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Supreme Court Affirms District Court Ruling that Noncompete Covenant was Unenforceable

on Monday, 22 December 2014 in Labor & Employment Law Update: Sarah M. Huyck, Editor

In Gaver v. Schneider’s O.K Tire, Co., Gaver had an agreement with Schneider’s which contained a restrictive covenant on post-employment competition. The consideration for the agreement, signed at the outset of employment, purported to be participation in the company profit sharing plan. The profit sharing plan did not contain any reference to the noncompete agreement, and Gaver received all payments due thereunder.

However, Gaver left employment and filed suit for a declaratory judgment that the noncompete agreement was unenforceable as overly broad and greater than reasonably necessary to protect the employer’s legitimate interest. The specific language at issue was:

[E]mployee shall not establish or open any trade or business similar to the business owned and operated by Employer or in any manner become interested, directly or indirectly, either as an owner, partner, agent, stockholder, officer or otherwise in any such business or trade within [a] 25-mile radius of Columbus, Platte County, Nebraska, from and after the date of the execution of this agreement and continuing for five (5) years after the termination of the employee’s employment for whatever reason….

Unlike other noncompete covenants, the Nebraska Supreme Court noted this was unique in a few relevant respects. First, it was not contained in an actual employment agreement. Rather, the agreement specifically warned that it was not an employment agreement and emphasized the employee’s at-will status. Second, Schneider’s argued that the purpose of the noncompete agreement was to prevent the employee from obtaining the benefits of the profit sharing plan and then later using that payment to compete against the employer. Despite this assertion, such purpose was not clearly articulated in the agreement.

The Nebraska Supreme Court affirmed the district court, holding that the agreement was unenforceable as overly-broad. First, the Court noted that regardless of the type of agreement in which the noncompete covenant is contained, the Court applies the same analysis. Second, the Court observed that it had no reason (or precedent) to apply a different standard to a restrictive covenant aimed at prohibiting a former employee from using profit sharing benefits to compete through a new business venture. Third, the agreement, as written, was overly-broad and violated the Court’s benchmark for enforceability of a noncompete agreement. Specifically, it precluded Gaver from competing at all with Schneider’s within a 25-mile radius, instead of just limiting him to not working only with those customers with whom he did business and had personal contact while employed by Schneider’s. In short, the agreement attempted to stifle competition, not just unfair competition.

Although the Court did not reach the issue specifically, it seemed to accept the premise that access to a profit sharing plan could be consideration for a noncompete agreement. It also suggested, without deciding, that Schneider’s profit sharing plan should have stated that the restrictive covenant is a condition of participation. Finally, the Nebraska Supreme Court will apply the same analysis to post-employment noncompete covenants regardless of the type of agreement in which they are contained.

Christopher R. Hedican

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