Dunkin' Donuts Pays Its Way Out of Starbucks Manager's Noncompete Promise

The Puget Sound Business Journal is reporting that Paul Twohig ran Starbucks retail operations in the Southeastern United States before taking the Dunkin’ job.

By switching companies, Starbucks alleged, Twohig violated an agreement in which he had said he would not work for a rival for 18 months. He left Starbucks in March and asked to have the non-compete lifted, but was denied.

“As part of the settlement Mr. Twohig will complete initial training but will otherwise not work at Dunkin’ until Jan. 15, 2010,” Starbucks said in a statement quoted by the Puget Sound Business Journal. “In addition Starbucks will be paid $500,000. Mr. Twohig also reconfirmed his commitments not to share Starbucks trade secrets and other confidential information with Dunkin’ at any time.”

So, per this report, Starbucks gets the benefit of some of the 18-month term in its noncompete promise from Mr. Twohig and they also get $500,000 for the effort.

Buy-outs of remaining term of a noncompete are not out-of-the-ordinary in the business world and they represent efficient legal solutions to often messy litigation.

Federal Appellate Court Holds No Error in $1.16 Million Noncompete Breach Verdict from Rhode Island

If you click on this link: http://newsroom.law360.com/articlefiles/129967-Astro_med.pdf or the title to this blog post you'll be able to read fresh analysis from the First Circuit in their affirmation of a lower court's entry of a $1.16 million verdict in a breach of noncompete and nonsolicitation trial.

But the part of the First Circuit's opinion that interested us most was an argument posed by the former employee and his new employer: if a covenant not to compete is deemed too broad to be enforced and is judically modified by the trial court to make it enforceable, can the employee be liable for breach of the original covenant BEFORE the covenant is judicially reformed or fixed? Employee was essentially asking: "how can I be liable in damages for breach of a promise the court says can't be enforced unless it is modified?" The employee acknowledged that he could be liable AFTER the trial court fixed the covenant - but he vehemently argued that he couldn't be liable for breach BEFORE the trial court fixed the covenant (which just happened to be when he engaged in all his breaching behavior).

The trial court found that he COULD be liable for his conduct that occurred before the judicial fixing and the First Circuit agreed. Here is their reasoning:

Defendants’ contention does not withstand analysis. Their logic would give the promisor in a non-competition agreement one free breach, requiring a prior judicial order before the provision could be said to have been violated. Such a proposition, the validity of which is without authority, 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. Further, because most breaching employees gain the full benefit of the breach the first time they compete with their former employer, a second breach after judicial warning would in most cases be cumulative. Also, once a court restricts the scope of the non-competition agreement, the breaching party is being held to a more narrowly circumscribed agreement than the one he signed, and the more restrictive terms of the agreement remain as effective
as the day they were agreed to.

We are not particularly persuaded by this logic and we think the Court had to craft a rule here so that this crafty litigant wouldn't get away with his plan to breach that covenant not to compete. The Court is essentially saying: "if you weren't liable for breach in the BEFORE MODIFICATION period, you'd be getting a free pass and we can't have that" and also "you were always obligated under the geographically reasonable restriction that the trial court modified the agreement to provide, you just weren't obligated under the geographically unreasonable parts."

There might be law review articles out there discussing this argument - you're bound by a geographic scope that is reasonable even though your's is unreasonable and if you run afoul of that reasonable provision, you're in trouble - and we'll keep an eye out for them. This is an interesting issue.