TERRY D. WHITTEN, DDS, PC v. Malcolm
11 I.E.R. Cas. (BNA) 470, 249 Neb. 48, 541 N.W.2d 45 (1995)
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Rule of Law:
A noncompetition clause in an employment agreement is unenforceable if it is broader than reasonably necessary to protect an employer's legitimate business interests, specifically if it fails to restrict the employee from working only with clients with whom the employee had personal contact, and unreasonable covenants are not subject to judicial reformation.
Facts:
- Dr. Terry D. Whitten established a dental practice, Midlands Dental Center, in Falls City, Nebraska, in 1971.
- On June 1, 1991, Dr. Terry Malcolm, a recent dental college graduate, entered into a two-year employment agreement with Dr. Whitten.
- The employment agreement included a noncompetition clause (Paragraph 12) stipulating that for one year following termination, Dr. Malcolm would not practice dentistry within a 25-mile radius of Falls City, Nebraska, and Sabetha, Kansas.
- The agreement also included a provision stating that if a court determined the restrictions to be unreasonable, it could modify them as necessary to make them reasonable.
- Just prior to the end of his two-year contract term, Dr. Malcolm informed Dr. Whitten that he would not enter into a new agreement.
- On July 6, 1993, Dr. Malcolm began practicing dentistry with another dentist in Falls City.
- On July 14, 1993, Dr. Whitten notified Dr. Malcolm that his new practice violated the terms of their employment agreement.
Procedural Posture:
- Terry D. Whitten, D.D.S., P.C., doing business as Midlands Dental Center (Whitten), filed an equitable action in the trial court (district court) against Terry Malcolm, D.D.S., seeking an injunction to prevent Malcolm from practicing dentistry and to be awarded damages for alleged breach of contract.
- The trial court refused to grant the injunction or award damages to Whitten.
- Whitten appealed the trial court's decision to the Nebraska Court of Appeals.
- The Nebraska Supreme Court removed the case from the Nebraska Court of Appeals' docket to hear it directly.
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Issue:
Is a noncompetition clause in an employment agreement enforceable if it broadly prohibits a former employee from practicing their profession within a specific geographic area, without limiting the restriction to the employer's existing client base with whom the employee had personal contact, and is such a clause subject to judicial reformation if found unreasonable?
Opinions:
Majority - Lanphier, J.
No, a noncompetition clause is not enforceable if it is broader than reasonably necessary to protect the employer's legitimate interest, particularly when it fails to limit the restriction to the employer's existing client base with whom the employee had personal contact, and such an unreasonable clause is not subject to judicial reformation. The court applied a three-part test for partial restraints on trade, focusing on whether the restriction was 'no greater than is reasonably necessary to protect the employer in some legitimate interest.' While Dr. Whitten had a legitimate interest in protecting its existing client base from unfair competition, the covenant unconditionally prohibited Dr. Malcolm from practicing dentistry in any form for one year within a broad 25-mile radius of two cities, without limiting itself to Dr. Whitten's existing clients with whom Dr. Malcolm had personal contact. This broad prohibition made the clause overreaching and thus unreasonable and unenforceable. The court further held that it is not the function of courts to reform unreasonable covenants for the purpose of making them enforceable, citing Vlasin v. Len Johnson & Co.
Analysis:
This case significantly clarifies the standard for enforcing noncompetition clauses in Nebraska, emphasizing the necessity of narrowly tailoring such restrictions. It reinforces that employers must define their legitimate interests precisely, primarily protecting customer goodwill developed through personal contact, rather than imposing blanket prohibitions on competition. Crucially, the ruling establishes a clear judicial policy against modifying or 'blue-penciling' overly broad covenants, effectively placing the burden on employers to draft reasonable and specific agreements from the outset or risk complete unenforceability. This decision serves as a strong deterrent against aggressive or speculative non-compete provisions.
