"Overly Broad": Employer Learns Bitter Lesson in Seeking to Enforce Restrictive Covenant Agreement
In a recent Illinois case, AssuredPartners, Inc. v. Schmitt, a wholesale insurance brokerage seemed to have caught a departing employee dead to rights violating his restrictive covenant agreement. The former employee was soliciting customers using a confidential document he had taken from his employer that contained policy expiration dates. Yet after bringing suit, the employer did not even get its day in court on the merits of the case. Instead, the case was thrown out on summary judgment.
How could such a seemingly inequitable outcome occur? In a word: overbreadth. To be enforceable, a restrictive covenant must be narrowly tailored to match the interest it is seeking to protect. In this case, the trial court and then the Illinois Appellate Court found the non-competition and non-solicitation covenants, and even the confidentiality provisions, of the agreement to be broader than necessary to protect the employer's interests. Furthermore, even though that agreement contained a clause explicitly "consenti[ing] to judicial modification" in the event any provision was determined to be overbroad, the appellate court refused to substitute reasonable restrictions to allow enforcement of the covenants.
Turning first to the non-competition clause, the appellate court noted that it barred the employee from working with all types of professional liability insurance anywhere in the country. However, during employment with the employer, the employee in question had brokered only one type of professional liability insurance: lawyers' professional liability insurance. In effect, the court reasoned, the covenant barred the employee from working in any capacity in the wholesale brokerage of professional liability insurance when the employee's business activities had been limited to professional liability products and services related to the legal profession. In the court's judgment, this overbreadth made the provision unreasonable and, therefore, unenforceable.
Elsewhere in the agreement, the non-solicitation provision barred the employee from soliciting any customer or prospective customers of the employer or its affiliates. Noting that the employer and its affiliates consisted of 47 insurance-related businesses that had conducted business with 30,000 customers, the appellate court found the non-solicitation provision overbroad and unreasonable because it was not limited to customers or potential customers with whom the employee dealt.
Surprisingly, the appellate court found even the confidentiality provision overbroad. The confidentiality covenant prohibited the employee from sharing any information regarding the "business or affairs of the Company or its affiliates." Many confidentiality agreements have similarly broad definitions of what is confidential. The appellate court, however, refused to enforce the provision because it covered almost any information the employee became aware of, regardless of whether it was truly confidential, or even whether the employee obtained it before he had begun working for the employer. Furthermore, the appellate court rejected the employer's argument that such overbreadth was cured by the provision’s limitation that its terms did not apply to "information that becomes generally known to and available for use by the public." In the court's view, a lot of information may not be known to the public, yet does not deserve protection because it is not truly confidential.
Finally, like many restrictive covenant agreements, this one contained a savings clause under which the parties "consented to judicial modification" in the event any provision was deemed overbroad. The appellate court, however, refused to reform the agreement to correct the deficiencies because they were "too great to permit modification."
The result: the employer was left with no remedy for a contract breach that would have been available if the agreement had been tailored more narrowly.
What are the key takeaways from the court’s decision?
Overall, employers should not rely on off-the-shelf restrictive covenant agreements. "One-size-fits-all" should be avoided, because restrictive covenant agreements, unlike other contracts, are restraints of trade. Employers must be able to show that the restraints imposed are narrowly aligned with their business’ true protectable interests. They should resist the natural urge to err on the side of over-inclusion, and instead assure that the restrictive covenant does not prohibit post-employment conduct that does not truly harm the employer's interests.
Employers should limit their non-compete provisions to preventing competition only in the market niche that the employee serviced. Employers with affiliates that engage in other related services in which the employee did not engage during his/her employment should refrain from broadly sweeping those services within the scope of the non-competition language. Geographic and temporal limits should be limited so as not to create an undue hardship on the employee ability's to find employment in his/her chosen profession.
Non-solicitation covenants should apply only to those customers or prospective customers with whom the employee had contact during employment with the employer.
In the AssuredPartners case, the policy expiration dates that the employee took with him were found to have been confidential, but the confidentiality provision went far beyond that information and was thereby doomed. Employers should ask themselves what information is truly confidential, in the sense that it is not common knowledge and that maintaining its secrecy gives the employer a competitive advantage. In general, information such as profit margins and market analyses would appear to be confidential, but information such as sales volume or general pricing may not because they are common knowledge or can be easily found out.
Employers should not be lulled into a false sense of security by inserting provisions instructing a court to judicially modify any overbroad provision, because the court may decline to do so. While such reformation provisions should still be included, employers should nonetheless be vigilant against overly broad restraints so that resorting to such provisions is unnecessary.
Many employers could benefit from a review of their current restrictive covenant agreements to see if they pass muster under this recent appellate court analysis.