From this post on D.C. Toedt’s blog I learned about Miller v. Honkamp Krueger Fin. Servs., Inc., No. 20-3061, 2021 WL 3729047 (8th Cir. Aug. 24, 2021) (PDF here). It’s of interest as an instance of a drafter making an odd mistake.
In 2006 Miller entered into an employment agreement with HKFS. Among other things, it said that “for a period of one year following the termination of Employee’s employment for whatever reason,” Miller wouldn’t compete with HKFS. After HKFS was acquired in 2020, Miller quit her employment and immediately began working for a competitor. A couple of days later, Miller also terminated the employment agreement. HKFS sought a preliminary injunction. The lower court granted it; the Eighth Circuit reversed.
Here’s what the court said:
By its terms, the non-compete provision survived the termination of Miller’s “employment.” But there is nothing in the non-compete provision to suggest the parties intended it to survive the termination of the Employment Agreement. And the contract treats the term of employment and the term of the Employment Agreement as two distinct concepts. …
Specifically, Section 2 of the Employment Agreement provides: “Term. Employment is at will; however the parties agree that either party may terminate the Agreement on written notice.” The subject of the two clauses is not the same. The first clause “employment is at will” refers to the term of employment, while the second clause allowing either party to “terminate the Agreement on written notice” refers to the term of the Employment Agreement. The meaning of Section 2 is plain: the first clause provides that employment is “at will,” and the second clause instructs that the Employment Agreement is freely terminable on written notice. By its plain meaning, Miller could quit or be fired at any time or for any reason; however, written notice was required to terminate the Employment Agreement.
Section 2’s distinction between the term of employment and the term of the Employment Agreement is critical because, as noted above, the non-compete provision only survives the termination of Miller’s employment. There is nothing in the non-compete provision to suggest that it survives the termination of the Employment Agreement. It follows that when Miller left her employment with HKFS on September 4, the non-compete provision remained in force, assuming, arguendo, that the Ancillary Agreement did not supersede the Employment Agreement with respect to the non-compete provision. Nonetheless, when Miller terminated the Employment Agreement in writing on September 7, the non-compete provision became inoperable.
I agree with the Eighth Circuit. Normally, a no-competing provision doesn’t have a term—it just says for how long the employee is prevented from competing. It follows that there’s no basis for an employee to terminate a no-competing provision.
A no-competing provision might occur in an employment agreement that provides for a term of employment. In that case, an employee might terminate the employment agreement to terminate their employment, but it would be understood that the no-competing provision nevertheless applies after termination, instead of being terminated along with the term of employment.
But in this context of this dispute, employment was at will, so terminating the employment agreement wasn’t require to terminate employment. For termination to have any meaning, it would have to apply the no-competing and no-soliciting provisions. That’s presumably not what HKFS had in mind, but you can’t assume that a court will be inclined to fix a drafter’s mistake.
The fix would have been simple—eliminate the reference to terminating the contract! Adding a provision saying that the no-competing provision would survive termination would not be a suitable fix, as that would involve preserving the mistake and adding something to neutralize it. Instead, eliminate the mistake.
Incidentally, if employment is at will but the employee enters into a contract covering ancillary matters, I recommend you call it something other than an employment agreement, to avoid just this sort of confusion.
Ken:
While I agree with your main point of avoiding arguable but stupid interpretations, this was a stupid interpretation. First, the distinction that the court makes between terminating employment by firing vs terminating agreement by notice is illusory: you fire an employee by notice. The idea that there’s nothing in the agreement other than employment and no-competing is a factual question that seems unlikely. For example, a typical IP assignment provision is neither, and ought to end with employment. So, I think the court probably got it wrong. We often see this kind of hyper technical focus on what the words say rather than what they say within the structure of the economic arrangement. So we ought to be wary of giving the court such an opportunity — treat court like malicious wish genies.
I agree.
The court didn’t discuss it, but isn’t an obligation that the obligee can cancel at any time illusory?
Yep.
I think that a big part of the problem is that there was a contract for an at-will-employment relationship. There’s no way that wasn’t going to cause confusion. It allowed the court to hold that the employment and the employment agreement were two separate things that could be terminated independent of each other.
It makes no sense to have a non-compete agreement that can be terminated by the obligee. We, of course, don’t have the whole employment agreement to know what else it contained. Depending on those other contents, it might make sense to have a provision that the noncompete provision survives the termination of the agreement. But Ken is right that, if the noncompete/solicitation were the only contents, such a survival would only compound the drafting error.
Oddly, the circuit court seems to have completely disregarded the catch-all phrase in the non-compete language — “for whatever reason” — which arguably includes employee’s termination of the employment agreement even if the term of the employment is not co-extensive with the term of the employment agreement. I don’t readily see how the non-compete language at issue is ambiguous (granted, I did not read the cited case interpreting an analogous non-compete language). [end]