Noncompetes are contracts, and any analysis of a noncompete starts with the language in the noncompete. Once a dispute arises, companies often learn that the language in their noncompete agreements fails to impose the obligations that they had intended. If a company then tries to enforce the agreement that it intended, rather than the agreement that was drafted and signed, courts are unsympathetic.
A recent federal court case in Colorado decided by Magistrate Wang, Continental Credit Corporation v. Garcia, demonstrates the risks to a company when it fails to use exact language to define the obligation owed by an employee under a noncompete.
Continental Credit, National Credit Care and Home Loans Assist Corporation were related companies that shared the same owners, officers, management and employees. All three companies were located in the same office on West 121st Avenue in Westminster, Colorado and provided credit repair services. The three companies operated separately to take advantage of different marketing and pricing opportunities. Any new employee was required to sign a noncompete agreement with National Credit Care. After the employee was hired, he or she was assigned to one of the three companies. Sometimes, employees were transferred from one company to another depending on the work available for the companies.
Mr. Garcia signed a noncompete agreement when he was hired in October 2014 and that agreement, like the other employee agreements, was with National Credit Care. As soon as Mr. Garcia was hired however, he began working for Continental Credit. Mr. Garcia continued to work for Continental Credit until he quit and joined a competitive company.
Continental Credit filed a lawsuit against Mr. Garcia and sought to enforce the noncompete that Mr. Garcia had signed with Continental Credit’s affiliated company, National Credit. Garcia argued, however, that he had never entered into a noncompete with Continental Credit and that the one year clock on his noncompete with National Credit Care had expired because his employment with National Credit had terminated on his first day of employment when he was directed to work for Continental Credit.
Continental Credit argued that Mr. Garcia’s literal construction of his noncompete should be rejected because it would lead to the “absurd result” that Mr. Garcia’s employment was terminated on his first day of employment when he was directed to work for an affiliated company. In effect, Continental Credit argued that Mr. Garcia’s noncompete really didn’t mean what it said. That is, that the contract should be construed to state that Mr. Garcia was barred from competing with not only National Credit, but also Continental Credit.
Magistrate Wang rejected these arguments and granted Mr. Garcia’s motion to dismiss. She reasoned that it is “axiomatic” that unambiguous contracts must be enforced according to the plain and ordinary meaning of their terms. More tellingly, Magistrate Wang said this axiom was “particularly true” when enforcing covenants not to compete. Accordingly, Magistrate Wang declined to consider the extraneous evidence submitted by Continental Credit, including an affidavit submitted to show that the parties’ intended that Mr. Garcia would be bound by a noncompete owed not only to National Credit but also to its affiliated companies.
Even though Magistrate Wang does state why the axiom is “particularly true” under the circumstances, it’s apparent that she was suggesting that National Credit and Continental Credit were stuck with the language that they had elected to use in the noncompete agreement. Because noncompetes are disfavored in Colorado, there was no reason for Magistrate Wang to find an ambiguity in the agreement and alter the agreement in a manner that would allow for its enforcement.