In a recent decision illustrative of the war on overbroad
language in employee non-compete agreements, one court made it
clear that trying to use "catch all" language and
"blue pencil" provisions may backfire in a big way.
Casting a wide net may spell serious trouble for the
employer.
In this case, a salesman worked for a high-end appliance
distributor for nearly fourteen years. Six years into his
employment, he signed an employment agreement that contained a
confidentiality clause and a covenant not to compete
("Agreement"). In relevant part, the Agreement
prohibited the salesman from providing "services similar or
competitive to those offered by [the employer] to any business
account or customer of [the employer] during the term of
[salesman]'s employment . . . " or "[w]ork[ing] in a
competitive capacity" for two years after separating from [the
employer]. The geographic limitation included the state of Indiana,
Marion County, those counties surrounding Marion County, and the
fifty-mile radius of the salesman's former principal office in
Castleton, Indiana.
Contrary to these restrictions, the salesman resigned from his job
and accepted employment with a competitor. The employer
sued.
After concluding that the employer had a legitimate protectable
interest, the court analyzed the reasonableness of the
Agreement's activity prohibitions, finding the employer's
customer base restriction and the scope of prohibited activities
unreasonably overbroad. The customer base restriction did not
limit contact to present customers, but effectively applied to
all of the customers during the fourteen years of
employment. The court concluded that even though present customers
constitute a protectable interest of an employer, an employment
agreement restricting "contact with any past or prospective
customers, no matter how much time has elapsed since their
patronage has ceased," presents a restriction too broad in
scope.
Further, the court found that the restrictive covenant prohibiting
the salesman from "work[ing] in a competitive capacity"
and providing services competitive "to those offered by [the
employer's]" for any competitor constituted an
unreasonably overbroad restriction on the salesman's economic
freedom. In essence, the covenant prohibited "harmless
conduct" and activities entirely unrelated and distinct from
the services performed as the salesman while at the employer.
The court's scrutiny did not end on the scope of the
restricted activities; it also found the geographic restriction
unreasonably overbroad. The court noted that the
reasonableness of "a geographic scope . . . depends on the
interest of the employer that the restriction serves."
The court accepted that a fifty-mile radius of the principal
office limitation may represent a reasonable restriction, but
criticized that the covenant also encompassed an expansive area in
addition to the fifty-mile radius limitation. Accordingly,
the court concluded that such a restriction unreasonably infringed
upon post-employment opportunities.
Blue-penciling failed to save the day. The Court of Appeals
explained that "the overbroad geographic restriction of the
covenant was [not] written in clearly separate and divisible
clauses, and the 'interdicted territory' was [not]
referenced separately [but] rather . . . as 'one indivisible
whole.'" As such, the court refused to redact
"sentence fragments from the indivisible whole of each
contested paragraph while . . . changing the entire meaning and
import of each paragraph." The Court of Appeals showed
zero sympathy for employers who forced employees to sign overbroad
covenants. In fact, it virtually invited employees to sign
overbroad covenants and be content with the knowledge that the
Indiana courts will "shred" them. Such a threat
warrants serious attention in the drafting of all employment
agreements!
Although this case arose in Indiana, the general principles of
careful drafting and precise wording of restrictions can be applied
to these agreements in employment generally.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
