Damages may be awarded for breach of a non-compete agreement even if the agreement is modified after the breach occurs, according to the recent First Circuit decision in Astro-Med v. Nihon Kohden.
In Astro-Med, the trial court modified the scope and range of the prohibited conduct set forth in the non-compete when it issued a preliminary injunction. Instead of North America and Europe, the trial court limited the prohibited conduct to a specific state and a limited subset of customers. Such limitation was consistent with Rhode Island law which disfavors non-compete agreements — as Colorado law does. Later, at trial, damages were awarded for breach of the modified non-compete. The opinion isn’t clear, but presumably the breach and resulting damages occurred prior to the preliminary injunction.
On appeal, defendants sought to have the damage award vacated as they argued that the non-compete was not enforceable until it had been modified by the district court. In the words of the First Circuit, defendants were seeking the application of the “one free breach” rule, which would bar damages for breach of a non-compete if the non-compete was subsequently modified by a court. At first blush, this argument seems plausible. As the First Circuit noted: “We have no quarrel with the defendant’s general contention that under the partial enforcement rule, an overly broad noncompetition provision cannot be enforced until it is modified, a proposition that seems self-evident”.
The First Circuit rejected defendants’ argument, however, as it reasoned that the one free breach rule “would eviscerate all but the most narrowly tailored non-competition agreements, since a modification of any term of the provision would justify a breach of all its terms”.
This case raises some perplexing issues. The First Circuit may be right that employees should not be able to enjoy the benefits associated with the “one free breach” rule. On the other hand, there may be situations where it would be unfair to ask employees to anticipate whether and how an unreasonable restraint will be construed. And, in those situations, a court may not be inclined to award damages against a former employee when the employee guesses wrong about how the restrictions in a non-compete should be enforced.