Nike, Inc. v. Eugene McCarthy, 379 F.3d 576 (9^th Cir. 2004)

This recent Ninth Circuit case provides an interesting analysis of the circumstances under which a court will restrain a former employee from accepting employment with a competitor. 

In this case, the Ninth Circuit had to determine the validity of a non-compete agreement under Oregon law.   In June 2003, Eugene McCarthy left Nike, where he was director of sales for its Brand Jordan division, and joined a competitor, Reebok, as its vice president of U.S. footwear sales and merchandising.  Nike sought a preliminary injunction to prevent McCarthy from working for Reebok for a year, invoking a non-compete agreement McCarthy had signed in 1997 when Nike had promoted him to his earlier position as a regional footwear sales manager.  Under Oregon law, a non-compete agreement generally is void and unenforceable unless agreed to upon either the employee’s initial employment or the “[s]ubsequent bona fide advancement of the employee with the employer.”  Or. Rev. Stat. § 653.295(1)(b) (2004). 

The Ninth Circuit affirmed the district court’s preliminary injunction enforcing the agreement.  Based on the circumstances surrounding McCarthy’s promotion by Nike and the execution of the non-compete agreement, the Ninth Circuit held that the agreement met the statutory requirements to be enforceable.  The Ninth Circuit further held that Nike has a legitimate interest in enforcing the agreement, because there is substantial risk that McCarthy in shaping Reebok’s product allocation, sales and pricing strategies, could enable Reebok to divert a significant amount of Nike’s footwear sales given the highly confidential information McCarthy acquired at Nike.  Although the Ninth Circuit’s decision involves extensive analysis of the Oregon non-compete statute, it also includes analysis of more general non-compete principles that would apply in Washington .  For example, the court explains that McCarthy’s general skills and industry knowledge that he acquired while with Nike are not a protected interest of Nike’s that would justify enforcing a non-compete agreement.  Rather, the court stated, an employer has a protected interest in specialized information "pertaining especially to the employer’s business.”

In this case, as Brand Jordan ’s director of sales, McCarthy obtained knowledge (e.g., Nike’s product launch dates, product allocation strategies, new product development) that was not general knowledge in the industry.

The Ninth Circuit rejected  McCarthy’s argument that Nike must show actual use or potential disclosure of confidential information before a non-compete agreement can be enforced.   Rather, “[a]n employee’s knowledge of confidential information is sufficient to justify enforcement of the non-compete if there is a substantial risk that the employee will be able to divert all or part of the employer’s business given his knowledge.”  The court held that, given the confidential information McCarthy acquired at Nike, and his new position with Reebok, “there was a substantial risk that Reebok would be able to divert a significant part of Nike’s business.”

The Ninth Circuit also rejected McCarthy’s contention that the balance of harm does not favor Nike because the only harm that Nike would have suffered is “fair competition.” The court held that Nike has shown “potential harm from unfair competition due to McCarthy’s knowledge of confidential information peculiar to Nike’s products.”  Meanwhile, there were many factors mitigating any potential harm to McCarthy from the preliminary injunction:  Under the non-compete, Nike had to pay McCarthy his full salary and benefits during the one-year restricted period, and Reebok agreed to keep his job offer open during the one year period.  Though McCarthy testified that he would suffer by sitting out a year because of the fast-moving nature of the industry, the court concluded that “the potential disruption to Nike’s sales and products outweighs any harm that the injunction would cause McCarthy in the intermediate or long term.”