A Court May Shorten the Duration of a Non-Compete Clause

Abstract

The court enforced a non-compete clause preventing a former employee from working at a competitor but reduced the duration of that restriction from five years to two years.

Background

During his employment at Syzygy, Bryan Harris signed an operating agreement with a non-compete clause preventing him from accepting employment for five years at a business that engages in activities “compet[ing] in whole or in part” with Syzygy. Harris quit Syzygy and, three days later, began working at Sherpa 6. Like Syzygy, Sherpa 6 works on sensor and communication integration and competes for Department of Defense contracts. Syzygy sued Harris and promptly moved for a preliminary injunction to immediately enforce the non‑compete clause while the case was pending.

A court cannot grant a preliminary injunction without Syzygy first proving a reasonable probability of eventual success that Harris breached the non-compete clause and that it is more likely than not that Syzygy would suffer irreparable harm without enforcement of such clause. If Syzygy satisfies these threshold inquiries, the Court considers whether the harm to Harris or other interested parties and the public’s interest in the matter weigh in favor of denying the injunction.

Under Pennsylvania law, for Syzygy to prove eventual success, it must show the existence of a contract, adequate consideration, material breach, and damages. Because a non‑compete clause is a restrictive covenant, Syzygy must also show the clause includes reasonable terms, protects a legitimate business interest that outweighs the employee’s interest in freely earning a living, and is in the interests of the public. A court may “blue pencil” the pertinent agreement and only enforce portions of a restrictive covenant reasonably necessary to protect legitimate business interests.

The Syzygy Decision

The court granted Syzygy’s request for a preliminary injunction to enforce the non‑compete clause but reduced the duration of that restriction from five years to two years, which the court found sufficiently protected Syzygy’s business interest. 

The court held that Syzygy established a reasonable probability of eventual success on its breach of contract claim. The operating agreement constituted a valid contract since it included Harris’s signature and provided new consideration in the form of a 2% membership interest in Syzygy. Further, despite some differences in the specific work Syzygy and Sherpa 6 engage in, the general services the companies provide sufficiently overlap to deem them competitors. Thus, Harris’s employment at Sherpa 6 was a breach of the agreement that could damage Syzygy. The court rejected Harris’s argument that Syzygy’s failure to provide copies of certain financial information, as required by the agreement, relieved Harris from his duties under the agreement because such failures were neither material nor caused Harris any injury.

Next, the court found that the circumstances warrant enforcing the non-compete clause because it protected Syzygy’s business interest in safeguarding confidential materials and trade secrets disclosed to Harris and the public’s interest in enforcing contracts. This interest outweighed the potential harm to Harris given he had the ability to negotiate different terms, voluntarily chose to leave Syzygy, and had employment opportunities at entities that are not direct competitors.

In analyzing the reasonableness of the scope of the non-compete agreement, the court found the lack of any geographical limitations appropriate because Syzygy competes with entities across the country for federal government contracts. The court, however, changed the time the clause is in force from five years, which it found to be more than reasonably necessary, to two years. The court based this determination on the fact that Syzygy spends fifteen to eighteen months negotiating bids for government contracts and additional time to prepare such bids.

Based on much of the same facts as discussed above, the court determined that the remaining preliminary injunction factors favor Syzygy. It was more likely than not that Syzygy will be irreparably harmed by Harris’s employment at a direct competitor. Further, the injury to Harris is minimized based on his ability to obtain gainful employment at a noncompetitor. Lastly, it is in the public’s interest to enforce contracts.

Strategy and Conclusion

Non-compete clauses are critical for companies to ensure former employees cannot freely accept positions with competitors risking exposure of the company’s valuable and sensitive confidential business information. To the extent necessary, courts can tailor the terms of a non‑compete clause. 

The Syzygy v. Bryan Harris decision can be found here.