Contracts lie at the foundation of any modern economy, yet many agreements used in business transactions are not legally enforceable. Reasons that may prevent contracts from being enforced include lack of capacity on the part of either party or the illegality of the agreement. One controversial form of contract that can be deemed unenforceable is a covenant not to compete. This agreement, often added to business sales or employment contracts, prohibits a party from competing with another party by engaging in similar business activities in a specified area and time. Though it may be considered as a contract in restraint of trade, which runs counter to public policy, this covenant can also serve legitimate interests by preventing unfair competition (Azevedo et al., 2018). Whether a covenant not to compete is deemed enforceable depends on the jurisdiction and on its terms being viewed as reasonable by the court.
The case of Coleman v. Retina Consultants concerns a covenant not to compete between Brendan Coleman and his employer. The contract prevented Coleman from using his program, Clinex, to compete with Clinex-RE, which was based on Clinex and co-developed with his employer. Having left the company, Coleman marketed both programs to its competitors. When the court enjoined Coleman from competing, he appealed the verdict. Covenants not to compete are accepted in most U.S. jurisdictions, including Georgia, where the trial was held (Azevedo et al., 2018). However, to be enforceable, the covenant must also apply to a clearly and reasonably (not overly broadly) defined activity, geographical area, and time (Edwards, 2018). It must not needlessly violate Coleman’s rights, including the property rights to Clinex, which he retained. If all those conditions are satisfied, the court would presumably be obliged to uphold the covenant.
In addition to stopping Coleman from competing with Retina Consultants, the court also requested that he repay the sum he took from his former employer’s bank account. The questions of why Coleman did this and how he managed to withdraw money from a company account seem pertinent to adjudicating this claim. However, this withdrawal appears unrelated to the central issue of the covenant. If Coleman stole funds from the company, then Retina Consultants has an adequate remedy at law. Therefore, the court did not need to ask Coleman to return the money in this instance.
It seems plausible to suggest that Coleman’s behavior – withdrawing the company’s money, offering both programs to its market rivals – may have prejudiced the court against him. U.S. courts are generally unfavorably inclined towards covenants to not compete (Azevedo et al., 2018). Coleman’s actions, however, appeared to illustrate such agreements’ usefulness to the public interest. The same public policy considerations of defending economic competition that non-competition clauses are said to contradict can also be applied to combating unfair competition. Marketing his employers’ program, which incorporated their trade secrets as well as his own, was an unfair practice on Coleman’s part. Whether the covenant is upheld or not, it seems to be in the public interest for the court to stop Coleman from marketing the program.
When considering whether to enforce a controversial contract such as a covenant not to compete, the court must consider the legitimate interests of all parties involved as well as the broader public policy. Although non-compete clauses can be a legitimate way of preventing unfair competition, it depends on them being reasonable, not restricting their signees beyond what is necessary. While Coleman has hurt his case by withdrawing money from a company account and using a program containing its trade secrets, this does not have a direct bearing on the assessment of his covenant. Both that agreement and Coleman’s other activities to the detriment of Retina Consultants need to be considered on their own merits and in the light of adequate alternative remedies.
References
Azevedo, A., Pereira, P. J., & Rodrigues, A. (2018). Non-compete covenants, litigation and garden leaves. Journal of Business Research, 88, 197-211.
Edwards, Linda H. (2018). Legal writing: Process, analysis, and organization (7th ed.). Wolters Kluwer.