Non-Compete Provisions in ERISA Plans – A Recent 5th Circuit Case

A recent case out of the Northern District of Texas and the Fifth Circuit Court of Appeals touches upon the intersection of non-compete agreements and ERISA plans.

From 1998 until his resignation in 2010, George Wall worked for Alcon Laboratories, a major pharmaceutical company.   In the years leading up to Wall’s resignation, Alcon was in a state of Flux.  In 2008, pharmaceutical giant Novartis began its takeover of the company.  In connection with the Novartis takeover, Wall’s responsibilities were substantially altered.  He was shuffled around between different supervisors and reassigned between a few different divisions of the research and development department.   In 2009, during a performance review, Wall expressed concerns that his role in the company was being diminished.  Although Wall gave himself high performance ratings in self assessments, his supervisors found that he only “partially met expectations.”  As a result, Wall received a smaller raise and bonus than he had expected.  On November 2, 2010, still unhappy with the direction things were going, Wall arranged for a meeting with Alcon’s HR director, Vickie Stamp, to discuss the situation.    He asked about an appeal of his 2009 performance review.  A week later, Wall again met with Stamp, this time to discuss the possibility of his retiring.  Apparently, Wall was unsatisfied with the outcome of that meeting.  That same day, Wall was offered a job as Vice President of Product Development with Otonomy, Inc., another biopharma company.   Roughly a week later, Wall accepted the offer.  Interestingly, his contract with Otonomy provided that the company would pay up to $50,000 in legal fees if Wall became involved in a dispute with Alcon over severance or retirement benefits.

On November 23, 2010, Wall emailed one of his supervisors and informed them of his intention to retire as of December 31st.  His last day at work would be December 17^th, after which he would take two weeks of paid vacation time.   On December 1st, Wall wrote to Alcon’s attorney explaining the reasons for his retirement and requesting certain retirement benefits.

Since 2004, Wall had been a participant in the Alcon Supplemental Executive Retirement Plan (“the Plan”), an employee benefit plan under the Employee Retirement Income Security Act of 1974 (“ERISA”).  As a condition of participating in the Plan and receiving Plan benefits, employees were bound by certain restrictions.  Yep, you guessed it:  Employees who received plan benefits agreed, among other things, not to disclose Alcon’s confidential information and not to compete against Alcon for five years following termination of employment.  Alcon, like many other companies, had a committee that administered the benefits and made decisions regarding those benefits (“the Plan Committee”).

After receiving Wall’s December 1^st request for Plan benefits, Alcon’s in-house counsel emailed Wall and asked him to provide additional information regarding his new place of employment and the nature of his position there.  Wall refused to provide any further detail.  In fact, on December 22^nd, Wall sent an email to the Plan Committee and indicated that the Company’s request for more specific details regarding his new job was unreasonable and violated his confidentiality obligations to his new employer.  Alcon continued to follow-up with Wall requesting information on his new employment.  Eventually, on January 21, 2011, Wall’s attorney wrote to Alcon indicating that he had accepted a position with Otonomy but that Otonomy did not compete with Alcon because it was a start-up company.

 Although Otonomy may have been a start-up company, it was aggressively pursuing the same market space as Alcon.  Otonomy was working on developing competing products, such as medications for ear infections.  And landing Wall clearly was viewed in competitive terms.  When Wall began working for Otonomy, the company touted his hiring in a press release that detailed his experience at Alcon.  In light of these considerations, the Alcon Plan Committee denied Wall’s earlier request for Plan benefits on the grounds that he was working for a competitor in violation of Plan guidelines.  As a result, he was not entitled to benefits.  The Committee gave Wall 60 days to appeal that decision.  Wall appealed.  Ultimately, on September 27, 2011, Alcon affirmed its denial of Plan benefits on the grounds that Alcon and Otonomy were both competing in the market for treatments of certain ear conditions, and, as a result, Wall had breached the terms of the Plan.

Eventually, Wall filed suit against Alcon.  His claims went beyond Plan benefits:  Wall also sued for breach of contract based on a dispute over vesting of certain restricted Alcon stock and for age discrimination and retaliation.  The district court granted summary judgment for Alcon on all counts and the Fifth Circuit affirmed the decision on all points.   The entire decision out of the Fifth Circuit is interesting and worth a read, but for my purposes, let’s focus on the non-compete aspect:

The first thing to note is that there is no affirmative claim for violation of any non-compete agreement.   This isn’t a standard non-compete case.  This is not a non-compete agreement tied to employment, where continued employment or salary is the consideration for the restrictive covenant.  Instead, we have a non-compete provision contained in an ERISA plan and tied to certain retirement benefits.

Immediately, this tells us that we are outside of the traditional non-compete / restrictive covenant / restraint of trade framework.   Alcon is not seeking enforcement of a non-compete agreement so the court does not delve into whether or not the non-compete provision is supported by a legitimate business interest.

But that’s not all:  Even though we are dealing with the terms of a benefits plan and various agreements between the Company and plan participants, we are not in the breach of contract framework.

Instead, all of this has to be run through the ERISA framework.  Both in the district court and on appeal, Wall argued about the exact terms of the non-compete provision, how it was written in the present tense (i.e. a company that “competes”), and how he wasn’t actually competing against Alcon because his new company only had products that were in the developmental stages.  Wall advanced a number of other relatively weak arguments as to why he was not competing against Alcon, in violation of the provision contained in Plan guidelines.  Ultimately, the Fifth Circuit rejected all of these arguments as absurd— both Alcon and Otonomy were involved in developing treatments for ear infections; they were clearly competitors.

But then the Court put all of this aside and made clear that this was not a matter of strict contract interpretation or ascertaining the true meaning of the agreement:  Instead, this was about ERISA.  And under ERISA, the only question is this:  Was Alcon’s decision to deny Wall benefits arbitrary and capricious?  On these facts, the answer is certainly not.

And because I’m such a nerd, I’ll take it a bit further:  Isn’t there a more interesting question here about the interplay between the enforceability of the non-compete provision, the contract and ERISA?  Suppose we have an ERISA plan, as we do here, and the plan contains broad non-compete provisions.  Suppose those provisions are likely unenforceable in some instance.  For example, the non-compete restrictions apply uniformly to everyone who participates in the plan.  Suppose some employees who are plan participants never had access to legitimately confidential information, never had contact with company clients, etc.  Suppose that, in some instances, the non-compete provision was not supported by a legitimate business interest and is, therefore, unenforceable.  Or, suppose the non-compete was dramatically overbroad in terms of temporal and geographic scope.  Maybe we’re in a state that doesn’t blue pencil.

So let’s say the Plan requires participants to abide by this overbroad non-compete agreement that, in some instances, is unnecessary and unenforceable.  Suppose an employee, Jim, leaves Company A, moves across the country, and takes a job with Company B, a company that competes with Company A.  But Jim never had access to Company A’s confidential information or customer relationships.  And assume further that Jim is working in a division of Company B that doesn’t compete with Company A.   And on these facts, Company A’s benefits committee denies Jim’s request for retirement benefits.

• If the restrictive covenant contained in the benefits plan is legally unenforceable, what happens?

• Do we ever get out of the ballpark of ERISA plan administrator discretion and back into the ballpark of the law of restrictive covenants?

• What is the limit of that discretion in situations involving covenants not to compete?  Does the limit of plan administrator discretion hinge, in any way, on the underlying law of restrictive covenants?

For me, these are all very interesting questions to consider.  The case is Wall v. Alcon Labs. Inc., 13-10117, 2014 WL 97287 (5th Cir. Jan. 10, 2014).   The Supreme Court denied cert on June 30, 2014.

Jonathan Pollard is a trial lawyer and litigator based in Fort Lauderdale, Florida.  He focuses his practice on competition, particularly cases involving non-compete, trade secret and antitrust disputes and represents clients in Florida and throughout the country.  He is licensed in all Florida federal and state courts and routinely represents clients in Fort Lauderdale, Miami, West Palm Beach, Boca Raton, Fort Myers, Tampa, Orlando, Jacksonville, and Sarasota.  His office can be reached at 954-332-2380.