Restrictive Covenants: There is No Substitute for Careful Drafting

Restrictive covenants, often called non-compete agreements, as well as non-solicitation and confidentiality agreements, can significantly help to protect a company's business and relationship with its employees and customers.  When carefully drafted, with due consideration given to the particular industry and locale involved, such agreements serve to maintain confidential and proprietary information, restrain a former employee from soliciting clients of his or her former employer, prevent that former employee from luring former co-workers to join a competitor, and prohibit the former employee from going to work for a competitor.  The enforceability of restrictive covenants will depend on a number of factors, including geographic and temporal limits, applicable state law, and the company's treatment of its confidential information.  See Trent S. Dickey and Jill Turner Lever, Are Restrictive Covenants Alive or Dead? The Metropolitan Corporate Counsel, November 2010.  Two recent federal cases involving restrictive covenants demonstrate the interplay between drafting and enforceability.

Ascencea v. Zisook, No. 08-5339, 2010 U.S. Dist. LEXIS 115676 (D.N.J. Oct. 29, 2010)

Ascencea, L.L.C. (Ascencea) sells mortgage protection life insurance.  The company maintains that its new customers leads, business practices and methods for obtaining those leads, and its training program and materials are valuable trade secrets.  Ascencea requires that its agents, managers, and consultants execute confidentiality and non-compete agreements to protect this information.

In June 2007, Malcolm Browne (Browne) started working for Ascencea as an independent agent selling life insurance.  In July 2007, he signed a confidentiality and non-compete agreement (Agreement).  Sometime thereafter, Browne went to work for a competing company selling the same insurance product as he had sold when he was with Ascencea.  Ascencea then brought an action against Browne for, among other things, violating the Agreement by going to work for a direct competitor.  Browne moved for summary judgment to dismiss the Complaint.

The Court found that Browne did not take or disclose any confidential or proprietary information belonging to Ascencea when he left its employment.  The Court also found that Browne did not solicit or recruit any person affiliated with Ascencea to leave their position to work for the competitor, nor did he receive earnings from any of Ascencea's previous clients.

Although Browne sold the same product for the competitor that he sold while working for Ascencea, the Court found no breach of the Agreement because the Agreement did not specifically prohibit Browne from working for a competing company, nor did it prohibit him from selling life insurance.  To the contrary, the Agreement expressly allowed Browne to work in the field of mortgage insurance and related products.  That Browne sold the exact same product for the competitor was of no moment to the Court, because the insurance product itself did not satisfy the definition of “confidential information” as set forth in the Agreement.  As a result, Ascencea's claims against Browne were dismissed.

Ayco Company, L.P. v. Feldman, No. 1:10-CV-1213, 2010 U.S. Dist. LEXIS 112872 (N.D.N.Y. Oct. 22, 2010)

Ayco Company, L.P. (Ayco) is a financial services company that provides financial counseling and education services to corporate executives and wealthy individuals.  Ayco develops its client base through relationships with corporations and by entering into contracts to provide financial services to corporate executives as part of their compensation packages.  Ayco's client list is not publicly available.

In September 2005, Brian Feldman (Feldman) began working for Ayco as a financial analyst.  He had no experience as a financial analyst and brought no new clients to Ayco upon joining the company.  Ayco trained Feldman and he serviced firm clients as well as those he solicited and cultivated.

Upon being hired, Feldman signed an employment agreement regarding confidential and proprietary information.  In 2010, Feldman signed a revised agreement which included, among other things, a new non-compete provision, a goodwill provision, a reduced non-solicit provision following termination, and a grant to account managers of access to certain confidential information.  Later in 2010, Feldman signed an additional trade secrets, confidentiality and company property agreement.

In late 2010, Feldman resigned and began working for another financial services company.  At the time of his departure, Feldman was an Account Manager servicing seventy-seven Ayco clients.  At least two Ayco clients followed Feldman to his new employer.  Ayco promptly filed a complaint and sought a temporary restraining order and a preliminary injunction against Feldman.  Ayco alleged that Feldman breached the non-compete, goodwill and confidentiality provisions of the various agreements, and that by virtue of his employment with a competitor, he would eventually divulge confidential and proprietary information. Ayco also alleged that Feldman misappropriated substantial amounts of client information immediately before his resignation.

On application for the preliminary injunction, the Court considered the factors typically associated with such requests for relief, which include whether the movant could show irreparable harm and whether the movant could demonstrate a likelihood of success on the merits.  The Court found the non-compete and confidentiality provisions to be reasonable and no greater than what was required to protect Ayco's legitimate interests, which included maintaining client goodwill and trade secrets.  In addition, the Court found that the non-compete, which restricted Feldman from working for a competitor for ninety days anywhere in the United States, was reasonable and did not impose an undue hardship on him.  Consequently, the Court preliminarily enjoined Feldman from working for a competitor for ninety days and from disclosing Ayco's confidential information.

Conclusion

The Ascencea and Ayco decisions represent important learning tools when it comes to drafting restrictive covenants.  In the former, Ascencea did not succeed in its suit against a former worker who left to join a direct competitor doing exactly what he had been doing while employed by Ascencea.  In the latter, Ayco successfully enforced the restrictive covenant it had entered with a former employee.  The respective failure and success of the employers in these cases can be attributed in no small part to how the restrictive covenants at issue were drafted, as the law in New Jersey and New York are essentially the same in this area.  The individual's employment as an independent contractor in Ascencea required extra drafting considerations that were apparently not utilized by Ascencea.  Employers desiring to protect client goodwill, trade secrets, and confidential and proprietary information from departing employees must carefully draft their restrictive covenant agreements with the assistance of a legal professional well-versed in this body of law specific to the jurisdictions where the employees work.

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