The natural tendency for many people when reviewing contracts is to skip to the good stuff. They want to know the important details. How much do I have to pay? What does the other party have to do? How long will this contract last? The boilerplate provisions at the end, involving things like severability, authority, and choice of law aren’t very exciting at all. Sometimes these are merely copied from prior contracts with little or no thought given to them. A recent case from the United States District Court for the Western District of North Carolina, however, makes clear that these provisions, particularly in the context of covenants not to compete, are as important as ever.
Mageba Textilmachinen GMBH & Co. KG v. Archibald arose from the employment relationship between Mageba, a German corporation, and Scott Archibald. Mageba, which manufactures and sells certain technologies for processing woven and knitted fabrics, hired Archibald in 2004 to represent its products. As part of his employment contract, Archibald agreed that during his time with Mageba and for the three years following the end of his employment, he would not serve as an agent or representative for the sale of similar materials within his territory. In 2010, Mageba informed Archibald that it would be terminating his employment in several months. Before the effective date of the termination, Archibald went to work for a competitor, and he continued working there after his employment with Mageba officially ended.
Mageba filed suit in North Carolina, where Archibald resides, contending that Archibald breached his employment agreement and stole Mageba’s trade secrets. In its lawsuit, Mageba asked the court to enter an order preventing Archibald from continuing his employment with the competitor.
Covenants preventing employees from working for competitors after their employment ends are generally upheld if the time and geographic restrictions are no broader than necessary to protect the employer’s legitimate business interests. In many cases, the protected business interest is the employer’s relationship with its customers, which the employer wants to preserve after an employee leaves. Whether the time and geographic restrictions are reasonably calculated to protect customer relationships is answered only after careful scrutiny by the court.
Mageba, however, did not get that far. One of the “standard” provisions toward the end of the employment agreement prevented any further analysis by the court.
Mageba’s contract with Archibald contained a “choice of law provision” providing that German law applied to the interpretation of the agreement. German law, unfortunately for Mageba, is rather strict when it comes to covenants not to compete. Post-employment restrictions cannot last longer than two years. Also, if the employer, rather than the employee, terminates the relationship, the restrictions are valid only if the employer first provided notice that the termination was for cause. Finally, the employer must continue to pay certain compensation to the employee during the term of the restricted period.
As none of these requirements were met, the court denied Mageba’s request for injunctive relief and declared that the covenant was unenforceable as a matter of law.
Whether the inclusion of German law at the end of the contract was a conscious decision or simply something that was included from a prior contract remains to be seen. One thing that is for sure, though, is that the provisions at the end of any contract merit serious attention. Businesses cannot assume that these provisions are “standard” or that they are not important. If they do make such assumptions, they may wind up getting something far different from what they were bargaining.