Question #273: Crafting a Concrete Non-Compete
Question: Our company uses non-compete and non-solicit agreements that bar former employees from having contact with any client of our company after they leave. One former employee who recently left is now claiming the agreement is invalid because it is “overly broad” in that it bars him from soliciting not only those clients of ours he used to work with, but clients he never had any dealings with. I can see his point, but at the same time, how are we supposed to know when he signs the agreement which of our clients he will end up working with?
Answer: By Joel O’Malley and Scott Selix
You are exactly right. When a company hires a new employee, it is often impossible to know the extent of the employee’s eventual duties. You don’t know which clients the employee will serve, which projects the employee will work on, or which confidential information of yours the employee will need to see. And it would be crazy to have to specifically name each of those things and have the employee sign a new agreement each time a new client, project, or piece of confidential information crosses the employee’s path. Thankfully, most courts recognize this.
One recent decision that is very helpful to employers in this context is Entegee, Inc. v. Korwek, 2015 WL 5202902 (D. Conn. Sep. 4, 2015), decided under Connecticut and Massachusetts law, but applying legal concepts that generally hold outside of those states. In that case, Entegee—a staffing company—hired Korwek as a recruiter. So he could do his job, Entegee gave Korwek access to its detailed nationwide database of clients, jobs, recruits, etc.
Korwek signed an employment agreement containing non-compete, non-solicit, and non-disclosure provisions. The non-compete provision limited Korwek from working for a competitive business for one year within a 50-mile radius of the Entegee location. The non-solicit provision restricted Korwek from soliciting any client served by Entegee (not just Korwek) within the 50-mile radius during the twelve months preceding Korwek’s departure from Entegee. And the non-disclosure provision barred Korwek from using or disclosing any information regarding Entegee’s procedures, sales, marketing, pricing and costs, training, finances, and—notably—client contact information.
Korwek accepted an offer to join Entegee’s competitor, which, of course, fell within the 50-mile prohibited radius. Before he announced his resignation, he engaged in the all-too-common mischief of foolhardy employees – he downloaded and emailed to himself a bunch of confidential Entegee documents. He then tried to destroy the evidence of his misconduct by deleting the emails off his work computer. When Entegee discovered the misconduct and Korwek’s new employment, it sought a preliminary injunction barring him from working for the competitor.
Korwek (and Korwek’s new employer) opposed the injunction by arguing the non-compete was unreasonable in scope because it included all of Entegee’s competitors in a 50-mile radius, not just those competitors who worked with clients that Korwek personally had serviced. The court pointedly disagreed, holding:
That the non-compete provision is not limited to competitors who work with a particular client . . . does not render it overbroad. At the time Korwek entered into his Employment Agreement, Entegee could not have known about which client(s) Korwek would subsequently pilfer confidential information.
Korwek made a similar argument regarding the non-solicit provision, claiming it was ambiguous and overly broad in that it did not specifically identify which clients he could not solicit, and he had no way to identify who was (or was not) an Entegee customer within the 50-mile radius. Korwek also argued that he could not be prohibited from soliciting clients he had not contacted during his employment at Entegee. The court again had no trouble disabusing Korwek of these notions:
That Korwek may have difficulty identifying the clients Entegee served in the designated market area is both unlikely and insufficient to render the non-solicitation provisions ambiguous, or otherwise unenforceable. Similarly, the phrase “client(s) which were served by [Entegee] in the Market Area” is straightforward. [The] assertion that “[t]here is no reasonable basis for Entegee to restrict Mr. Korwek from soliciting companies” with whom “he had no contact” is also flawed. Massachusetts and Connecticut courts have granted preliminary injunctions enforcing non-solicitation provisions extending to all of an employer’s clients.
The court grounded its holding on the nature of Korwek’s former position with Entegee and the high level of access he had to his employer’s confidential information:
While the Court recognizes the broad scope of the non-solicitation provision—which may not be warranted in every case—given the nature of Korwek’s position, his previous lack of any experience in the staffing industry, and Plaintiff’s demonstration that Korwek had access to and took documents and information generally applicable to Entegee’s clients, including hundreds of resumes, pricing data, and client and employee contact information, the Court finds such a provision likely to be enforced.
Based on these conclusions, the court granted Entegee’s motion for a preliminary injunction.
One thing to note here is that this case does not mean that employers necessarily may utilize restrictive covenants identical to those used by Entegee. The analysis of whether a restrictive covenant is overly broad or ambiguous depends on all the facts of the particular situation. Courts will consider the employee’s position and job duties, the level of access the employee had to the confidential information, the amount of actual contact the former employee had with the client(s) sought to be restricted, how confidential and valuable the information sought to be protected is, and any other relevant factors.
One other aspect of the case is interesting. The employment agreement at issue contained a binding arbitration clause providing that “all legally cognizable disputes” be arbitrated with the American Arbitration Association. Notwithstanding the arbitration clause, Entegee still had the right under the agreement to sue Korwek in court for injunctive relief relating to the restrictive covenants. Korwek challenged Entegee’s motion for a preliminary injunction, arguing the motion should have been arbitrated and that Entegee could have obtained injunctive relief from the arbitration panel.
The court disagreed. It noted the agreement plainly included a carve-out for court actions to enforce the restrictive covenants, and that while disputes ultimately had to be resolved in arbitration, injunctive relief could be obtained in court—granting injunctive relief did not resolve any of the underlying disputes. This is a good reminder for employers that even if binding arbitration of employment disputes is desired, agreements can be drafted that still allow employers to obtain preliminary injunctive relief from a court.