A recent decision by the Montana Supreme Court raises one of the trickier situations in the trade secret and non-compete practice: Can you, or better yet, should you, enforce a covenant not to compete against an employee that you just fired? In Wrig v. Junkermier, Case No. DA 11-0147 (Nov. 22, 2011), the Montana Supreme Court held “an employer normally lacks a legitimate business interest in a covenant when it chooses to end the employment relationship.” Applying that rule, the court refused to enforce a non-compete after the employer elected not to renew the employee’s contract.
Many courts are, at best, ambivalent about non-competes and some are even hostile towards them (California forbids them except in the most limited of circumstances). Trying to enforce a restrictive covenant against an employee who has just been terminated in The Great Recession may be no easy task. Whatever the law, in these situations, an employer will need to overcome the sense that it is “piling on” or rubbing it with that employee.
Most jurisdictions require that a company show a legitimate business interest, such as the protection of trade secrets or customer relationships, that justifies enforcement of a non-compete. In this sense, Montana has now joined Illinois and many other states that require that showing. In the case of a fired employee, however, a court may expect a compelling showing of that interest. In the absence of that showing, a court may reason that the employer’s claim that the recently-fired employee now suddenly poses a competitive threat is disingenuous. Or, as the Montana Supreme Court put it, “[a]n employer’s decision to end the employment relationship reveals the employer’s belief that the employee is incapable of generating profits for the employer.” (For a more thorough analysis of the facts and reasoning of the Wrig decision, check out Non-Compete and Trade Secrets Blog’s fine post on this case).
Of course, the circumstances giving rise to the termination will be key. As the Montana Supreme Court recognized, a protectable interest may be found if the firing arose from misconduct of the employee. Thus, as in any injunction case, the conduct of the employee, as well as the employer, will heavily influence the court’s exercise of discretion.
The takeaway? As an employer, take a long, hard look at whether it is worth the time and expense to enforce the non-compete of a fired employee. Be prepared to face an uphill fight if your client has fired or laid off the employee. Having documentation supporting a termination for cause will be critical but also do not understimate the importance of demonstrating a compelling trade secret or customer relationship interest.