Fifth Circuit Holds Mississippi Employer to Precise Language of its Non-Competition Agreement and Denies Enforcement

Posted: Monday, January 05, 2009

By: Joshua C. Dickinson

Topic: Agreements

Fifth Circuit Court of Appeals Affirms Mississippi Court's Decision Holding Non-Compete Covenant in a Purchase Agreement Unenforceable

By:      Joshua C. Dickinson

            Mick Messbarger

The United States Court of Appeals for the Fifth Circuit recently affirmed the decision of the United States District Court for the Southern District of Mississippi which held that a non-compete covenant in a purchase agreement was unenforceable against a former employee because his employment was not terminated during the term of his five year employment contract but simply ended with the expiration of the express five-year term.  Specialty Rental Tools & Supply, LP v. Shoemaker, 2008 WL 5235987, at *7 (5th Cir. Dec. 17, 2008). 

In March 2002, WilliamP.Shoemaker (Shoemaker) sold his oilfield service company to Specialty Rental Tools & Supply, LP ("STS").  In conjunction with the sale, the parties entered into a purchase agreement which included a covenant not to compete  under which Shoemaker agreed not to compete with STS for the longer of (1) two years from the date of the signing of the purchase agreement, or (2) two years after Shoemaker's employment with STS was terminated.  Id. at *1.  Shoemaker also entered into a five-year employment contract with STS lasting until March 1, 2007.  Id. at *2.  In late February 2007, Shoemaker received a letter from STS advising him that his "employment contract with [STS] will expire on March 1, 2007, and will not be renewed.  This notice does not constitute a termination of your contract, rather a notice of non-renewal."  Id. (emphasis in original).  Within days of receiving this letter, and after his employment contract expired, Shoemaker went to work for a direct competitor of STS.  Id.

STS sought injunctive relief prohibiting Shoemaker from competing with STS.  Id.  The district court determined that Mississippi law applied under which, "restrictive covenants are in restraint of trade and individual freedom and are not favorites of the law," and that their enforceability is "largely predicated upon the reasonableness and specificity of [their] terms."  Id. at *3.  The district court found "the parties clearly intended that once Shoemaker concluded his five-year term of employment, he would no longer be prohibited from competing with STS."  Id. (internal brackets omitted).  In reaching its conclusion, the court determined "the parties contemplated that Shoemaker's employment at STS would be deemed to have been 'terminated' only if it ended (1) prior to the completion of five years[, and] (2) as the result of an act taken by one of the parties to the agreements."  Id.  The district court noted the STS "termination" letter was carefully worded and specifically stated that "Shoemaker was not being terminated, only that his contract was not renewed.  Thus, it is clear that STS understood and appreciated the differentiation, meaning, and effect of the term 'termination' versus a non-renewal under the contract."  Id.

On appeal, the Fifth Circuit Court of Appeals affirmed the District Court, finding the use of the word "'terminate' is ineluctably limited to affirmative acts of the contracting parties."  Id. at *4.  As such, the non-compete covenant "could be enforced only if a termination of Shoemaker's employment occurred during the years of its five-year term."  Id. at *6 (internal brackets and emphasis omitted).  "As this condition precedent never occurred, the . . . covenant against competition expired, simultaneously with the expiration of the Employment Agreement, on March 1, 2007."  Id.

In short, STS cannot now claim that Shoemaker's employment was terminated after it had carefully detailed that his employment was not being terminated, but instead his employment contract was not being renewed.  If STS originally intended to extend the non-compete covenant for two years after the completion of the employment contract, it could have plainly said so.  Instead, the non-compete agreement specified that it applied only where Shoemaker's employment was terminated, something STS specifically addressed and denied in its letter electing not to renew Shoemaker's employment contract.

The lesson from this case is that employers must carefully draft restrictive covenants as courts will hold the employer to the verbiage it utilized.