Wednesday, September 28, 2016

Research Firm, With No Customers, Cannot Enforce Non-Compete Agreement

When asked by clients how a court will react to a non-compete, I only can do so much.

Responsible lawyer make no guarantees. They lay out a range of options and distribution of outcomes, emphasizing what's most and least likely to occur based on experience. This is particularly the case when assessing non-compete and competition disputes. Those disputes place squarely into tension competing principles: the freedom to contract and the freedom to compete. So with great regularity, courts have to reconcile these principles and do so in ways that can lead to unpredictable results.

One of my central messages to clients is that courts and attorneys need to understand the ins-and-outs of the actual business in order to place these policy questions into focus. Some businesses, to be sure, are understood by most judges: accountancy, staffing, physicians, to name a few. Others are far more opaque: financial services and technology come to mind.

A perfect example of this came up in the recent case of CytImmune Sciences, Inc. v. Paciotti, a non-compete dispute out of Maryland. There, the district court refused to enforce a non-compete agreement of a diagnostics company that was engaged only in research and development. It had no product to bring to market. According to CytImmune's website, it has been around since 1988 and has "transitioned from a successful diagnostics company into a clinical stage nanomedicine company with a core focus on the discovery, development and commercialization of multifunctional, tumor-targeted therapies."

That's a lot of syllables. And without the appropriate industry background, I'm not capable of articulating further what CytImmune does. And that likely was part of the problem with its attempt to enforce a broad non-compete against a senior manager. CytImmune had no customers and no goodwill to protect, though it predictably could have argued that its research had trade-secret value. When the district court refused injunctive relief, it focused on this truism about a company with no market presence.

Another recurring problem appeared. The non-compete lacked ascertainable terms, by preventing competition in markets in which the company contemplated entering. I often see this unneeded qualifier, which can unnecessarily broaden an otherwise enforceable agreement. In an obvious need to use a belt-and-suspenders approach, companies seem not to be satisfied with defining the actual competition and instead broaden it to technologies, products, or markets in which they "may" engage or "anticipate" engaging in.

All this simply gives a skeptical court another reason to strike down broad agreements. This point reminds me of something else I often tell clients: the fewer words your non-compete contains, the better.

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