Evidence Does Not Support Nationwide Injunction Against Competition by Former Employee

Confidentiality Clauses, Non-Compete, Restrictive Covenant, Employment Agreements, Nevada

The Nevada Supreme Court reversed an injunction entered by a district court, when it found the employer failed to put on sufficient evidence to justify an injunction enforcing a 50-state non-compete against a former employee. Here’s what happened.

Landon Shores worked as a sales associate for Global Experience Specialists, Inc. (“GES”). Shore’s duties involved soliciting trade shows and conventions to contract with GES to build show floors and exhibits. As a condition of being given a promotion, Shores was required to sign a Confidentiality and Non-Competition Agreement (NCA).

The Agreement

The NCA stated that Shores could not compete with GES directly or indirectly, or work in a similar capacity for any of GES’s competitors, for the 12 months following the end of his employment. These restrictions applied throughout the United States.

When Shores informed GES that he had taken a position with one of its competitors, GES filed a complaint against Shores.

Court Enters Nationwide Injunction

The district court granted a preliminary injunction, enjoining Shores from performing services “that are competitive with and/or similar to the services he performed for GES.” Shores appealed.

The question presented to the Nevada Supreme Court was whether GES demonstrated a likelihood of success on the merits sufficient to warrant upholding the NCA with a preliminary injunction, where the NCA geographically covered the entire United States.

Shores argued that, in order for a noncompete agreement to be reasonable, its geographical scope must be limited to areas in which the enforcing party has protectable business interests. He further contended that GES’s conclusory characterization of its business as nationwide did not automatically make a nationwide restriction reasonable.

In particular, the preliminary injunction prevented Shores from working in his chosen profession in a number of jurisdictions for which GES presented no evidence of previously existing business contacts.

Geographic Scope of Injunction Must Be Reasonable

The court observed that the geographical scope of a restriction must be limited to areas where the employer has “established customer contacts and good will.”

GES presented evidence that it had conducted business in 33 states, the District of Columbia, and Puerto Rico. Thus, there were a number of states as to which GES made no showing that it had business interests.

GES Failed To Meet Its Evidentiary Burden

An employer seeking a preliminary injunction enforcing a noncompete agreement bears the burden of making a prima facie showing, through substantial evidence, of the agreement’s reasonableness.

On the record before the court, GES failed to make a prima facie demonstration that the NCA was reasonable by showing its restrictions did not extend beyond the geographical areas in which GES conducted business.

The Supreme Court did not address statutory changes to Nevada law which would now require a court to reform an overly broad noncompete agreement. A good summary appears in one of our earlier blog posts.

It appears that Shores was under the injunction until it was reversed. It is unclear if he kept his new job and it remains to be seen whether he might have a claim for wrongful issuance of an injunction.

Takeaways

There are several takeaways. First, it is almost always a good idea to draft a non-compete agreement as narrowly as possible, since many courts are hostile to agreements that restrict a former employee’s livelihood. Second, be as sure as possible that sufficient evidence in the record supports a request for injunctive relief. Third, consider whether to seek injunctive relief—as opposed to damages—since a number of states recognize that reversal of an injunction may allow the improperly enjoined party to seek damages for harm caused by the injunction.

Michael R. Lied is a partner at Howard & Howard’s Peoria, Illinois office. He concentrates his practice in the areas of labor & employment law, and related litigation and immigration law, representing employers.

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