Enforceability of Non-Compete/Confidentiality Agreements with Competitor
Obviously, it is not advisable to share proprietary and trade secret information with competitors or potential competitors, but business circumstances may dictate a need for such revelations, such as a possible merger, acquisition or future business arrangement. In these situations, the parties generally enter into a Non-disclosure Agreement (“NDA”) and should also consider a Non-compete and Confidentiality Agreement (“Non-compete Agreement”).
The 2018 case of Darton Environmental, Inc. v. FJUVO Collections, LLC, et.al. (U.S. District Court, Western District)(the “Darton Case”) illustrates the risks of revealing your secrets to a competitor, even with a Non-compete Agreement in place. If the situation turns bad, the August 1, 2018 opinion of Judge Moon is a useful summary of the various causes of action that are available in such circumstances. The opinion also highlights how the court will approach each available cause of action. The next several issues of this newsletter will be devoted to an analysis of Darton v. FJUVO.
Darton Environmental, Inc. (“Darton”) refines cooking oils to sell as biofuel. FJUVO Collections, LLC (“FJUVO”) collects, refines and sells cooking oil. Three individual defendants in the Darton Case (Andy Chen, Daniel Zheng and Adam Zheng) inspected Darton’s facility on behalf of FJUVO for the sole “purpose of evaluating a potential business relationship”. Prior to the inspection, the parties executed Non-compete Agreements, as well as an agreement for the sale of oil by FJUVO to Darton at a reduced price. The sale of oil went well and is not a subject of the Darton case. However, Darton claims that FJUVO and the individual defendants used the information learned during the inspection to set up a competing refinery based on Darton’s technology.
Breach of Contract
The Court focused on two components of the agreement between the parties, first, the non-compete provision and, second, the confidentiality section.
The non-compete portion of the agreement states that FJUVO “shall not, in any manner, represent, provide services or engage in any aspects of business that would be deemed similar in nature to business of Darton..” and “directly or indirectly engage in any business that would be considered similar in nature to with [sic] Darton Environmental, Inc., its subsidiaries, and any current or former clients and /or customers.” and further not “solicit any client, customer, officer, staff or employee for the benefit of [itself] or a third party that is or may be engaged in a similar business.”
Judge Moon found the non-compete language to be unenforceable because it was ambiguous and overbroad. The Court noted that FJUVO was in the business specifically restricted by the agreement and that FJUVO would be forced to stop soliciting its existing customers the way the non-compete provisions were written. The Court concluded that this would improperly prevent FJUVO from engaging in its normal day-to-day business. Furthermore, the restrictions exceeded protection of Darton’s proprietary technology and if read literally, would limit conduct that is “similar” in nature. Finally, the Court refused to enforce the non-compete provision, finding that it lacked traditional geographic and temporal limitations.
The Court pointed out the Virginia Supreme Court applies the same test to the confidentiality sections of the agreement as it does to the non-competition portion. Thus, with the same lack of temporal limitation and overbreadth, it was inevitable that the Court would strike the confidentiality provision in the agreement.
Other Causes of Action
The Complaint filed by Darton also included the following legal theories: conversion, tortious interference with business expectancy, statutory business conspiracy, common law conspiracy, and violation of Virginia Uniform Trade Secrets Act. The next issue of this newsletter will discuss the conversion and trade secrets claims.
If you want to review other articles by our law firm on the topic of non-compete agreements, visit: https://grddlaw.com/case-example-non-compete-agreement-must-narrowly-tailored and https://grddlaw.com/non-compete-agreements-even-unenforceable-agreements-can-effective-virginia.