Some employers spend large amounts of money and time training employees, creating customer lists, and coming up with secret strategies to stay ahead of their competitors, so it makes sense that they would want to protect their investments. For many, this requires the use of restrictive covenants.
Many states view restrictive covenants as depriving an employee of his or her choice, but employers need ways to prevent their former employees from soliciting their clients or giving away confidential information.
Restrictive covenants are governed by state law and because most states don’t have specific statutes in place, they turn to common law to determine whether they’re enforceable. Enforceability falls on how reasonable the restrictions are and whether the employer has a legitimate business interest. If parts of a restrictive covenant are viewed as overly broad or unenforceable, a court may use discretion to modify the agreement and only enforce the remainder (blue penciling!).
But What Are Reasonable Restrictions?
A former key account executive violated his restrictive provisions by going to work for the direct competitor of a linen rental and sales company after untruthfully informing his employer that he was quitting to work for his family’s tile business. Mickey's Linen v. Fischer, Case No. 17 C 2154, 2017 BL 316684 (N.D. Ill. Sep. 8, 2017).
The executive was promoted four times, exposing him to confidential marketing plans, pricing lists, and customer contact information. He signed an agreement that prohibited him from engaging in the same business in the three counties that he worked in for 18 months and from soliciting customers that he worked with during his last 18 months of employment. Mickey’s didn’t follow normal procedure and continued to give the executive access to confidential information because it believed that he was leaving the industry. On his last day of work, he deleted all of the customer information on his company phone before returning it and refused to return any company related paperwork.
The competing company knew that the executive was bound by restrictive provisions but it assigned him a territory including part of a county that he was prohibited from working in. Within a month and with the company’s knowledge, the executive was actively soliciting Mickey’s customers. He argued that the restrictions shouldn’t be enforced because they impose a “blanket prohibition on competition,” but they only targeted the areas and customers that he had direct contact with.
The court found that the nonsolicitation provision was overly broad but it modified the provision to only include customers in the two counties that the executive had contact with. Lastly, the court noted that the provisions didn’t provide any undue burden to the executive because he could easily work in another territory.
And What Aren’t?
In Allied Fire Prot., Inc. v. Huy Thai, Case No.: PWG-17-551, 2017 BL 351368 (D. Md. Oct. 2, 2017), a company that specializes in fire protection and equipment installation alleged that its former engineer violated the terms of his employment agreement when he left the company to work with its clients and competitors. One restrictive provision prohibited the engineer from “directly or indirectly engaging with former, current, or future clients” for a period of five years while the other provisions had no time or geographical limit.
The court found that the terms of the restrictions were overly broad and unreasonable because it essentially prevented the engineer from working in his field or similar fields for an extended amount of time unless Allied Fire gave him written consent. Allied Fire said that the restrictions were reasonable to protect its business interests because the engineer developed strong relationships with its clients but it failed to show that five years was a necessary time frame or that clients would leave in favor of the engineer.
Blue penciling was not an option in this case because the company didn’t provide the court with the actual language included in the employment agreement.
Although a company may have legitimate interests that it wants to protect, it still needs to be mindful of the fact that employees leave jobs. While specific and narrowly tailored restrictions may be okay for a year or two, broader restrictions that cover larger periods of time and geographical areas aren’t. Employers should also consider that their new employees may have previously signed restrictive covenants and make sure that they are not helping the employee to deliberately violate them.
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