• D.C. Court of Appeals Adopts Equitable Reformation Approach for Interpretation of noncompete Agreements.
  • December 4, 2018 | Author: Peter C. Biberstein
  • Law Firm: Thomas, Thomas & Hafer LLP - Washington Office
  • Background

    This case involves an appeal of a preliminary injunction granted by the D.C. Superior Court and the Trial Court’s application of the equitable reformation doctrine to revise noninterference and noncompete clauses in an employment contract between Rabbi Yehuda Steiner and the American Friends of Lubavitch (“AFL”), a nonprofit religious organization. Rabbi Steiner and his wife initially moved from Brooklyn, New York, to Washington, D.C. in 2008, when Rabbi Steiner was hired by AFL to run the campus outreach program at the George Washington University (GW). Rabbi Steiner butted heads with Rabbi Levi Shemtov, the head of AFL’s Washington office, who attempted to fire Rabbi Steiner. Rabbi Steiner challenged his termination before a Rabbinical Court, where he prevailed, and entered into a subsequent employment contract that included non-compete and non-interference clauses which form the basis of this appeal.

    After Rabbi Steiner’s employment was terminated a second time, the Steiners continued to engage in religious outreach activities at GW. Rabbi Shemtov and the AFL sued the Steiners for breach of contract and AFL also sought and obtained a preliminary injunction to prevent the Steiners from competing or interfering with the organization’s on-campus activities at GW. The Steiners appealed the injunction and argued, among other things, that the injunction violated their rights under the Free Exercise Clause of the First Amendment and the Religious Freedom Restoration Act, and that the Trial Court erred in applying the doctrine of equitable reformation to the noncompete and non-interference clauses in order to make reasonable modifications to the clauses rather than employing the more rigid “blue pencil rule,” which is favored in Maryland, and would have required the Court to simply strike out unenforceable provisions.

    Holding

    The D.C. Court of Appeals rejected the Steiners’ arguments that the employment agreement involved religious interpretation and found that the dispute could be resolved based on neutral principles of law. The Court then formally adopted the doctrine of equitable reformation to modify overly broad or otherwise unenforceable provisions in noncompete clauses, but held that the Trial Court erred by modifying the noncompete clause to prohibit activities conducted by the Steiners in their personal capacity. The Court of Appeals vacated the preliminary injunction order and remanded the case to allow for the Trial Court to assess how to properly enforce the employment agreement consistent with the Court of Appeals’ guidance.