On January 10, 2014, the U.S. Court of Appeals for the Fifth Circuit affirmed a lower court’s determination that an employer properly denied a former employee’s request for benefits because he violated the noncompete portion of his Employee Retirement Income Security Act (ERISA) plan.

The plaintiff in this case had worked for Alcon Laboratories Inc., a major pharmaceutical company, from 1988 until resigning in 2010. He asked for, but was denied, a series of retirement and incentive-based benefits before he left Alcon to join another company. He then sued Alcon and its benefit plans, seeking those benefits as well as damages stemming from alleged age discrimination and retaliation.

In January 2004, Alcon permitted the plaintiff to participate in the “Alcon Supplemental Executive Retirement Plan” or “ASERP,” an employee benefit plan under ERISA. Employees must agree to various covenants as a condition of receiving ASERP benefits. The lawsuit and subsequent appeal focused on two covenants: (1) a covenant not to disclose Alcon’s confidential information; and (2) a covenant not to compete. The latter—the more important of the two—states:

[A]s a condition to receipt of ASERP Benefits, for a period of five (5) years following termination of employment, each Participant will not . . . carry on any business of, or be engaged in, consult or advise, . . . or permit his name or any part thereof to be used by, any person or entity engaged in or concerned with or interested in any business carried on, anywhere in which the Alcon Affiliated Companies carry on their business, which competes with the products manufactured and sold or services provided by the Alcon Affiliated Companies (the “Business”). If the Participant violates the Covenant Not to Compete set forth herein, he or she shall forfeit all ASERP Benefits.

Prior to retiring from Alcon, the plaintiff accepted a job as the Vice President of Product Development with Otonomy, a clinical stage bio-pharma company focusing on diseases of the inner and middle ear. His contract with Otonomy included higher base pay and a guarantee that Otonomy would pay up to $50,000 in legal fees in the event of a dispute with Alcon about severance or retirement benefits. Three days after accepting his offer from Otonomy, the plaintiff emailed his Alcon supervisors stating his intention to retire from Alcon, and requesting ASERP benefits.

After Alcon received the plaintiff’s request for ASERP benefits, Alcon requested that he provide additional information, including the name of his new company and the nature of his duties so that the ASERP Committee could determine whether his post-Alcon employment would violate the non-compete or confidentiality covenants. Despite those covenants and the plaintiff’s acceptance of a position with another pharmaceutical company a month earlier, he repeatedly refused to provide the requested information. Finally, his counsel informed Alcon that he had accepted employment with Otonomy but that Otonomy was not a competitor because it was a start-up company.

While the ASERP Committee was considering the plaintiff’s request, Otonomy issued a press release announcing his hiring, citing his previous experience at Alcon, and naming several Alcon products. Otonomy’s website also announced that the company was developing medications for ear infections, which Alcon believed were clearly aimed at developing products that could compete with those sold by Alcon. Accordingly, the ASERP Committee denied the plaintiff’s ASERP benefits and informed him that he had 60 days to request a review and to provide any material he desired the Committee to include in its review of the claim.

The plaintiff appealed, denying that his employment with Otonomy violated the covenant not to compete. Alcon later affirmed its denial of ASERP benefits on the grounds that Alcon and Otonomy were both competing in the market for treatments of otitis media (an ear condition).

The plaintiff filed suit claiming that the benefits were improperly denied. His ERISA claim came down to one question: whether the ASERP Committee’s determination that his employment with Otonomy violated the non-compete clause was arbitrary and capricious. The district court granted summary judgment, concluding that the ASERP Committee’s finding that the plaintiff violated the non-compete was not arbitrary and capricious, even if “[o]ther people might have made a different decision.”

On appeal, the plaintiff contended that the clause is written in the present tense (“competes”), whereas the allegedly competing product was a product in development, not for sale at the time he joined Otonomy. He thus emphasized that the non-compete covenant requires that Otonomy be “manufactur[ing]” a product in order to violate the non-compete covenant. The plaintiff also argued that the product does not compete with anything Alcon produces because Alcon’s product was approved by the FDA only to treat acute otitis media, but Otonomy’s product is being developed to treat chronic otitis media.

The Fifth Circuit held that the contract did not in fact require that a competitor be manufacturing anything. Although it anticipates that the competitor be competing with “the products manufactured and sold or services provided by Alcon,” that only requires that Alcon, not the competitor, be producing something. The portion of the clause that is relevant to Otonomy’s conduct is much broader: the prohibition is on the plaintiff’s “engag[ing] in, consul[ting] or advis[ing] . . . or permit[ting] his name . . . to be used by” any company—such as Otonomy—that is “concerned with or interested in any business . . . which competes with products” manufactured by Alcon. As the court concluded, Otonomy is in the developmental stages of a drug treating otitis media, and Alcon manufactures a drug treating otitis media.

The Fifth Circuit held also that the plaintiff’s interpretation of the contract failed for another, more simplistic, reason. The plaintiff, by profession, is a researcher. Almost by definition, any work he would ever do on a product would be in its developmental stage. By the plaintiff’s interpretation, he could never, then, violate the non-compete clause of the ASERP. The court stated that his interpretation would thus be an absurd rendering of the contract.

The court held that the plaintiff’s behavior gave credence to the reasonableness of the Committee’s interpretation. After his “retirement” from Alcon, the plaintiff initially refused to respond to Alcon’s request that he divulge the entity for which he was working. Alcon provided four opportunities over the course of several months for the plaintiff to provide information concerning his new company, and only on the last attempt did he finally comply.

Finally, the Fifth Circuit noted that when the plaintiff signed his employment contract with Otonomy, he extracted a promise for $50,000 in legal fees should Alcon dispute whether he had violated the non-compete clause. The court noted that if he truly believed that any finding that he was violating the non-compete clause was unreasonable, that promise was “a curious extract from negotiations,” and that promise revealed at least the reasonableness of the Committee’s non-compete determination.

The Fifth Circuit also affirmed the district court’s summary judgment as to other retirement benefits sought by the plaintiff, and affirmed the dismissal of his age discrimination claim.