Tuesday, June 22, 2010
Restriction on Working With "Potential Customers" Held Invalid (Church Mutual Ins. Co. v. Copenhaver)
It is common for a non-solicitation covenant to extend beyond existing customers and cover prospects or potential accounts. Any territory-based non-compete accomplishes the same thing. If you can't contact customers in a certain defined region, almost by definition this will include both existing and potential customers (unless the employer has a customer monopoly).
But provisions that apply this broadly are not always valid. A recent case out of Arkansas proves this point. In Church Mutual Ins. Co. v. Copenhaver, two insurance company sales representatives were sued for violating a customer non-solicitation covenant which prevented them from selling or soliciting property and casualty insurance to churches or other religious institutions for three years within their assigned geographic territories.
The agents left, joined a competitor, and immediately increased the new employer's premiums attributable churches by a factor of five. The former employer sued to enforce the non-solicitation covenant. The court concluded that the covenant was invalid because it was broader than necessary to protect the employer's legitimate business interest in its church clients.
Specifically, the court found that the covenant extended to all churches and religious institutions in a certain territory, which meant it captured non-customers. That was too restrictive under Arkansas law. Additionally, the court found some vagueness in the term "religious institutions", opining that it could mean faith-based schools or hospitals. This ambiguity rendered it overbroad.
Lawyers drafting non-solicitation covenants must be aware of a particular jurisdiction's laws as it pertains to protectable interests. Many jurisdictions will take a very narrow view of what an employer is entitled to protect. In a state that will not blue-pencil (such as Arkansas), even the slightest drafting mistake can render the enforceable part of the covenants invalid.
Court: United States District Court for the Eastern District of Arkansas
Opinion Date: 5/24/10
Cite: Church Mutual Ins. Co. v. Copenhaver, 2010 U.S. Dist. LEXIS 51268 (E.D. Ark. May 24, 2010)