Non-compete agreements are standard in employment contracts, particularly when the employee obtains an ownership interest in the company. However, as the case of Riddle v. Geckobyte.com makes clear, these agreements are not fool proof.1 Employers wishing to enforce non-competes should make sure these agreements are drafted carefully to avoid a similar result.
Jeffrey Riddle was a computer programmer who decided to sell his company, RTM, to Tiegan Fryberger, who operated a competitor to RTM called Geckobyte.com. This sale was accomplished by an Asset Purchase Agreement (APA), whereby RTM sold its assets to Geckobyte for payment over time. The parties also executed an Employment Agreement (EA), where Geckobyte agreed to pay Riddle $150,000 per year to continue working for the company. The EA contained a term that prevented Riddle from engaging in any business that might “solicit, diver, or compete for. . . any client, or prospective client.”
Riddle and Fryberger experienced a falling out and Fryberger eventually fired Riddle because he felt Riddle did not “fit within the culture very well” and it was “time for a change.” Following Riddle’s termination from the company, Fryberger stopped all payments under the APA and EA. Riddle began communicating with Geckobyte’s clients, and shortly thereafter both sides sued each other.
Geckobyte sought to enforce the non-compete provision in the EA, but the Court declined to do so. Specifically, it found that it was impossible for Riddle to know who might constitute a “prospective client.” As the non-compete provision was overly broad, the Court found that it was unenforceable. The Court also stated that even if the non-compete provision did not include prospective customers it still would have rejected the non-compete because it was written to last 5 years, which the Court found unreasonable. (Interestingly, the Court found that the geographic scope, which included the entire United States, was not unreasonably broad because of the nature of the business.) As a result of the above issues, the Court ruled that Geckobyte could not enforce the EA against Riddle.
This result was in no doubt frustrating for Geckobyte, which had relied upon the EA to prevent Riddle from competing with its business. Moreover, even though Riddle had reached out to Geckobyte’s actual customers, the Court ruled the whole non-compete unenforceable because it included prospective customers and thus was unreasonably broad.
This case demonstrates that it is important to review the non-compete agreements used by your business on a regular basis. Terms that stretch beyond a legitimate business purpose may render the entire non-compete provision void. This determination is a fact-intensive enterprise and should be conducted with the assistance of an experienced employment law attorney.
Please contact me, Jason Raether, if you have any questions or concerns about the non-compete that your business uses or about a non-compete that you signed as an employee.
1 No. 17-623 (D. Minn. June 22, 2018).