Tenth Circuit may clarify when a non-compete begins to run

In an interesting development, Judge Daniel's decision in Xantrex Technologies v. Advanced Energy Industries has been appealed to the Tenth Circuit. One of the issues on appeal is whether Judge Daniel erred when he ruled that the employee defendant should be enjoined from working for a competitor for a full year from the date of his order. On appeal, the employee has argued that, in accordance with the language of his non-compete, the one year period should have commenced on the date of the termination of his employment.  

As one of my earlier posts suggested, there are several decisions from the Colorado Court of Appeals that support the employee's position. In a 2007 decision, for example, the Court of Appeals affirmed that a non-solicitation provision was enforceable only for the period set forth in the provision itself. That is, the non-compete period could not be extended beyond the period in the agreement.

In its appeal brief filed last month, Xantrex, the employer seeking to enforce the non-compete, has raised several intriguing arguments. Xantrex argues that Judge Daniel also found that the employee had misappropriated trade secrets and that there was a risk of future disclosure of trade secrets. Based on this misappropriation,  Xantrex argues that Judge Daniel merely used the employment agreement's one year non-compete period as "guidance in issuing the length of the injunction". It was reasonable, according to Xantrex, for the Court to use a one year period from the date of its order because the parties had agreed to a one year period for the protection of  Xantrex's trade secrets.  

While intriguing, Xantrex's arguments raise a number of questions. Judge Daniel's Order, for example, doesn't really say that the employment agreement's one year period was being used merely as "guidance". In fact, Judge Daniel never explains why he decided that the one year period should commence on the date of his order.  Xantrex also doesn't explain why any trade secrets couldn't be preserved by an order barring their disclosure or dissemination, rather than an extension of the non-compete.

There are practical reasons for Judge Daniel's decision that are never discussed in the appeal briefs. The employee terminated his employment with Xantrex in July 2007. Xantrex filed its action in January 2008, a hearing on Xantrex's motion was held in January 2008 and Judge Daniel issued his decision in May 2008. If the "clock" had begun to run on the non-compete when the employee terminated his position, any injunction issued by Judge Daniel would have expired within a few months after his order, or in July 2008. After finding that the employee acted wrongfully, Judge Daniel may have been concerned that this abbreviated injunction would not provide Xanrex with the relief that was equitable. 

In its appeal brief,  Xantrex also argues that many courts in other jurisdictions have extended non-compete periods beyond the period set forth in any employment agreement. Ample precedent has been provided of instances in which courts have not felt constrained by the agreement of the parties. 

No guidance has been provided by the Tenth Circuit about when it might issue a ruling on the appeal. The employee has asked for expedited consideration but there hasn't been a ruling on his request. 

Once the Tenth Circuit issues its ruling, it may provide some clarity on this key question of when the clock begins to run on an employee's non-compete obligation. There is a chance, however, that the Tenth Circuit will not need to face this issue. The employee has also argued on appeal that Judge Daniel erred in holding that the non-compete was enforceable. If the Tenth Circuit accepts this argument, it may not reach the timing issue. 

Void means void; the validity of a non-compete is determined at the time of execution

In many non-compete cases, an issue arises about when the validity of a non-compete should be determined. Under Colorado's non-compete statute, a non-compete won't be enforce unless it falls within one of the four exceptions set forth in the statute. One  of those exceptions is for 'executive and management personnel". 

Many employees sign non-competes, however, when they are first hired by a company, or before they become an executive or manager with the company. Later, they are promoted and become executives and managers. When they leave the company, employers argue that the exception for executives and managers applies and that the non-compete is enforceable, even if the employee was not an executive or manager when they were hired. And when they signed the non-compete

In Phoenix Capital,  the Court of Appeals rejected this argument when it ruled that the applicability of the exceptions set forth in the non-compete statute should be determined at the time the non-compete is signed, rather than the time when the employee terminates his employment. The Court of Appeals rejected the employer's argument that this ruling would leave employers unprotected from employees who weren't executives or managers when they joined a company but who later were promoted to executive or management positions. As the Court of Appeals noted, an employer may always enter into new agreements with employees as they take on additional responsibilities. 

Ample precedent exists for the Court of Appeals' ruling. In Management Recruiters v. Miller, a decision from 1988, the employee signed a non-compete when he was hired as an "account executive" or "information gatherer". Later, the employee was promoted to office manager, but a new agreement was not executed when he was promoted. Based on these facts, the Court of Appeal declined to enforce the non-compete. 

An interesting factual wrinkle was presented by another case that was decided prior to Phoenix Capital.  In Doubleclick  v. Paiken, a federal district court decision issued in 2005, the employee entered into a separation agreement with her employer when she left the company. The separation agreement included a non-compete. Several months later, the employer learned that the employee was working for a direct competitor and filed suit against the employee. 

Employee argued, however, that the non-compete was not enforceable because she had signed it after she had resigned and "was not, ipso facto, management personnel". In effect, employee had anticipated the rule announced in Phoenix Capital that the enforceability of a non-compete should be determined at the time the agreement is signed. If she wasn't a manager when she signed the non-compete, employee argued, then the non-compete couldn't be enforced even if the non-compete was part of her separation agreement. 

Judge Miller, on the federal bench, was not swayed, however, by this argument as he ruled against the employee. Miller seemed to be convinced that the non-compete was enforceable because it was predicated on the position that the employee had held immediately prior to the execution of the separation agreement. Notably, Judge Miller states in his opinion  "The timing of the agreement does not preclude its enforceability". Following Phoenix Capital, that statement is subject to question because a non-compete may be deemed unenforceable if it is signed prior to an employee's promotion to an executive or management position. 

The ruling in Phoenix Capital is a lesson for both employers and employees. Each time an employee is promoted to an executive or manager position, employees must consider whether to require the employee to sign a new employment agreement with a non-compete. Employees asked to sign a non-compete in connection with a promotion, on the other hand, must recognize that their promotion comes at a cost. The promotion may mean that future employment prospects will be limited by a non-compete.  

Differing opinions issued on the duration of a non-compete

In a recent decision, Phoenix Capital, Inc. v. Dowell, the Colorado Court of Appeals appeared to establish a "bright line" rule for determining the duration of an employee's obligations under a non-compete. The trial court had ruled that the non-solicit provisions were only enforceable for the period set forth in the provision itself (that is, one year from the employee's termination).  On appeal, however, the employer argued that the non-compete should be extended beyond the one year period. 

The Court of Appeals rejected the employer's argument and held that any injunctive relief based on a restrictive covenant must be "co-extensive" with the terms of the contract. In other words, a one year non-compete could not be extended beyond the one year period. 

A different conclusion was reached earlier this summer in a decision that how reveals how the scope of injunctive relief is often determined by a judge's effort to provide a "fair" decision. In Xantrex Technology v. Advanced Energy Industries, Judge Daniels on the federal bench was presented with a series of difficult issues but he eventually ruled that the employee was bound by a non-compete. Judge Daniels granted the employer's motion for preliminary injunction and ordered the employee not to work for certain companies in accordance with the non-compete. 

Judge Daniels also ordered, however, that the "clock" for the duration of the non-compete should start on the date that the injunction was issued, not on the date of the employee's termination. This ruling was entered even though the non-compete itself stated that the non-compete was for one year following the termination of the employee's employment.

Based on the decision in Xantrex Technology, it may be possible, although difficult, for an employer to argue that a non-compete should be extended past the date set forth in the non-compete. On the other hand, the ruling in Phoenix Capital may lead employers to be more creative in drafting non-compete obligations. Employers may, for example, draft non-competes to provide that the duration of the non-compete will be extended if the employee violates the non-compete.

Any such efforts at creative drafting will face its own challenges. In a 2007 decision, for example, the Wisconsin Court of Appeals held that a provision extending the duration of the non-compete for any period of violation was unenforceable.