the intentions of the employer and guard against potential loopholes.

A recent Washington appellate case illustrates what happens when the precise contract language renders a non-compete totally ineffectual, such that traditional notions of reasonableness and protectable interests never even get addressed.

Fluke Corp. v. Milwaukee Electric Tool involves a dispute over the termination of Jonathan Morrow, who left Fluke to begin work for Milwaukee Electric in its Test and Measurement Field. But Morrow was initially hired by Jacobs Chuck Manufacturing, a subsidiary of Danaher Corporation. Fluke was a separate subsidiary of Danaher.

Morrow's two-year, broad non-compete restriction was contained in a contract with Jacbos Chuck; Fluke was not a party to it and the definition of "Company" in the preamble to the agreement referenced only Jacobs Chuck as a division of Danaher.

The non-compete clause broadened the definition of Company to include any affiliate of Danaher, but the expanded definition of Company was limited just to the non-compete term. Morrow was transferred to Fluke after he signed the non-compete contract, and he never signed a new agreement with Fluke.

Fluke balked when Morrow quit to join a competitor. Reversing the trial court's order of injunctive relief, the appellate court held that the unambiguous contract language rendered the non-compete unenforceable by Fluke against Morrow.

The reasoning: Morrow's transfer to another subsidiary - Fluke - constituted a termination of the employment agreement. It was critical that other contract provisions not at issue stated that a transfer of Morrow to another affiliate of Danaher would not constitute a termination of the agreement. However, by limiting the effect of transfer to just a few paragraphs, the fact the non-compete section was silent on this issue meant Morrow's transfer to Fluke was a termination for purposes of the non-compete covenant.

Finally, the agreement did not provide for automatic assignment to a subsidiary in the case of a transfer. Had it, the outcome may have been different - or at least the court would have been forced to address the substance of the non-compete.

The decision is an example of how employers must be careful in analyzing when the non-compete purports to operate, either in terms of an inter-company transfer, a termination or an assignment following an acquisition. It is critical that terms in one paragraph match up with another so that employees cannot argue that the strict construction rule releases them from any post-employment obligations.


Court: Court of Appeals of Washington, Division One
Opinion Date: 2/17/09
Cite: Fluke Corp. v. Milwaukee Electric Tool Corp., 2009 Wash. App. LEXIS 364 (Wash. Ct. App. Feb. 17, 2009)
Favors: Employee
Law: South Carolina

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