Common Clauses

When have Non-Competes been struck down?

Oct 9, 2023

Non-Competes have become increasingly unenforceable, as we’ve covered in a previous blog post: Are Non-Competition Clauses Enforceable? This week, we’re starting with specific examples of non-competes that have been struck down. We’ll return next week with the opposite end of the spectrum, when non-competes have been upheld.

When the scope of the Non-Compete was too broad

For the first time ever, the Federal Trade Commission (FTC) sued three companies in 2023 for unlawful non-competes. These examples reflect cases where too broad a scope, particularly where an individual’s ability to maintain livelihood is threatened, is when non-competes are most likely to get struck down.

  1. Prudential Security, Inc. and Prudential Command Inc.: Low-wage security guards had a non-compete for a radius of 100 miles from their Michigan job site for 2 years after leaving, and had to pay a penalty of $100,000 for violations. This non-compete was struck down and the company had to notify all employees they were no longer bound by the non-compete.

  2. O-I Glass, Inc. and Ardagh Group S.A.: The two largest glass container manufacturers in the US had non-competes for salaried employees covering the entire US and lasting from 1 - 2 years after leaving. This non-compete was struck down and required both companies to provide a clear notice to employees for the next 10 years that no such non-compete existed.

When the Non-Compete clause didn’t ‘Survive’ the Contract Termination

Slightly different, is the 8th Circuit Court case of Cara Miller v. Honkamp Krueger Financial Services, Inc. (2021). In this case, the non-compete was struck down not on the clause itself, but a technicality as the clause was not included in the Survivability section of the most recent employment agreement signed by both parties. When you sign an employment contract, all the clauses in it terminate when your employment relationship terminates, unless explicitly stated to ‘Survive’ beyond termination. That’s why it’s important to review the Miscellaneous Clauses at the end of your contract ;)

When Non-Competes were introduced at the wrong time

In the Kentucky Supreme Court case of Creech, Inc. v. Brown (2014), someone signed a non-compete after 16 years on the job, preventing him to go work for competing companies for 3 years after leaving. The court ruled that as the employee didn’t receive anything ‘new’ for signing this non-compete (e.g. a raise, promotion, or additional training), it was invalid on the basis of ‘Consideration’. Consideration is one of the foundations of legal contracts, requiring that both sides be exchanging something of value, the proverbial quid pro quo! It’s worth noting, however, that other state courts such as the Colorado Supreme Court in Lucht’s Concrete Pumping, Inc. v. Horner (2011) have actually ruled in favor of mid-employment non-competes in the case of At-Will employment.

On the too early end of the spectrum, the 5th Circuit Court case of Rouses Enterprises, LLC v. Clapp (2022) had an employee asked to sign a non-compete during the interview process, a month before an offer was extended. Louisiana law found the non-compete unenforceable because there was no formal employment relationship at the time of signing.

We hope these cases show a variety of ways non-competes have been put to the test, and subsequently failed the test. While the scope is the number one area of enforceability, it’s fascinating to learn about other facets like survivability and time of introduction. We’ve also only touched the surface, as non-competes have been struck down for many other reasons. We hope you look forward to next week’s post when we cover the flip side, when non-competes have passed the test.

For advocacy and beyond,
The Ask Ginkgo Team

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