Enforcing Non-Competes Against Telecommuters

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http://blogs.orrick.com/trade-secrets-watch/files/2014/01/14jan14-200x150.jpgThe number of people working from home, or “telecommuting,” has increased over time, with Census data showing that 17 percent of American employees do their jobs remotely.  When someone is working very far from the office, even out-of-state, to what extent can an employer enforce non-compete obligations against employees who leave their jobs?  Last month, a federal district court in Pennsylvania concluded that some but not all of a non-compete agreement’s restrictions were enforceable in this situation.

The case, Capsicum Group, LLC v. Rosenthal, involved two telecommuting e-discovery workers named Garry Pate and Brian Rosenthal.  Pate and Rosenthal worked for Capsicum Group LLC, a digital forensics and e-discovery vendor.  When Capsicum hired them in 2008 and 2009, respectively, it had each sign employment agreements that contained six restrictive covenants limiting their use and disclosure of Capsicum confidential information, and barring them from soliciting Capsicum employees or competing with Capsicum within a 250-mile radius of one of Capsicum’s offices for a period of two years.

Capsicum was based in Philadelphia, but had offices in New York, Washington DC, and Florida.  Pate lives in Maryland and worked out of Capsicum’s Washington DC office.  Rosenthal lives in Brooklyn and worked out of Capsicum’s New York office.

Around Labor Day 2013, Pate and Rosenthal resigned to go work for a Capsicum competitor and former customer called SRR.  Both Pate and Rosenthal had been assigned to work with SRR, then a customer, while they were employed by Capsicum.  SRR was based in Detroit, and both Pate and Rosenthal intended to telecommute and work for SRR from their homes in Maryland and Brooklyn.

When Capsicum learned of their plans, it immediately filed suit and sought a preliminary injunction to enforce the terms of the restrictive covenants in their employment agreements.

In December 2013, the U.S. District Court for the Eastern District of Pennsylvania granted Capsicum’s request in part, and denied it in part.  The court upheld two of the six covenants—one pertaining to the nondisclosure of Capsicum’s unique technologies, business strategies, customer information, and other confidential information, and another prohibiting Pate and Rosenthal from working for former Capsicum clients within a 250-mile radius for a period of two years following their departure from Capsicum.

The court declined to enforce the remaining covenants.  Some it found too broad, including a covenant that extended non-solicitation of customers also to include prospective customers, as well as a general prohibition against working for or having a financial interest in any competing company within the same 250-mile and two-year window.  And in the case of the covenant prohibiting Pate and Rosenthal from soliciting Capsicum’s employees to leave the company, the court found no evidence to support the likelihood of a breach.

Given that both Pate and Rosenthal were working remotely for SRR, the court went through a nuanced application of the covenants’ geographical limitations.  Even though SRR’s primary office and e-discovery servers were located in Detroit — outside the prohibited zone — the court needed to consider whether Pate and Rosenthal, who were working remotely from the Washington, D.C., and New York metro areas, respectively, could run afoul of those limitations.

Because the parties had not presented any authority as to whether Pate and Rosenthal’s remote activities from Washington, D.C. and New York were more properly attributed to those cities or Detroit, the court considered that question equitably, finding that “Pate and Rosenthal will not violate [the agreement] if they communicate with other SRR employees or work on customer matters via Detroit-based servers while physically present in Washington, D.C., or New York,” but holding that “[t]hey will violate [the agreement] if they have substantive contact with customer personnel while they are physically present within the restricted zone [within 250 miles of a Capsicum office].”  As a result, the court concluded that Pate and Rosenthal were prohibited from participating in data collections in the restricted zone.

Satisfied that it had properly balanced Capsicum’s legitimate interests by imposing these restrictions, the court noted that in such a “highly technological field which permits substantial work to be done remotely, this geographic restriction may not prove much of a limitation at all, as evidenced by the substantial amount of work that they will be able to do for SRR from their current home regions in the restricted zone.”

As technology changes the way we work, employees and employers alike will need to adapt their thinking about the geographic restrictions in non-compete agreements.  Employees will need to carefully consider the implications of a move to a new company as well as to a new city.  Depending on the nature of the job, an employee working in Boston could still be working “in” San Francisco, Seattle, or anywhere else for that matter.  For their part, employers crafting non-competes should think multiple steps ahead and consider not only where competitors are located but also where their data is stored and where employees and consultants are located.  Just because a former employee and/or the new employer is located in a city outside the restricted zone doesn’t mean the original employer is out of luck when it comes to enforcement.

Topics:  Non-Compete Agreements, Restrictive Covenants, Telecommuting

Published In: General Business Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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