If a company intends to enforce a non-competition agreement, it had better be prepared to convincingly show that it fully complied with the other terms of that agreement, at least in Pennsylvania. In Figueroa v. Precision Surgical, Inc., Case No.10-4449 (3rd Cir., April 12, 2011), the U.S. Court of Appeals for the Third Circuit refused to disturb the U.S. District Court of New Jersey’s decision not to enforce a non-compete because it held that there was a real issue as to whether the plaintiff, Precision Surgical, Inc., had failed to abide by the terms of the agreement it sought to enforce. (A special thanks to Paul Derrick of Cranfill, Sumner & Hartzog, LLP for bringing this case to my attention). More specifically, the court found that Precision had failed to clearly show that it had fully performed under the agreement because there were many facts that demonstrated it had improperly treated the defendant, Joseph Figueroa, as an employee rather than as an independent contractor, including allegedly failing to pay him all of the commissions to which he was due.
The facts (and in particular, the terms of the controlling written agreement) are less than clear in the opinion, which makes it difficult to determine the severity of the alleged breaches. In 2003, Figueroa executed an Independent Contractor Agreement (“ICA“) with Precision that included a two year non-compete and non-solicitation provisions as well as a non-disclosure obligation. Figueroa chafed under the restrictions that were increasingly placed on his efforts by Precision. After the parties sparred over a deduction from his commissions, Precision told Figueroa that it was abandoning the independent contractor model and asked him to sign a new agreement as an employee. When he refused, Precision terminated the ICA. Figueroa then commenced a preemptive action to challenge the non-compete.
There are a number of facts that the district court and the Third Circuit found compelling in finding that Precision was possibly in breach. For example, Precision imposed “primary and secondary levels of reporting authority, as well as dress requirements, training obligations, and sales goals” upon Figueroa (Op. at 6). The Third Circuit also found it noteworthy that Figueroa wasn’t allowed to solicit clients without Precision’s involvement, that he was given an employment identification picture, a Precision business card and Precision headquarters telephone number, that he was required to devote 100% of his time to Precision, and that he was required to inform Precision of future marketing opportunities. These factors led the court to conclude that Figueroa was treated more like an employee than as an independent contractor in derogation of the ICA.
Perhaps of greater significance was Precision’s inability to refute Figueroa’s contention that it had failed to pay him his full commissions. Again, the record is less than clear but it appears, reading between the lines, that Precision required Figueroa to hire a subcontractor owned by Precision’s president, and then refused to reimburse him when Figueroa elected to hire another subcontractor instead.
Although not emphasized in the opinion, an important fact appears to have been that Precision terminated the ICA because Figueroa refused to convert to the new agreement formally making him an employee. This act reinforced the theme of the fundamental breach of the agreement, as well as the unfairness of enforcing the covenant not to compete when it appeared that Precision was trying to change the rules.
Figueroa should serve as a good wake-up call for companies looking to enforce a non-compete or non-solicitation agreement. If a business is looking to enforce a non-compete or non-solicitation agreement, it should make sure that it has fully complied with its own contract. If a company owes travel expenses, severance, a commission or some other payment, it should ensure those payments have been made at the termination or exit interview stage if it is contemplating enforcing a non-compete or non-solicitation agreement. Likewise, it would be wise to take a step back and look critically at the contract and/or relationship that will be scrutinized to ensure that any potential claims of breach or other defenses can be defused.
On the flip side, if you are an employee, independent contractor, or other party who might be subject to a non-compete upon the termination of a relationship, Figueroa makes clear the importance of documenting what you believe to be material breaches of your agreement. As courts are increasingly tough on these agreements, the argument that the plaintiff failed to comply with its own agreement is a powerful club to wield.