Trade Secret / Noncompete Blog

A common debate in noncompete drafting circles is whether to define the prescribed “business” or refer to the “business being conducted by the Company,” or words to that effect. In a nutshell, those in favor of defining the business tend to believe that instructing the employee (and eventually the court) with specificity as to which lines of business are within the scope of the noncompete is preferable, whereas the folks choosing to refer to the “business being conducted by the Company” may be concerned that defining the business specifically may preclude application of a noncompete to new product lines that emerge following the execution of the noncompete.

Drafting decisions made on this issue can have far-ranging effects, causing the trier of fact to determine what a competing business is. Note the case of Luminar Laval Ignite Limited v. Mama Group PLC and Mean Fiddler Holdings Limited, in the First Division, Inner House, Court of Session in Edinburgh, Scotland (http://www.scotcourts.gov.uk/opinions/2010CSIH01.html), which involves a noncompete in which a music venue was sold by one group to another. The selling group operated a nearby music venue and, in the purchase and sale agreement, restricted the purchasing group from operating a music venue that engages in “late night entertainment in direct competition on a like for like basis with the discotheque business” of the selling group, although the purchasing group was specifically permitted to operate the purchase property “as live music venue, or a bar at which music is played.”

This “like for like basis” language, with respect to which one judge stated, “The phrase which the parties used seems to me to be a recipe for litigation,” had the effect of causing the judges to attempt to determine whether the noncompete was violated by the purchasing group’s operation of a discotheque that played recorded music that may have differed in style and ambiance from that of the selling group (including whether one club catered more to people who wanted “to get trashed”).

The lower court found that the purchasing group could operate its club without violating the noncompete because one club was “regarded as studently and trendy” while the other was “popular and good for dancing, but also ‘cheesy.’” The higher court disagreed, finding that the distinction between “cheesy” and “studently and trendy” was not appropriate and holding that the purchasing group would be violating the noncompete by operating a club playing recorded music in any style and with any ambiance.

So, in sum, whether you are drafting a noncompete in the businesses of medical devices, insurance, industrial equipment, operating a discotheque or club or any other field of business, you should consider whether you would like to specifically describe which lines of the applicable business are subject to the noncompete or let a judge make that determination for you. Who is in a better position to understand the intent of the parties with respect to, for instance, which types of music (or medical devices or insurance offerings) are considered competitive to your business?