Courts continue to wrestle with the issue of whether a company has a legitimate business interest in enforcing a post-employment non-compete when it fires an employee without cause.   Last September this Blog discussed Missett v. Hub International Pennsylvania, LLC, in which the Pennsylvania Superior Court explained that “the circumstances of termination are, alone, not determinative of whether the restrictive covenant is enforceable….”  See You're Fired!! And Don't Forget Your Non-Compete!  In its September 2010 decision, the Pennsylvania court backed away from a bright line rule of unenforceability that had been read into two of its earlier opinions.  Over the years, other courts have weighed in with varying pronouncements. Recently, however, relying in part on one of the much earlier decisions from the  Pennsylvania Superior Court (the 1994 decision in Insulation Corp. of America v. Brobston), the Montana Supreme Court appears to have renewed the bright line of unenforceability in cases of involuntary termination without cause.  On November 22, 2011, the Montana Supreme Court  in Wrigg v Junkermeir, Clark, Campanella, Stevens, P.C., concluded  “an employer normally lacks a legitimate business interest in a covenant when it chooses to end the employment relationship.”  (A copy of the opinion is available in pdf format below.)

Facts of Wrigg v Junkermeir, Clark, Campanella, Stevens, P.C.

The facts of Wrigg are interesting in a number of respects.  Wrigg was hired as a staff accountant for Junkermeir, Clark, Campanella, Stevens, P.C. (the “Firm”).  Fifteen years later, she was promoted to a shareholder of the firm and held that status for six  years.  Under the terms of the shareholder agreement, if the agreement was terminated for any reason, Wrigg would have to pay an amount equal to 100% of gross fees previously billed by the Firm in the twelve months preceding termination for any Firm client who is serviced by Wrigg’s new employer within a year of Wrigg’s termination.  The court treated the shareholder agreement as an employment agreement and the payment clause as non-compete clause.  The shareholder agreement expired by its own terms, and the Firm advised Wrigg that it was not renewing the agreement.  At trial Wrigg conceded she had solicited clients of the Firm and performed work for them at her new employer within the one-year temporal restriction. The trial court found the covenant enforceable. 

On appeal, the Montana Supreme Court reversed, agreeing with Wrigg that the covenant serves no legitimate business interest when the employer terminates the relationship without cause.  The language of the shareholder agreement mirrored language that the Montana Supreme Court had found reasonable and enforceable in a 1985 decision.  The court nonetheless rejected the Firm’s call for equal treatment, distinguishing the earlier ruling on the grounds that in the earlier case the employee voluntarily terminated his employment.  The court reasoned that, “[t]he employee makes an informed decision under [those] circumstances about the risks associated with a covenant's enforcement and voluntarily chooses to encounter those risks.”  The court further reasoned that when an employee is terminated without cause, “no informed decision exists” and thus “[e]nforcement of the covenant could impoverish an employee who has done nothing to warrant his termination.” 

In reaching the conclusion that ordinarily there is no legitimate business interest served in enforcing a non-competition clause when the employee has been terminated without cause, the Montana Supreme Court’s analysis relies heavily, but not exclusively, on two cases: the Pennsylvania Superior Court’s 1994 Insulation Corp v. Brobston decision  and the Seventh Circuit’s 1983 decision in Rao v. Rao, applying Illinois law.  According to state supreme court, the Brobston court determined that “[a]n employer's decision to end the employment relationship reveals the employer's belief that the employee is incapable of generating profits for the employer.” Thus, “[i]t would be disingenuous for an employer to claim an employee was worthless to the business and simultaneously claim that the employee constituted an existential competitive threat.”  The Rao court, according to Wrigg, concluded that when an employee is terminated without cause, “[a]n employer needs no covenant to protect its business  . . . as the employer sits in the best position to protect itself simply by maintaining the employment relationship.”  Whether Brobston and Rao can be appropriately used to support a bright line rule that does not look at the unique facts of each case is open to question.  As mentioned above, in Missett the Pennsylvania Superior Court chastised courts for their bright line application of Brobston.  More recently on December 1, 2011, the Illinois Supreme Court issued a decision establishing that under Illinois law, courts are required to make determinations on the existence of a legitimate business interest based on the totality of the circumstances of each particular case, not on any limited pre-determined set of factors.  

In Wrigg, the Firm apparently did not offer any explanation for the termination.  One clear takeaway for employers who seek to enforce their non-competes is that if there is a basis to support a for cause termination, it is far preferable to have the reasons on the record, then simply to let an employment contract lapse by its own terms.     

David W. Erb is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow David Erb on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

Wrigg v Junkermier.pdf (130.78 kb)

Many people believe that an employer cannot enforce a non-compete agreement against an employee whom it has fired without cause.  For years, many have cited two Pennsylvania Superior Court decisions to support this contention.  But the Pennsylvania Superior Court just weighed in with a new opinion stating that courts must consider factors extending beyond whether and why the employee was fired.  In short, Pennsylvania courts can no longer reflexively find non-competes unenforceable simply because an employee was terminated.

On Thursday, September 23, 2010, in Missett v. Hub International Pennsylvania, LLC, the Pennsylvania Superior Court explained that “the circumstances of termination are, alone, not determinative of whether the restrictive covenant is enforceable….”  (A copy of the opinion is available in pdf format at the bottom of this post.)

Facts of Missett v. Hub International Pennsylvania, LLC

In 2000, Christopher Missett began employment with the Clair Odell Insurance Agency, and he signed a customer non-solicitation agreement.  Clair Odell was subsequently purchased by Citizens Financial Group, and Missett was paid $300,000 to sign an additional non-solicitation agreement that covered a larger variety of clients.   In 2006, Hub U.S. Holdings purchased the outstanding equity interests of Clair Odell from Citizens and eventually terminated Missett in April of 2008.  After Hub fired Missett, it sent him a letter reminding him of his post-employment restrictive covenants.  Missett filed suit in the Montgomery County Court of Common Pleas seeking a declaration that Hub could not enforce his agreements in part because he had been terminated.  The trial court relied heavily on two previous decisions from the Pennsylvania Superior Court noting that when an employer fires an employee, it “deems the employee worthless” and thereby acknowledges that it lacks a legitimate interest in enforcing a restrictive covenant.  Accordingly, the Common Pleas court found the restrictive covenant unenforceable against Missett.

Hub appealed to the Pennsylvania Superior Court, which took the opportunity to expand upon its prior opinions.  The Superior Court explained that “the circumstances of termination are but one of many factors to be considered by the court” when determining whether to enforce a restrictive covenant, and “that the issue of enforceability is one to be determined on a case-by-case basis.”  It noted other important factors include, for example: “What effect will the restraint have on the employee’s life?  Will it deprive him of the opportunity [to support] himself and his family in reasonable comfort?  Will it tend strongly to impoverish him?”  Clearly, the Court was influenced by the fact that Missett had received $300,000 in exchange for signing one of his agreements.  It also emphasized that Missett “had access to a great deal of confidential and proprietary information belonging to HubPa” and that he had repeatedly signed non-solicitation agreements.  In sum, the Superior Court stated that the lower court took an unreasonably “myopic” view of prior case law, and it ordered the lower court to reexamine the case and consider the broader facts and circumstances.

The Pennsylvania Superior Court’s ruling in Missett is a reminder that courts will not reflexively adhere to prior precedent.  Rather, judges often try to reach what they believe is the “right result” for the case before them.  As Supreme Court Justice Antonin Scalia recognized, many judges “will be disposed to change the law to accord with their ‘moral sense’”.  See Making Your Case: The Art of Persuading Judges, at page 27, by Antonin Scalia and Bryan A. Garner.  To support this observation, Justice Scalia and Mr. Garner quoted a renowned 20th century British judge who said: “My root belief is that the proper role of a judge is to do justice between the parties before him.  If there is any rule of law [that] impairs the doing of justice, then it is the province of the judge to do all he legitimately can to avoid that rule – or even to change it – so as to do justice in the instant case before him.”

From this point forward, it is clear that Pennsylvania courts must look at the facts and circumstances of each non-compete case they decide.  Bright line rules precluding enforcement of restrictive covenants no longer exist (if they ever did).

Missett v. Hub.pdf (72.27 kb)

Many employers with offices or employees located in multiple states use the same non-compete/confidentiality agreement in each state in which they do business.  Typically, the form of the non-compete/confidentiality agreement originated in the employer’s home state, and the employer went on to use this same agreement wherever the employer does business.  However, these employers may find out too late that a non-compete/confidentiality agreement enforceable in their home state may not be enforceable in another state.

State law on the enforceability and interpretation of non-compete/confidentiality agreements differs from state to state, and what is entirely reasonable in one state may be viewed as entirely unreasonable—and unenforceable—in another state.  If you do business in multiple states and want to effectively protect your customer good will and confidential and proprietary information, we recommend that you review the enforceability of various provisions of your non-compete/confidentiality agreements under the laws of each of the relevant states.

There are many ways in which relevant laws, and courts’ views, differ in various states on the enforceability and interpretation of non-compete/confidentiality agreements.  Some of the more important variables include—but are not limited to—what constitutes adequate consideration, whether the court will edit or amend an overbroad agreement to bring it within permissible state law restrictions, the extent to which an employer may enforce an agreement against an employee terminated without cause, and whether the court will grant injunctive relief in addition to liquidated damages.

Consideration:  All agreements must have adequate legal consideration to be enforceable.  Courts in some states hold that consideration for a non-compete/confidentiality agreement does not exist—and therefore that the agreement is not enforceable—unless the employer provided separate monetary compensation or the parties entered into the agreement at or near the inception of employment.  On the other hand, courts in other states hold that continued employment by itself (even without separate monetary compensation) is an adequate form of consideration that will support enforcement of a non-compete/confidentiality agreement.

Editing an overbroad agreement:  Courts in some states will amend or edit an overly broad non-compete/confidentiality agreement to bring it into compliance with state reasonableness requirements, while courts in other states will not.  The approach can vary from state to state, with courts in some states following a strict blue pencial approach (i.e., striking unenforceable, severable language), while other states permit courts to exercise their equitable discretion to modify covenants.  Still yet, courts in other states may decline to enforce the entire agreement even if only one term or provision is slightly overbroad (e.g., geographic scope).

Termination without cause:  State law—and court temperament—varies on the issue of enforceability when an employer terminates an employee’s employment without cause.  Courts in some states refuse to enforce restrictive covenants against employees who have been separated from employment through no fault of the employee.

Injunctive Relief/Liquidated Damages:  Many non-compete/confidentiality agreements contain both liquidated damage and injunctive relief provisions.  Courts in some states will not grant injunctive relief if the agreement also contains an enforceable liquidated damages provision.  In this view, an adequate “legal” remedy exists in the form of monetary damages, and therefore equitable relief in the form of an injunction is not be available.

If you have employees in multiple states, and you want to effectively protect your legitimate business interests against employee defections to competitors, you should take steps to tailor your non-compete/confidentiality agreements to ensure that they will be enforceable to the greatest extent permitted in each state in which you do business.