Enforcing a Non-Compete Agreement? – One Size Does Not Fit All

| Alexander D. ZengMark Kachner

Two high-end, off-price fashion brands are duking it out over an employee jumping ship from Century 21 Department Stores, LLC to Rue Gilt Groupe.  On November 5, 2018, Century 21 sued Rue Gilt Groupe and Berenice Arcuri in New York state court. The suit is to enforce, amongst other things, Arcuri’s post-employment non-compete and confidentiality obligations to Century 21.  Though the suit was filed in New York, there is no allegation what state law governs the non-compete.  Resolution of this issue will have a significant impact on the case.

According to the complaint, Acuri entered a Confidentiality and Fair Competition Agreement during her prior employment with Century 21.  For most of her employment at Century 21, Arcuri was responsible for buying premium denim, women’s clothing, and accessories.  Arcuri worked closely with Century 21’s European vendors.  Arcuri was allegedly entrusted with highly confidential and proprietary information pertaining to Century 21’s vendors, European agent identities and relationships, history of vendor discounts, brand volume, merchandise selection, merchandise turn, products, sales, future business plans, merchandise allocation plans, pricing, profitability and gross margins.  She agreed not to work for Century 21’s competitors for up to two years after the end of her employment. The agreement included a list of specific competitors, including Rue Gilt Groupe.  Nevertheless, Acuri left Century 21 and began working at Rue Gilt Groupe, allegedly to work with the same European vendors with whom she had developed relationships with while working for Century 21.

In the lawsuit, Century 21 seeks “injunctive relief enforcing the non-compete covenants agreed to by Arcuri by: (i) compelling Arcuri and Rue Gilt Groupe to terminate their employment relationship; (ii) prohibiting Arcuri from exploiting her knowledge of Century 21’s most confidential information for her and/or Rue Gilt Groupe’s benefit; and (iii) prohibiting Arcuri from working with the European agents and vendors she developed relationships with during her employment with Century 21 or otherwise disrupting Century 21’s valuable vendor relationships; and (B) damages caused by Arcuri and Rue Gilt Groupe’s unlawful behavior.”

Non-compete agreements are subject to state law, and states vary in their treatment of them.  There is no one-size-fits-all non-compete agreement, and the enforceability of a non-compete agreement turns upon the state law under which it is construed.

For example, California law favors employees.  Section 16600 of the California Business and Professions Code states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”   In the seminal case, Muggill v. Reuben H. Donnelley Corp., the California Supreme Court interpreted section 16600 to invalidate a non-compete clause.  62 Cal. 2d 239, 241, 398 P.2d 147, 149 (1965). In Muggill, the employee quit his employer after qualifying for retirement benefits.  A provision of the retirement benefit plan recited that Muggill would forfeit his benefits if he went to work for a competitor. After leaving, the employee accepted employment with a competitor, and the company terminated his benefits. The California Supreme Court held that Section 16600 “invalidates provisions in employment contracts prohibiting an employee from working for a competitor after completion of his employment or imposing a penalty if he does so, unless they are necessary to protect the employer's trade secrets.” Id. at 149. The pension program was part of the employment contract, and the court found that the forfeiture provision would restrain him from “engaging in a lawful business” and voided the forfeiture provision.

Generally, states that are more willing to enforce non-compete provisions do so for countervailing policy reasons: to prevent trade secret misuse, reduce the cost of trade secret litigation, protect employers’ investments in employees, and favor freedom of contract.  The outcome of this lawsuit will be heavily impacted by the state law governing Arcuri’s non-compete agreement.

Editor: Catherine Holland