Tuesday, August 10, 2010
Tennessee Court Expands Geographic Reach of Non-Compete Agreement (J.T. Shannon Lumber v. Barrett)
Regular readers of this blog know that a court's application of the blue-pencil or equitable modification rule can be outcome-determinative in a non-compete dispute. Normally, this rule is applied to pare back or narrow an otherwise overbroad non-compete agreement.
But what about using the rule to expand the geographic scope of a covenant?
That is what a recent federal court in Tennessee did in a non-compete dispute, though it is not clear the court utilized the blue-pencil rule per se.
In J.T. Shannon Lumber v. Barrett, an executive vice-president signed a non-compete agreement that prohibited him from working for "any company which competes directly or indirectly with [J.T. Shannon] anywhere within the United States of America, or such area as a court in enforcing this Paragraph shall determine is reasonable under the circumstances."
The court interpreted the non-compete provision in such a way as to restrict the executive's ability to work in the Asian lumber market, given his prior involvement in expanding the company's office in Shanghai. In particular, the court noted that "the parties' expectations under the contract" allowed it to alter the geographic scope both to shrink the territorial region within the United States or to extend it internationally. Therefore, the court looked more to the contract language than the blue-pencil rule itself.
The result certainly seems equitable, but this is a case we don't see come down very often. I highly doubt the parties "expectations" included expanding the geographic reach of the non-compete, and I am sure the employee's attorney advised his client that the language in the contract likely was inserted to allow a court to reduce - rather than expand - the covenant.
Despite the employer-friendly ruling, I would not recommend that companies deploy language like that quoted above. There are much better ways to provide for flexibility in the geographic reach of a non-compete agreement than relying on extremely general language that likely was not meant to address the situation presented in J.T. Shannon Lumber.
Court: United States District Court for the Western District of Tennessee
Opinion Date: 8/4/10
Cite: J.T. Shannon Lumber Co., Inc. v. Barrett, 2010 U.S. Dist. LEXIS 79099 (W.D. Tenn. Aug. 4, 2010)