Wednesday, March 18, 2009

Utah Court Questions Parties' Intent After Careless Drafting of Commercial Non-Compete Agreement (digEcor v. e.Digital)

Sometimes unremarkable cases yield insight into how a judge examines a non-compete agreement.

The commercial dispute between digEcor, Inc. and e.Digital is just such a case. The parties signed a contract in 2002 that was, at heart, a standard non-disclosure agreement. Boyer (a predecessor to digEcor) had an idea to market portable viewers to airlines so that passengers could watch movies not yet released for rental to the general public. He wanted to pitch the idea to e.Digital but insisted on a confidentiality provision protecting his idea and e.Digital's ability to compete in the same market.

The non-compete provided e.Digital could not "compete with APS, Inc. directly or indirectly during the term of this Agreement and for a period of seven (7) years after the termination of this agreement anywhere in the world by years after termination of this agreement anywhere in the world by manufacturing and/or selling like or similar components: (any and all components that APS, Inc., and manufactured, designed, etc."

It would be an understatement to state that the nearly unintelligble covenant verged on the ridiculous.

Eventually, the parties signed a separate agreement memorializing the terms by which e.Digital would design and oversee the manufacture of a portable viewer. That agreement contained no non-compete clause.

When the business relationship fell apart, and after e.Digital sought to introduce its own line of portable viewers, digEcor sued for breach of the non-compete agreement recited above. The court concluded California law applied, and under Section 16600 of the Business and Professions Code, the non-compete was per se invalid.

However, the court took the unnecessary (though arguably wise) step of noting the importance of a sloppily drafted agreement on the court's overall view of the case:

"...the court has its doubts concerning digEcor and e.Digital's expectations about the continuing enforceability of the covenant not to compete. It is apparent that little care was taken in drafting and proofreading the 2002 NDA's non-compete provision. Also, when the parties documented their business relationship in the October 22 Agreement, which expressly superceded all prior written and oral agreements on the same subject matter, they did not include a covenant not to compete. One would expect that, given the importance digEcor now attaches to e.Digital's ability to compete, digEcor would have insisted that a non-compete provision be included in the October 22 Agreement, even if doing so seemed overly cautious or not technically necessary."

Practitioners defending a non-compete claim may want to cite this passage when addressing agreements that contain poor drafting, inconsistent terms, or appear to have been put together with little thought.


Court: United States District Court for the District of Utah
Opinion Date: 3/13/09
Cite: digEcor, Inc. v. e.Digital Corp., 2009 U.S. Dist. LEXIS 20382 (D. Utah Mar. 13, 2009)
Favors: N/A
Law: California

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