Caseflicks

Alaska Supreme Court • 1988

Data Management, Inc. v. Greene

757 P.2d 62 | 1988 Alas. LEXIS 111 | 1988 WL 69466

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Takeaway

In short, this case adopts a flexible modification rule for noncompetes: Alaska courts may narrow an overbroad covenant to a reasonable scope, but only when the employer proves it drafted the restraint in good faith.

Background

Data Management, Inc. employed James H. Greene and Richard Van Camp under contracts containing covenants not to compete. The covenants barred the employees, for five years after termination and anywhere in Alaska, from performing similar services or participating in a competing business without Data Management’s written consent. The contracts justified the restriction by referring to confidential and secret information available to the employees.

After Greene and Van Camp left the company, Data Management sued for breach of the covenants. It obtained a preliminary injunction preventing them from providing computing services to twenty-one named individuals. The superior court later granted summary judgment for Greene and Van Camp, holding that the covenant was overbroad, indivisible, and therefore wholly unenforceable. It also denied Data Management’s request for contractual liquidated damages. Data Management appealed.

Issues

Issue #1

Whether an overbroad employee covenant not to compete must be held wholly unenforceable, or may instead be judicially modified to a reasonable scope.

Holding

An overbroad covenant may be reasonably modified and enforced, provided that the employer proves it drafted the covenant in good faith.

Reasoning

The court rejected the strict rule under which any overbroad restrictive covenant fails in its entirety. Although that approach prevents courts from remaking the parties’ bargain, it is too mechanical because it invalidates every excessive covenant without regard to its setting or to the parties’ legitimate contractual interests. Courts should generally respect parties’ ability to contract while still protecting employees from unlawful restraints.

The court also rejected the narrower “blue-pencil” rule, which permits enforcement only when offending words can literally be deleted without adding or rewriting language. That rule makes enforceability turn on semantic drafting accidents rather than substance: a geographically excessive covenant may be enforceable or unenforceable depending solely on whether its language happens to be grammatically divisible.

Instead, Alaska adopted a rule of reasonableness. A court may alter an excessive covenant enough to make it enforceable if the revised restriction reflects what would have been reasonable between the parties when they contracted. In assessing reasonableness, courts may consider the restriction’s time and geographic limits, the employee’s customer relationships and access to confidential information, whether the restraint prevents unfair rather than ordinary competition, the burden on the employee’s livelihood, and whether the employer seeks to suppress skills developed independently of the employment.

The employer bears the burden of establishing good-faith drafting. This requirement answers the concern that judicial modification would reward employers for deliberately imposing oppressive restrictions in the expectation that a court will later salvage them. If the employer willfully overreached, the court should refuse to modify the covenant at all.

The court found support for this approach in Restatement (Second) of Contracts section 184(2) and Alaska’s unconscionability statute, AS 45.02.302. Both permit a court, in appropriate circumstances, to limit an unconscionable term rather than invalidate an entire agreement.

Issue #2

Whether Data Management’s covenant should be modified and enforced, and whether liquidated damages are available.

Holding

The court did not decide those questions; it remanded for the trial court to determine good faith, reasonable modification, and, if modification is appropriate, liquidated damages.

Reasoning

The superior court had treated the covenant as wholly unenforceable because it believed the provision could not be severed. Because that court did not apply the good-faith-and-reasonableness standard adopted on appeal, a remand was necessary.

On remand, the trial court must first decide whether Data Management drafted the five-year, statewide restriction in good faith. If it did, the court must determine whether the covenant can be reasonably narrowed and enforced in light of the relevant facts. If a modified covenant is enforceable, the trial court must also reconsider Data Management’s claim for liquidated damages, which it had denied solely because it viewed the covenant as void.