By Wayne D. Garris, Jr., J.D.
After the district court granted CVS’ motion for a preliminary injunction to stop the former VP from beginning his new job, the employee appealed, arguing that his 2017 non-compete agreement was unreasonable.
Affirming the district court’s grant of CVS’ motion for a preliminary injunction, the First Circuit held that a former vice president’s new position with PillPack, a direct competitor, would violate his non-compete covenant with the pharmaceutical giant. Examining the reasonableness of the covenant, under Rhode Island law, the court concluded that under either an “as-applied” or “facial” analysis, the non-compete covenant was reasonable and applied to the vice president’s new position (CVS Pharmacy, Inc. v. Lavin, February 28, 2020, Lipez, K.).
The employee was the Senior Vice President for Provider Network Services for CVS. He managed a team of 250 employees and his primary duties included negotiating pricing contracts with retail pharmacies, auditing pharmacies, and setting up pharmacy networks for payers. He also participated in underwriting calls for the contracts that the employer negotiated with its payer clients. Because of his role, the employee was “intimately familiar with the prices and terms of [the employer’s] deals with both retail pharmacies and payers.”
“Competitor.” At four points during his time as a senior VP, the employee had to sign an RCA. Each RCA contained a noncompetition, nonsolicitation, and nondisclosure covenant. By 2017, when the employee most recently signed an RCA, the employer had significantly expanded the definition of “competitor” in the RCA. The 2011 and 2012 RCAs defined “competitors” as other companies providing pharmacy benefit management services. The 2014 RCA expanded this definition to include retail pharmacies and health clinics, as well as any other entity that ‘provides products or services competitive with the products and services provided by the [employer] within the last two years’ of the employee’s employment. In 2017, the definition of “competitor” was expanded to include companies providing services to long-term care facilities and prescription infusion drugs.
New job. On March 29, 2019, the employee accepted employment with PillPack, one of the employer’s direct competitors. While he worked for the employer, the employee led the employer’s development of a strategy for determining whether to contract with the competitor. His role with the new company was expected to be similar to his role with CVS, however, the employee and the competitor stated that it would take measures to ensure that he would not disclose CVS’ confidential information.
Lawsuit. CVS sued the employee seeking to enforce the noncompete covenant contained in the 2017 RCA. The district court entered a TRO barring the employee from working for PillPack or disclosing confidential information. CVS then moved for a preliminary injunction. The district court granted the employer’s motion finding that the employee’s new position would violate the terms of the noncompete covenant and that the covenant was reasonable and enforceable under Rhode Island law. The employee appealed, but only challenged the district court’s finding that the CVS would likely be successful on the merits of its claim.
Enforceability. Under Rhode Island law, noncompete covenants will only enforced if “the contract is reasonable and does not extend beyond what is apparently necessary for the protection of those in whose favor it runs.” The employee argued that the noncompete covenant was unreasonable because its definition of “competitor” was overly broad.
Notably, the employee did not assert that his new position fell outside of the scope of the covenant’s prohibited activities, or that his new employer was not a “competitor” as defined by the agreement. Instead, he argued that because the covenant was overbroad, it was unreasonable on its face, and thus unenforceable. The employer, on the other hand, argued that the court should not analyze the reasonableness of the covenant on its face, but as applied to the employee.
Reasonableness. The court noted that Rhode Island law is unclear on whether a “fact-specific” analysis of the reasonableness of a covenant requires a facial review of the agreement or an as applied analysis. In this case, the court noted that a facial review is less desirable because the covenant identifies six categories of competitors, but only two are relevant to the district court’s analysis. A facial review would require the employer and the court to delve into issues that have nothing to do with the issues between the parties. Whereas, the as-applied approach, would allow the court to quickly get to relevant issues. The court declined to endorse a particular method of analysis, however, concluding that the noncompete covenant is enforceable under an as-applied review or a facial review.
As-applied review. The employee argued that the non-solicitation and non-disclosure provisions sufficiently prevented him from disclosing CVS’ confidential information to the competitor. Thus, the noncompete agreement, as applied to his specific position, is unreasonable because barring his future employment is too broad given the other restrictions that were available.
The court rejected this argument noting that the employee’s previous position provided him with “extensive knowledge of [the employer’s] strategic initiatives and detailed information about its contracts with retail pharmacies and payers.” Further, the court stated, it “strains credulity” to think that the employee could perform the duties of his new position without using the knowledge he gained in his previous position. The competitor even stated that it hired the employee in part to “disrupt the industry,” which he is qualified to do “because of his knowledge of strategic initiatives developed by a major industry player.”
Facial analysis. The court did not adopt the district court’s finding that the agreement was reasonable on its face. However, Rhode Island adopted the doctrine of partial enforcement, which allows the enforcement of overly broad covenants “to the extent reasonable, so long as there is no bad faith or deliberate overreaching by the employer.”
The district court found no evidence of bad faith or deliberate overreaching and the appeals court agreed. Thus, even if the noncompete agreement failed a facial review, the court held, it was reasonable to enforce the noncompete agreement to stop the employee from working for the competitor for 18 months. Applying the doctrine of partial enforcement, the court concluded that the employee’s new role would fall within the scope of the non-compete agreement even if it had to be modified to make it facially reasonable.
Concurring opinions. In separate concurring opinions, Judge Lynch and Judge Selya agreed that the noncompete agreement was reasonable. However, both judges took issue with the opinion’s approach to the as-applied versus facial analysis issue.
Judge Lynch concurred only with the section of the opinion that enforced the agreement based on an as-applied analysis as required by Rhode Island law. She called the opinion’s the use of facial analysis and the partial enforcement doctrine “unprecedented” and noted that it is up to the Rhode Island courts or legislature, not the federal courts, to change Rhode Island law.
Judge Selya argued that the facial approach is more consistent with Rhode Island Supreme Court precedent which has expressed disfavor of noncompete provisions and in which that court had explicitly stated that the “reasonableness inquiry concerns the contract or agreement as a whole.”
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