Arbitrary Geographic Restriction May Not Be Unreasonable (Timber Lake Foods, Inc. v. Estess)

How can a nationwide business draft a non-compete so that its geographic scope is reasonable?

For starters, employers should consider less restrictive (and more enforceable) alternatives such as a client non-solicitation clause. Such a clause is self-contained, in that a court need not determine mileage scope and where exactly the agreement extends. It would be limited to identifiable clauses - assuming it is well-drafted.

An employer also could add to this a more limited non-compete, identifying prime competitors and trying to contain the non-compete in some respect. The downside to this is that it may not be all that effective in businesses with low barriers to entry or if the employer runs into a wide range of competitors.

Employers can get away with mistakes, though, and rely on more traditional time-and-territory covenants. Take the case of Stephanie Estess and her employment with abrokerof meat products, Timber Lake Foods, Inc. based in Tupelo, Mississippi.* Estess signed a 2-year, post-employment non-compete covenant that prevented her from "performing any services regarding the brokerage of meat and/or poultry prodcuts...for any person or business entity...within a 250-mile radius of Tupelo, Mississippi."**

Estess' job extended throughout the country, in that she apparently dealt with both suppliers and customers in various states. She could work from home or any location as long as she had access to a computer. Her argument was that the geographic scope was arbitrary. However, as the Court of Appeals of Mississippi held: a finding of arbitrariness "does not establish the unreasoanbleness of the geographic limit." True enough. Estess could have moved to some other locale and not violated anything.

It would have been much easier had the employer drafted the agreement only to prevent certain activities, as opposed to employment itself. That type of restraint would not have needed the geographic term. It also would have applied if Estess moved away to compete. Consider the employer lucky on this one.

* If you don't know the significance of the Elvis picture, you know nothing about music history.

** As an aside, I am not sure the covenant is as clear as the court in this case thought. If Estess could not broker food products for any person within a 250-mile radius of Tupelo, does that mean that the competitor or the customer has to be located within the 250 miles? To me, the services are provided to the customer, so the location of the competitor seems irrelevant. I think the court and the litigants may have misread what the clause actually says.

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Court: Court of Appeals of Mississippi
Opinion Date: 3/8/11
Cite: Timber Lake Foods, Inc. v. Estess, 2011 Miss. App. LEXIS 136 (Miss. Ct. App. Mar. 8, 2011)
Favors: Employer
Law: Mississippi

Supreme Court of Illinois Destined to Hear Reliable Fire Equipment v. Arredondo

As readers of this blog know, I wrote extensively last year on the important, and largely muddled, opinion in Reliable Fire Equipment v. Arredondo. The Second District Appellate Court in Illinois caused a split with its rejection of another district's approach to analyzing employment non-competition agreements. Still, it is not totally clear what test applies in the Second District, and assuming I am right, three of the five appellate districts in Illinois have different tests for enforceability.

This past week, Reliable Fire Equipment filed a Petition for Leave to Appeal to the Supreme Court of Illinois. That petition likely will be decided in the next six weeks, and the Court almost certainly has to take the case. As it stands right now, the enforceability of a non-compete in Illinois depends largely on where a suit is filed. Assuming the Court does take the case, I hope it adopts the traditional three-part reasonableness test that is common in many states, including Iowa and Ohio.

For those of you interested in my prior discussion of Reliable Fire Equipment, read here, here, here, here, here, and here. (Yeah, it was an important case.) If you haven't had enough, check out Zachary Jackson's post here.

I was gratified to be cited in the PLA under the heading discussing how litigants are divided and "unable to agree" on what test governs non-compete agreements in Illinois. In one of those odd twists of fate, my views were juxtaposed against a former adversary of mine who (unbeknownst to me) published another view on what Reliable Fire Equipment really means.

One-Way Fee Shifting Clauses and Public Policy

Fee-shifting clauses are fairly common in non-compete agreements.

While most fee-shifting provisions in negotiated commercial contracts are mutual, employment non-compete agreements frequently contain one-way clauses. Under this scheme, employers often retain the right to obtain fees if they prevail in a dispute against an ex-employee. (Not suprisingly, I have yet to see a clause that allows only the employee to obtain his or her fees in a successful defense.)

One question I often hear from my employee clients is whether such a one-way provision is even enforceable.

At least a couple of theories are available.

First, some states may have statutes of general applicability that automatically construe one-way fee shifting provisions into mutual ones. California, Montana, and Washington are examples.

Second, a judge may be receptive to an unconscionability defense. For prevailing employees, this argument doesn't appear to give them a right to recover their fees. However, it may be a viable route to avoid fee-shifting in the event of a loss. An appellate court judge in Ohio in 1992 was open to this unconscionability defense, but since the parties did not raise it before the court, the issue was never decided.

Third, the rule of equitable modification may give a prevailing employee grounds to seek fees under a one-way fee-shifting clause. In those states that adopt equitable modification, rather than a strict blue-pencil rule, courts retain the ability to modify overbroad covenants to make them reasonable.

Can this rule be extended to allow a court to modify a fee-shifting clause? I don't know if there is any case that has ever ruled on this issue, but I think the argument has some intuitive appeal. In my mind, a lot would depend on the breadth of the restrictions, the parties' bargaining power, and the governing state's policy on reformation of covenants.

Because non-compete agreements implicate public policy unlike other commercial contracts, a higher degree of scrutiny of one-way fee provisions logically should apply. Whether a court actually will be open to this argument is something I have not yet seen.

Amendment Introduced to Proposed Illinois Covenants Not to Compete Act

As I wrote back in January, House Bill 16 in the Illinois General Assembly introduces a statutory framework for non-compete agreements in the State of Illinois. Though it is unlikely to work its way to the required "Third Reading" during the General Assembly's regular session for 2011, the bill has drawn a significant number of co-sponsors.

Rep. Rosemary Mulligan is back as Chief Sponsor. Even if the bill gains some traction (likely next year), there will be several changes. This week, an amendment was added to make clear that the Act does not apply to "news media." Readers of this blog are aware that Illinois is one of many states that exempt broadcast industry employees from post-termination non-compete agreements. The amendment offered likely only clarifies this exemption.

Other changes likely will concern the two-week notice provision for employees who are asked to sign a non-compete agreement. The recent Oregon law contains a similar requirement as House Bill 16.

I also would not be surprised to see some provision included in the bill that is specific to medical practices, perhaps along the lines of what the Texas Covenant Not to Compete Act provides. In addition to other criteria, the Texas statute provides that a physician must be allowed to buy out the covenant at a reasonable price. Non-compete disputes for physicians were the main impetus behind House Bill 16 and its predecessor.

Beware Drafting Trap Under Colorado's Non-Compete Statute (Saturn Systems v. Militaire)

Colorado usually produces some interesting opinions because it has a statute that is inconsistent with traditional non-compete law.

Non-competition and non-solicitation covenants are presumptively void in Colorado. But they can be valid if they meet one of four criteria:

(1) the covenant is made in connection with the sale of a business;

(2) the contract protects trade secrets;

(3) the contract recovers an employee's training or education costs; or

(4) the contract is for "executive and management personnel" or "officers and employees who constitute professional staff to executive and management personnel."

The last exception does not apply to independent contractors, and it appears the only way to bring a contractor under a covenant is to assert that the agreement protects a company's trade secrets.

If a company relies on the second exception, there are some tricks it has to be aware of. To fall under this trade secrets exception, the covenant must be specifically be for the protection of those trade secrets and narrowly tailored to protect that interest. The statute contains no savings provision for lesser protected "confidential information," so the employer must be prepared to identify and justify information as truly trade secret material. Otherwise, it cannot invoke this exception at all.

Another tricky area is in the drafting itself. Colorado lawyers will tell you that the non-solicitation or non-competition provision should be included within the confidentiality restriction. Why? Because it is much easier to demonstrate that the restriction is designed to trade secret information if the non-compete is directly tied to the confidentiality clause.

Contrast this scheme with that found in Wisconsin, where attorneys will tell you to do the exact opposite. Separate the covenants into different paragraphs. Avoid interlocking or co-dependent terms. The reason? Wisconsin's follows a very rigid application of the blue-pencil rule, which can trip up covenants that may be overbroad in some respect but not others.

All this goes to show that non-compete law is not uniform by any stretch. The dichotomy between Colorado and Wisconsin is a perfect example from a draftsmen's perspective.

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Court: Court of Appeals of Colorado, Division Two
Opinion Date: 2/17/11
Cite: Saturn Systems, Inc. v. Militaire, 252 P.3d 516 (Colo. Ct. App. 2011)
Favors: Employer
Law: Colorado