New Jersey Bill Would Limit Non-Compete Agreements

A bill in the New Jersey Senate, Senate Bill 3518 (“SB 3518”), and an identical companion bill in the New Jersey Assembly (Assembly Bill 5261), would significantly curtail the use of non-compete agreements in New Jersey.  In an article posted on our website, Cliff Atlas, Kevin Miller and Colin Thakkar analyze SB 3518 and pose key questions about the impact and wisdom of the proposed legislation.  While certain recent reports have suggested that employers overuse or abuse non-compete agreements against even low-level employees, that conclusion is inconsistent with our overall experience.  It is unclear how the legislature would be better equipped than the courts to combat improper use or abuse of non-compete agreements in particular cases.  These and other questions will undoubtedly be addressed, and hopefully answered, during the upcoming legislative proceedings.

 

Members of Jackson Lewis’s Non-Competes Practice Group are prepared to help employers with New Jersey employees navigate this budding legislative initiative.

Minnesota Court Of Appeals Reaffirms That A Non-Compete Must Be Part Of A Job Offer To A Prospective Employee

Last month, this Blog highlighted a Minnesota decision evaluating the consideration required for non-compete agreements entered into after the commencement of employment.  As that decision held, such agreements must be supported by valuable consideration over and above continued employment.

This month, in Safety Center, Inc. v. Stier, Case No. A17-0360 (Minn. App., Nov. 6, 2017), the Minnesota Court of Appeals weighed in on the consideration required for non-compete agreements entered into at the commencement of employment.  In doing so, the court issued an important reminder to employers that impose non-competes as a condition of employment:  if the conferral of at-will employment is to serve as the only consideration for a non-compete agreement, then the agreement must be presented to the employee before the offer of employment is accepted.  This timing for the presentation of the non-compete agreement to the new hire is different from the looser requirements applicable in most states.

Background

On May 19, 2013, Joan Stier interviewed for a part-time therapist position at Safety Center, a treatment center for special-needs sex offenders. Shortly thereafter, Safety Center made an offer of employment to Stier, which she accepted.

Safety Center sent Stier a letter confirming her acceptance of the job. The letter discussed Stier’s rate of pay and other terms of employment, but made no mention of the need for a restrictive covenant agreement.  Nevertheless, on Stier’s first day of work, she was handed a non-compete agreement and told to sign it in order to be able to commence employment.  Stier signed the agreement and proceeded to work for Safety Center for nearly twelve years, eventually attaining the position of Program Director.

In 2015, Stier resigned from Safety Center and started a competing treatment center, in express violation of the non-compete agreement she signed on her first day of employment. Safety Center sued and sought enforcement of the agreement.

The Court’s Analysis

The Minnesota Court of Appeals relied upon well-settled law in holding that Stier’s non-compete agreement was unenforceable. When a non-compete agreement is not specifically made part of the offer of employment, i.e., ancillary to the employer’s offer and employee’s acceptance, there must be independent consideration for the non-compete.  This holds true whether the non-compete is presented to the employee on the first day of employment, or the tenth year of employment.

Critical to the court’s decision was its determination that an offer was made by Safety Center, and accepted by Stier, before Safety Center ever advised her of the requirement of a non-compete agreement. In other words, the non-compete was not “ancillary” to the employment offer and acceptance.  Consequently, Safety Center could not create an enforceable non-compete agreement without providing Stier with independent consideration for signing it, over and above continued employment.  Safety Center failed to do that, and, therefore, the court refused to enforce the agreement.

The Takeaway

This case serves as an excellent reminder that Minnesota employers should describe the requirement of a non-compete agreement in the job offer to a prospective employee, and perhaps include a copy of the non-compete with the job offer. Please contact a member of Jackson Lewis’s Non-Competes Practice Group for further assistance in establishing enforceable non-compete agreements.

SCOTUS Declines To Review Password Sharing Prosecution Under Computer Fraud and Abuse Act

Our Workplace Privacy, E-Communication and Data Security Practice Group recently posted this article regarding the United States Supreme Court’s denial of certiorari in Nosal v. Unites States, 16-1344.  This Blog previously posted articles about the Nosal case, which can be found here and here.

In the Nosal case, the individual defendant was criminally prosecuted under the Computer Fraud and Abuse Act (“CFAA”), for using his past assistant’s password to access his former employer’s computer system after the company had revoked his own access credentials. His conviction was affirmed by the Ninth U.S. Circuit Court of Appeals, and the petition for certiorari to the U.S. Supreme Court followed.

By declining to review the Ninth Circuit’s affirmance, the Supreme Court left in place a pronounced split in the Circuit Courts regarding the extent to which the CFAA applies in the employment context. While the First, Fifth and Eleventh Circuits generally hold a similar view as the Ninth Circuit, other courts have concluded that criminal prosecution under the CFAA was intended for the more limited purpose of targeting third party hackers.  Jackson Lewis attorneys, including members of our Non-Competes and Protection Against Unfair Competition Practice Group, are available to answer further questions.

Clear as Mud: Illinois Courts Continue to Grapple With The “Adequacy” Of Consideration for Non-Compete Agreements

It is axiomatic that a contract requires consideration to be binding. Ordinarily, courts only inquire into the existence, but not the “adequacy,” of consideration.  Illinois courts, however, also scrutinize the adequacy of consideration when it comes to determining whether restrictive covenant agreements qualify as an enforceable contract.  Absent adequate consideration for the restrictive covenant, there is no contract, and the court never gets to the question of whether the restrictions are otherwise reasonable and enforceable.

Since the 2013 Illinois appellate court decision in Fifield v. Premier Dealer Services, Inc., state courts in Illinois have consistently held that, absent 2 years of continued employment after the restrictive covenant is signed, additional consideration beyond simply continued employment is required; whether such additional consideration is adequate is determined on a case-by-case basis.  In contrast, the federal courts in Illinois have quarreled with the Fifield decision and its progeny, usually finding that the 2-year requirement is not a “bright line” test for adequacy of consideration, and then engaging in an analysis as to whether the amount of continued employment in the particular case was “substantial” enough to qualify as adequate consideration.  This state-vs-federal court distinction persists, as revealed in two recent cases.

On October 20, 2017, the federal court for the Northern District of Illinois again announced that it did not consider the 2-years-continued-employment to be a bright-line test for the adequacy of consideration. In Stericycle, Inc. v. Simota, Case No. 16 C 4782, the court held that the enforcement a non-compete supported by continued employment requires an individualized, case-by-case assessment, and is not subject to a bright-line rule.

Factually, the Court noted that in February 2015, approximately one month into their employments with Stericycle, Donald Simota, Dana Sullivan, and Chad Van Houton signed employment agreements prohibiting them from soliciting any Stericycle customers or employees for twelve months following their separations from the company. Two months later, Simota signed a separate agreement with an additional prohibition against general competition for the same twelve-month period.

In March 2016, Simota, Sullivan and Van Houton tendered their resignations from Stericycle. Shortly thereafter, they allegedly commenced employment with a competitor, solicited customers of Stericycle, and solicited at least one Stericycle employee to join them in their new venture.  Stericycle promptly filed suit for breach of contract, and in July 2016, the three defendants moved for dismissal of the complaint.  As a basis for dismissal, the defendants argued that even if Stericycle’s accusations were true, they did not work for the company long enough to be bound by the applicable non-solicit and/or non-compete covenants.

In reviewing the motion to dismiss, the court noted that the defendants’ employment with Stericycle lasted for approximately thirteen months after they signed the non-solicit agreement, and for approximately eleven months after Simota signed the separate non-compete agreement. The court further noted that three recent Illinois appellate court decisions “appear[ed] to adopt” a “bright-line rule” that at-will employment must continue for two years in order to constitute adequate consideration for post-employment restrictions on solicitation and/or competition.  Ultimately, however, the court denied the motion to dismiss, based on the prediction that the Illinois Supreme Court would reject the two-year rule.

As the court explained, “a promise of continued employment may be an illusory benefit where the employment is at-will.” For that reason, “at-will employment [must] continue for a ‘substantial period’ after an employee signs a restrictive covenant” in order to qualify as adequate consideration for the covenant.  The court added, however, that while two years of employment would normally be sufficiently “substantial” to support a restrictive covenant, it did not follow that “anything less than two years is automatically insufficient.” Rather, the court advocated a “fact-specific approach” that takes into account not only the length of employment but also various other factors, including “the circumstances surrounding the employee’s signing of the covenant, the conditions of his employment, and his termination.”  In the case of Simota, Sullivan, and Van Houton, the court considered “the length of their employment and that all three resigned,” and concluded that their employment “continued for a ‘substantial period’ under Illinois law.”

Only 11 days later, on October 31, 2017, an Illinois appellate court affirmed the dismissal of a non-compete claim in Automated Industrial Machinery, Inc. v. Christofilis, No. 2-16-0301, where the lower court found inadequate consideration based on the two-year bright-line rule.  Although the appellate court noted the “possibility” that the Illinois Supreme Court might ultimately reject the two-year rule, it pointed out that the defendant in that case only worked for five months after signing his non-compete agreement – a duration the court found to be insufficient under any standard.  Importantly, the court also rejected the former employer’s argument that the non-compete was supported by additional consideration beyond just continued employment, pointing to the fact that no other consideration was specified in the agreement.

The lesson for employers, once again, is that drafting matters. For example, enforceability may be enhanced if the agreement with the employee spelled out what the employee is receiving beyond mere employment in exchange for the employee’s covenants not to compete or solicit.  For guidance on how to navigate the “adequacy of consideration” issue in Illinois, please contact a member of Jackson Lewis’s Non-Competes Practice Group.

Georgia Court of Appeals Confirms Non-Solicitation of Employees Covenant Need Not Have Geographic or Material Contact Language

As previously noted in Jackson Lewis’ Non-Compete & Trade Secrets Report, Georgia adopted legislation governing restrictive covenant agreements entered into on or after May 11, 2011. This law, however, does not address employee non-solicitation (i.e., anti-pirating) covenants, leaving courts to apply common law to such restrictions.  Georgia common law can be confusing and even contradictory on certain issues, such as whether an anti-pirating covenant must be limited to a specific geographic territory or to employees with whom the covenanting employee had contact.  The Georgia Court of Appeals for the Fourth Division addressed both issues in a recent decision, CMGRP, Inc. v. Gallant, No. A17A1168 (Ga. Ct. App. Oct. 4, 2017).

Gallant began working for a unit of CMGRP in October 2008.  On October 7, 2008, she executed an employment agreement prohibiting her from “recruiting or hiring any employee of [CMGRP] for a period of one year following her resignation.” Notably, this anti-pirating covenant was not limited to a particular geographic territory or to employees of CMGRP with whom Gallant had any contact or relationship.

The trial court initially rejected the anti-pirating covenant because it was not limited to employees with whom Gallant had established relationships at CMGRP.  The Court of Appeals reversed the trial court’s order, however, based on prior holdings in which it “repeatedly upheld employee non-recruitment provisions that were not limited to employees with whom the former employee had an established relationship.”  Notably, the Court acknowledged a seemingly contradictory decision in which it criticized a non-solicitation covenant for prohibiting the solicitation of employees with whom the employee had no prior contact. The Court explained that the matter at issue in that case was actually a separate non-compete covenant, and its discussion of the non-solicitation covenant was merely “dicta” that “lack[ed] the force of an adjudication.”

In addition to challenging the anti-pirating covenant’s application to employees with whom she had no established relationship, Gallant also argued the pirating covenant was unenforceable because it lacked a geographic territory.  Though she ultimately abandoned that argument, the Court of Appeals found it “worth noting that this Court has upheld employee non-recruitment provisions that lacked a geographic limitation.”

This is a pro-employer decision, as the Court was clear that an anti-pirating covenant need not be limited to a particular geographic territory or to employees with whom the soliciting employee had material contact.  Moreover, because Georgia’s recent restrictive covenant legislation does not apply to anti-pirating covenants, the Gallant decision is instructive in all cases involving such covenants, regardless of the date of the agreement.  Employers should be aware, however, that other courts of appeals in Georgia have issued conflicting holdings, and those courts are not bound by the ruling in Gallant.  For assistance in drafting legally enforceable restrictive covenant agreements, please contact a member of Jackson Lewis’s Non-Competes Practice Group.

Continued Employment Isn’t Always Sufficient – Minnesota Requires Additional Consideration For Non-Compete With Current Employee

The Minnesota federal district court recently refused to enforce a non-compete agreement, in part, because the employer failed to establish that the agreement was supported by valuable consideration.  The decision, issued on October 6, 2017 in Mid-America Business Systems, v. Sanderson et. al., Case No. 17-3876, serves as an important reminder that, in Minnesota, there can be no shortcuts with restrictive covenant agreements.   New employees must be presented with the non-compete agreement before accepting an offer of employment.  Further, existing employees must receive something of additional value, beyond continued employment, as consideration.

By way of background, Mid-America Business Systems (“Mid-America”) claimed in its TRO request that it hired Kevin Sanderson as a temporary employee, subject to an “unwritten” probationary period. Mid-America did not require Sanderson to sign a restrictive covenant agreement when it first hired him.  Months later, however, Mid-America allegedly converted Sanderson to a permanent position and required him to sign a non-compete.   Mid-America stated that in consideration for signing the agreement, it increased Sanderson’s pay, provided him additional training, and gave him access to confidential information.  In response, Sanderson denied that any increases in pay, training or access to information were tied to a non-compete, and further denied knowledge of any probationary period.

In rejecting the TRO request, the court concluded that Mid-America failed to prove the agreement was supported by adequate consideration. Importantly, the court agreed that increases in status, pay, and/or training could constitute adequate consideration for a post-hire non-compete.  However, it found that Mid-America failed to demonstrate that it informed Sanderson of the alleged probationary period, or of any connection between the agreement and the alleged additional consideration.   Therefore, for purposes of awarding injunctive relief, the court deemed the non-compete to be unenforceable.

For employers operating in Minnesota, the takeaway from this decision is that courts will look carefully for proof of adequate consideration before enforcing a non-compete agreement. In particular, when asking an existing employee to sign a non-compete, employers must offer additional consideration beyond continued employment, and must ensure that the employee understands the terms of agreement.  The absence of clear documentation seemed to be a critical factor in this case.  Please contact a member of Jackson Lewis’s Non-Competes Practice Group for further assistance in making your company’s non-compete agreements stick.

Virginia Uniform Trade Secrets Act Prohibits Improper Acquisition of Trade Secrets, Regardless of Subsequent Use

Misappropriation of trade secrets claims can sometimes be difficult to sustain. While evidence of the taking of a trade secret may be available, evidence of its subsequent use may not.  In Integrated Global Services, Inc. v. Michael Mayo, Case No. 3:17cv563, by decision issued on September 13, 2017, the federal court for the Eastern District of Virginia entered a preliminary injunction against a former employee, after concluding that he had likely misappropriated the company’s trade secrets in violation of the Virginia Uniform Trade Secrets Act (“VUTSA”).  The opinion is particularly notable for its conclusion that the mere acquisition of a trade secret by improper means constituted an unlawful misappropriation under the VUTSA, regardless of whether the defendant actually used the trade secrets or disclosed them to third parties.

The former employee, Michael Mayo, held a management position with Integrated Global Services, Inc. (“IGS”) until his involuntary termination on June 21, 2017. In that role, Mayo evaluated work proposals; assisted in the development of project estimates, bids and proposals; and interacted extensively with customers.  Those activities allegedly afforded Mayo access to IGS’ “technical, engineering, sales, customer, budget, manpower, and cost and pricing information.”  IGS took various measures to ensure the confidentiality of that information, including limiting accessibility to only employees who needed the information to perform their jobs, as well as requiring those employees to sign detailed confidentiality agreements.

For nearly one month after his termination, IGS claims Mayo ignored repeated requests for the return of his company-issued laptop and phone. Further, when IGS finally received the property, it allegedly discovered that Mayo “wiped” his phone of company data in the days following his termination, as well as copied and deleted numerous files of highly sensitive information from the laptop.  IGS also allegedly learned that Mayo was going to work for a competitor and had been in discussions with competitors prior to returning the laptop and phone.  IGS quickly filed suit under the VUTSA and moved for a preliminary injunction, requiring the immediate return of any IGS documents and strict compliance with the terms of his Confidentiality Agreement.

The Uniform Trade Secrets Act is a model statute for the protection of trade secret information that has been adopted, to varying degrees, by 48 states and the District of Columbia. Virginia’s version, the VUTSA, defines a prohibited “misappropriation” as “[a]cquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means” or “[d]isclosure or use of a trade secret of another without express or implied consent by a person who … [u]sed improper means to acquire knowledge of the trade secret.”

In granting IGS’ request for a preliminary injunction, the court held that IGS established a likelihood of success on its VUTSA claim by submitting credible evidence that Mayo (1) copied electronic trade secret data from his company-issued laptop to an external memory device, and (2) used “improper means” to do so (by copying the data after his termination date, despite knowing that his actions were prohibited by the Confidentiality Agreement). Importantly, the court specifically held that the statutory definition of “misappropriation” did not require IGS to prove that Mayo had actually used the copied data files against IGS.

When a company learns that a former employee has left with valuable trade secret information, there is often an immediate need to secure the information before any material damage has been done.  The above decision demonstrates that in Virginia at least, companies can pursue enforcement actions against the former employee without having to wait for damage or threatened damage to occur.  Please contact a member of Jackson Lewis’s Non-Competes Practice Group for further assistance in protecting your company’s trade secrets.

Federal Court Warns Companies – If You Don’t Protect Your Trade Secrets, Neither Will We

In 2016 Congress passed the Defend Trade Secrets Act, creating a federal cause of action for the theft of trade secrets. For a plaintiff attempting to prove that the information at issue is a trade secret, there is a tendency to focus only on the information itself, rather than the manner in which the plaintiff maintained such information. However, as explained by the federal court for the Eastern District of New York, in an Order dated October 3, 2017 in the matter of Art and Cook, Inc. v. Haber, No. 17-cv-1634, the courts will not protect proprietary information whose confidentiality the plaintiff failed to take reasonable steps to preserve.

On January 13, 2017, Art and Cook, Inc. (“A&C”) terminated Abraham Haber, an employee of nearly five years, after allegedly making a startling discovery. While conducting an audit of Haber’s work computer, the company claimed it discovered that Haber transferred valuable proprietary information to his personal email account.  The material transferred included logos, banding/marketing strategies, and sales projections for two product lines that were set for launch, as well as the contact information of 72 retailers to whom the company hoped to sell its products. Moreover, shortly after A&C terminated Haber, a supplier of some of the company’s products reported that Haber was seeking to establish his own supply line for products similar to those supplied to A&C.

Recognizing the significant damage that Haber would cause to its business if his alleged efforts were successful, A&C quickly filed suit under the federal Defend Trade Secrets Act (“DTSA”), moving for an emergency temporary restraining order and preliminary injunction. Although a TRO issued, the court subsequently determined that the retailer lists were composed entirely of information “generally known in [A&C’s] industry.” In ruling on A&C’s preliminary injunction request, the court noted that the product designs and branding/marketing strategies “are the sort of business information that the DTSA was designed to protect: they derive independent economic value from not being generally known.”  There was one catch, however; A&C did not do enough to keep that information a secret.

Under the DTSA, it is unlawful to misappropriate a “trade secret” that is related to a product or service used in, or intended for use in, interstate or foreign commerce. Not surprisingly, whether a company’s business information qualifies as a protected “trade secret” depends largely on the nature of the information; as the DTSA explains, the information at issue must “derive[] independent economic value … from not being generally known … [or] readily ascertainable … [to] another person who can obtain economic value from the disclosure or use of the information[.]”  However, equally important is how the owner of the information treats it.  Simply put, “the owner [must have] taken reasonable measures to keep such information secret.”

In the instant case, A&C demonstrated that it took certain steps to protect its business information, including by password-protecting its server and folders, and contracting a third-party security company to protect its servers from outside hacking. Additionally, the company’s President testified that he spoke to Haber on many occasions about confidentiality.  However, A&C ultimately could not overcome the consequences of the steps it failed to take.  Specifically, the company did not require Haber to sign a non-compete.  Further, the company did not even ask him to sign a non-disclosure agreement until approximately three years after he was hired.  Even after Haber refused A&C’s request that he sign the non-disclosure agreement, the company continued to employ him for two more years and took no steps during that time to limit his access to its sensitive proprietary information. While the court conceded that A&C had a potentially winnable argument that the measures it took were sufficient to confer DTSA protection, it could not conclude that he was likely to succeed on the argument, as required for the issuance of an injunction.

One would be hard-pressed to argue that Haber would not have realized the information he allegedly took was proprietary and highly valuable, and that the taking was unauthorized. Indeed, the court expressly agreed that A&C’s product designs and branding/marketing strategies bore all of the hallmarks of protectable trade secret information.  The problem, at least from the court’s perspective, was that A&C did not treat them accordingly.

This ruling represents a stark warning to companies: if you do not protect your trade secrets, neither will the courts.   To ensure that you are taking the appropriate steps to safeguard your trade secrets and confer protection in the courts, please contact a member of Jackson Lewis’s Non-Competes Practice Group.

Referral Sources Can Be A Protectable Interest Under Florida Law

In Florida, non-competition and other restrictive covenant agreements are enforceable to the extent they are tailored to protect a legitimate business interest. On September 14, 2017, the Florida Supreme Court held that a company’s relationships with business referral sources may constitute a protectable business interest – White v. Mederi Caretenders Visiting Services of Southeast Fla., No. SC16-28, and Americare Home Therapy, Inc. v. Hiles, No. SC16-400. Importantly, the Court stressed that its decision is highly fact-specific and depends on the role of referrals in particular industries and companies in question.

In a majority of business situations, the solicitation of new business involves direct communication between business representatives and their potential customers or clients. However, in certain industries, businesses are largely or even exclusively reliant on third party referrals. Home health care (“HCC”) providers, for instance, obtain new patients by way of referrals from those patients’ treating physicians.

Instead of competing over patients, HHC providers generally dedicate the bulk of their business development efforts toward the development of relationships with patient referral sources. However, as noted in the recent Florida Supreme Court decision, HHC providers and other types of businesses have historically run into trouble enforcing non-compete and non-solicitation agreements that restrict competition over referral sources, as opposed to actual customers, clients or patients.

Restrictive covenant agreements in Florida are governed by Florida Statute Section 542.335, which provides that restraints on competition are enforceable to the extent that they protect a “legitimate business interest.” The statute goes on to provide a non-inclusive list of “legitimate business interests,” one of which is described as “substantial relationships with specific prospective or existing customers, patients, or clients.”

Notably, the Florida non-compete statute does not list referral relationships as a legitimate business interest. Further, conferring protected status to such referral relationships might seem to conflict with the statute’s express protection of relationships with “specific prospective or existing customers, patients, or clients.” In this regard, referral sources, by their very nature, are relied upon for customers, patients or clients whose identities are not yet known.

Despite acknowledging the above concerns, the Florida Supreme Court ultimately held that such factors do not preclude the designation of referral sources as protectable legitimate business interests.  First, the Court pointed out that the statutory list of legitimate business interests is expressly non-inclusive.  Second, the Court concluded that “[a]ttempting to protect identifiable referral sources is distinct from claiming an interest in an unidentified patient base.”

Central to the Court’s holding was the unique nature of the HHC business model. As the Court explained, HHCs “are dependent upon referrals to obtain patients as HHCs do not directly solicit patients.  In fact, a physician signing a treatment order can be a condition precedent to receiving home health services, similar to a prescription…  Therefore, for an HHC to obtain a specific prospective or existing patient…, it must first develop a referral source to supply the patient.”  In other words, referral relationships are “crucial business interests” for an HHC, and, therefore, are consistent with “the legitimate business interests listed in the statute.”

Importantly, the Court was careful to emphasize that the determination of protected status for referral relationships is “heavily industry- and context-specific.” Therefore, employers should proceed cautiously before attempting to restrict former employees from competing for referral sources.  For example, employers should consider the manner in which they rely on referral sources for business opportunities; the degree to which they rely on those referral sources; the contractual or other relationship with the referral sources themselves; and the investments made to develop and retain referral relationships.  As always, please contact the member of Jackson Lewis’ Non-Competes Practice Group for further assistance in assessing these issues relating to referral relationships.

Kansas Decision Highlights The Perils Of Overreach In Restrictive Covenant Agreements

In a recent decision examining Kansas non-compete law, the United States District Court for the District of Kansas partially granted a company’s motion to enjoin its former employee’s violations of the non-compete and customer non-solicitation provisions of his employment agreement. The decision, in the matter of Servi Tech, Inc. v. Olson, highlights a number of key issues that Kansas employers should consider when fashioning restrictive covenant agreements.

 

Olson’s Obligations to Service-Tech

On August 21, 2014, Servi-Tech, which provides agricultural crop consulting services to commercial and individual clients, hired Dillan Olson as one of its consultants. In addition to assuming responsibility for 10 existing Servi-Tech clients at the inception of his employment, Olson acquired 8 additional clients through his own efforts, 5 of whom were family members, friends, acquaintances and/or long-time business contacts.

As a mandatory condition of his employment, Olson signed an Employment Agreement that, among other things, prohibited him, for two years following his termination of employment, from:

  • engaging in a competing business within 50 miles of any Servi-Tech customer that he serviced during the two years preceding his termination; and
  • soliciting, servicing, or otherwise diverting the same customers on behalf of a competing business.

The Agreement also included a tolling provision, which stated that the 2-year restrictive period “shall be deemed to begin running on the date of the entry of the court order granting SERVI-TECH injunctive relief[,]” and “shall be tolled during any time [Olson] violates” the applicable restrictive covenant(s) and/or court-issued injunction.

Servi-Tech terminated Olson’s employment on September 30, 2016 (for reasons not specified in the Court’s decision). Less than two months later, Olson established a competing business within the 50-mile restricted territory and diverted the business of the 5 personal contacts he brought to Servi-Tech.  Servi-Tech responded by suing Olson for breach of the employment agreement and requested a preliminary injunction to prevent continued breaches during the pendency of the lawsuit.

The Court’s Decision is a Mixed Bag

Like many states, Kansas does not have a statute of general applicability to restrictive covenants, but courts will permit and enforce such restraints to the extent they protect a legitimate business interest. Here, the Court determined that Servi-Tech’s investment in specialized crop consulting and agronomy training for Olson, as well as its development of customer contacts and customer relationships through Olson, constituted legitimate business interests that justified reasonable non-compete and non-solicitation provisions.

The court also endorsed the 2-year duration of both the non-compete and non-solicitation provisions, noting that a 2-year restraint is “common” in Kansas non-compete cases. On the other hand, the Court labeled the tolling provision as “most uncommon” as well as unreasonable, particularly in light of the employer’s failure to file suit for about 7 months after learning of Olson’s competitive activities.  Importantly, the Court also found the 50-mile geographic scope of the non-compete provision to be overly broad, writing that it was “unrelated to the protection of Servi-Tech’s business interests” and served only to insulate Servi-Tech from ordinary competition.

In light of the above findings, the Court denied Servi-Tech’s motion for injunction as to the non-compete provision. On the other hand, the Court granted the injunction with respect to the customer non-solicitation provision, even with respect to Olson’s family members and long-time personal contacts.  Finally, the Court held that the non-solicitation provision’s 2-year restraint should run from Olson’s date of separation from Servi-Tech rather than from the date of the injunction order, essentially striking down the tolling provision in the agreement.

Takeaways

By refusing to enforce the non-compete provision altogether, despite suggesting that it was valid to a more limited extent, the Court’s decision is seemingly at odds with the general willingness of Kansas courts to limit the scope of restrictive covenants rather than strike them down entirely. While preserving the employee’s right to compete generally, the Court’s extension of the customer non-solicitation provision to the employee’s personal friends and family members is remarkable, and seemingly at odds with established law in other states.

In sum, this decision serves as a reminder that employers in Kansas (and elsewhere) should take care to tailor their agreements to meet the realities of their businesses and the unique circumstances of the employees affected, to ensure that any restraints on competition are no broader than necessary to protect the employer’s legitimate business interests. Please contact the member of Jackson Lewis’s Non-Competes Practice Group with whom you work for assistance in preparing restrictive covenant agreements that will be enforceable under the laws of your applicable state.

LexBlog