Enforceability of Covenants Not To Compete: Employers Win and Lose

Covenants not to compete are generally disfavored. To enforce a non-compete, an employer must show that the covenant is necessary to protect a legitimate business interest, reasonably limited in time and space, and consonant with the public interest. This often requires individualized judicial consideration. And the matter is usually first presented to the judge by the employer seeking a preliminary injunction to prohibit the former employee from working for a competing business until the expiration of the restriction period. Two recent cases demonstrate the peculiarities of enforcing these restrictions.

In Genzyme Corporation v. Laidlaw, No. 13-P-1990 (Mass. App. Ct., Feb. 7, 2014), Laidlaw worked as a medical science liaison supporting one of Genzyme’s patented drug products, eventually becoming director of the national liaison team for this drug. He was subject to an agreement prohibiting him from competing with Genzyme anywhere in the United States for a period of one year after termination of his employment. In September, 2013, Laidlaw left Genzyme to become director of the medical science liaison team for Keryx Biopharmaceuticals, a company with only one drug in development, a drug that would compete directly with Genzyme’s drug. Laidlaw argued, however, that he was not in violation of his non-compete because the earliest that the Keryx drug could receive FDA approval for marketing was after the patent on the Genzyme drug had expired and then Genzyme’s market share and business interest in this drug would be much less significant. Genzyme disagreed and filed an action to enforce the covenant not to compete and sought a preliminary injunction to prevent Laidlaw from working for Keryx until September, 2014.

To obtain the requested preliminary injunction, Genzyme had to show a substantial likelihood of success on the merits, that is, a showing that Laidlaw was in breach of the covenant not to compete and that such covenant met the standards for enforceability, and that there was a substantial risk of irreparable harm if the injunction were withheld and that harm outweighed the hardship to be suffered by Laidlaw if the injunction were granted. The court found that the terms of this particular covenant were reasonable in both time and geographic scope and that Laidlaw was likely in violation. In addition, the court found that, notwithstanding the expiration of patent protection, there was a substantial risk that Genzyme would suffer irreparable harm from the prohibited competition and that harm outweighed the potential loss of income for Laidlaw. Consequently, the court granted the preliminary injunction. Employer wins.

In Upromise, Inc. v. Angus, Civil Action No. 13-cv-12363 (D. Mass., Jan. 21, 2014), Angus worked for Upromise, a company that provided management, recordkeeping, and marketing services for so-called 529 college savings plans, holding many high-level positions. He was subject to an agreement prohibiting him from competing with Upromise anywhere in the world for one year after termination of his employment. In February, 2013, Angus was laid off and received a severance payment of $450,000. Three months later, he accepted an offer to work for Intuition, a company that provided administrative services for so-called 529 college prepaid plans. Angus did not believe that working on prepaid plans for Intuition would violate his non-compete obligations to Upromise. Upromise disagreed and filed an action to enforce the covenant not to compete.

The court found that Upromise did not satisfy its burden of proof for obtaining a preliminary injunction, mainly because the court was not persuaded that Intuition and Upromise compete against each other. The court seemed to accept the argument that the distinction between the two types of 529 plans was material on the issue of competition, notwithstanding that the recordkeeping and related services required for both type of plans may be similar. Employee wins.