Data Management v. Greene

Supreme Court of Alaska · Contracts

ContractsCovenants not to competenoncompeterestrictive covenantreasonablenessgood faithjudicial modificationblue pencil rule

Facts

Data Management employed James H. Greene and Richard Van Camp under contracts containing a covenant not to compete. The covenant barred the employees, for five years after termination, from competing with Data Management anywhere in Alaska and broadly prohibited them from performing similar services or being connected with similar businesses. Shortly after the employees were terminated, Data Management sued for breach and sought a preliminary injunction preventing them from rendering computing services to twenty-one named individuals. The injunction was granted, but the trial court later concluded the covenant was not severable and entirely unenforceable.

Issue

When a covenant not to compete is overbroad, may a court modify it to make it enforceable rather than invalidate it entirely? If so, under what standard may the court do that?

Rule

If an overbroad covenant not to compete can be reasonably altered to render it enforceable, the court should do so unless the covenant was not drafted in good faith. The employer bears the burden of proving the covenant was drafted in good faith, and the trial court may consider the commercial setting, purpose, effect, and reasonableness factors such as time, space, confidential information, unfair versus ordinary competition, hardship to the employee, and proportionality of benefit and detriment.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

North Shore Analytics, a software consulting firm in Anchorage, requires Mira Solis to sign a covenant barring her for four years from working for any competing technology business anywhere in Alaska. After she leaves, the firm sues, and the evidence shows a one-year restriction limited to clients she personally serviced would adequately protect the firm’s confidential customer information. The firm also presents credible evidence that it honestly drafted the broader clause believing it was necessary to protect those interests.

Under the governing rule, what is the most appropriate response by the court?

Explanation. The majority adopted a reasonableness approach: if an overbroad covenant can be reasonably altered to render it enforceable, the court should do so unless the covenant was not drafted in good faith. Because the employer bears the burden of proving good faith and has done so here, the court may enforce a reasonably narrowed restraint rather than void the clause entirely. (Derived from Data Management v. Greene (n.d.).)