Tuesday, March 16, 2010
Non-Solicitation Clause Without Backward Restriction Unenforceable (Share Corp. v. Momar, Inc.)
Competent drafting is essential to enforcement of non-compete agreements. For anyone who follows this blog, that should go without saying by now. But drafting errors continue to plague employers faced with threats of unfair competition.
Poor drafting generally takes two forms: procedural and substantive. Procedural errors concern contract formation, elements of consideration, or vague language about when a restrictive covenant begins. For anyone representing an employee, this is where to start. Demonstrate a procedural error, and you are well on your way to victory (or at least a favorable settlement). Attorneys must scour every word in a contract to find procedural errors, but the investment can be well worth the return.
Substantive errors, by contrast, are less clear and get litigated extensively. The issue here has to do with the overriding notion of reasonableness tied into any non-compete. Attorneys make substantive errors when they are not aware of the nuances of non-compete law and what courts will require from employers to make a restraint narrowly tailored to balance out the competing interests in employee investment and labor mobility.
A perfect example of a substantive drafting error can be found in the Wisconsin case of Share Corp. v. Momar, Inc., a dispute centered around employee recruitment between competitors in the chemical sales business. The non-solicitation clauses at issue generally barred sales representatives and sales managers from soliciting chemical sales business for any customers they served or supervised during the term of their employment with Share Corp.
The problem for the court was that the covenant contained no backward restriction. A customer one of the representatives serviced 10 years ago would still be off-limits. Under Wisconsin precedent, this lack of a backward restriction violated the rule of reason. That is not to say the lack of such limiting language makes the agreement per se unenforceable. Other mitigating factors may help offset that mistake. But the court found no such mitigating factors in the ex-Share employees' contracts. Accordingly, the court denied a TRO petition, finding Share was unlikely to prevail on the merits of its claims.
Employers who have sales-based employees sign non-solicitation covenants should always ensure that the restraint contains a backward restriction, so that the employee is prohibited from soliciting the business of customers with whom he or she has dealt or managed in the one year prior to termination of employment.
Court: United States District Court for the Eastern District of Wisconsin
Opinion Date: 3/11/10
Cite: Share Corp. v. Momar Inc., 2010 U.S. Dist. LEXIS 22608 (E.D. Wis. Mar. 11, 2010)