I was recently retained by a client to evaluate whether Nebraska courts would enforce a clause similar to the one below. The clause
stated:
“Non-Compete: It is understood and agreed by the Contractor
that the Contractor will not work with or contract with any of COMPANY'S existing and potential clients or any parties that Contractor was acquainted
while working as a Contractor for COMPANY during the term of this Agreement
and for a period of five years of the termination of this agreement, unless so
advised in writing by COMPANY.”
I evaluated the cases from Nebraska courts and determined that the covenant not
to compete appeared to be invalid because it restricted my client from competing
against their former employer in seeking to work with even potential clients. The former employer would have had a right to restrict
its former employee from contracting with its clients that my client worked with while employed by the Company. However, because the
clause was impermissibly broad it should be held invalid. It also does not have any geographic specifications
on the restriction.
General Considerations for Evaluating Covenants Not
To Compete
There are three
general questions relative to validity of partial restraints of trade: First,
is the restriction reasonable in the sense that it is not injurious to the
public? Second, is the restriction reasonable in the sense that it is no
greater than is reasonably necessary to protect the employer in some legitimate
interest? Third, is the restriction reasonable in the sense that it is not
unduly harsh and oppressive on the employee? See Securities Acceptance
Corp. v. Brown, 171 Neb. 406, 106 N.W.2d 456 (1960).
In Philip G. Johnson & Co. v. Salmen,
211 Neb. 123, 317 N.W.2d 900 (1982), the Nebraska Supreme Court recognized a
"balancing test" to be applied in determining whether the restraint
of a postemployment covenant not to compete is unduly harsh or oppressive and,
therefore, unenforceable. The factors or considerations involved in such
balancing test, required by Philip G.
Johnson & Co. v. Salmen, 211 Neb. 123, 128, 317 N.W.2d 900, 904, are
"the degree of inequality in bargaining power; the risk of the covenantee
losing customers; the extent of respective participation by the parties in
securing and retaining customers; the good faith of the covenantee; the existence
of sources or general knowledge pertaining to the identity of customers; the
nature and extent of the business position held by the covenantor; the
covenantor's training, health, education, and needs of his family; the current
conditions of employment; the necessity of the covenantor changing his calling
or residence; and the correspondence of the restraint with the need for
protecting the legitimate interests of the covenantee."
As
required by Philip G. Johnson & Co. v. Salmen, supra, harshness and
oppressiveness on the covenantor-employee is weighed against protection of a
valid business interest of the covenantee-employer. However, in the balancing
test applied to a postemployment covenant not to compete, there is no
arithmetical computation or formula required in a court's consideration of the
factors involved or to be considered. The factors or considerations to be used
in that balancing test are not weighted; that is, there is no prescribed method
by which more or less weight is assigned to each factor to be considered in the
balancing test required by Philip G. Johnson & Co. v. Salmen.
The Clause Prohibits Ordinary Competition
by Applying to Potential Clients
The Nebraska
Supreme Court noted that a prior employer had no protectable interest in
keeping a former employee from contacting its former clients. Polly
v. Ray D. Hilderman & Co., 407 N.W.2d 751, 225 Neb. 662, 667 (Neb.
1987). Similarly, this Company can have no
legally protectable interest in keeping you from contacting its potential
clients. That is a restraint of ordinary
competition because my client would not be using the goodwill he gained working with
this Company to get the client.
In the Polly case the Covenant included
restrictions on services to former clients and clients which Salmen had not
served and did not know. Id. The
court held that on that ground alone, the covenant was impermissibly broad and
is therefore unreasonable and unenforceable.
Id. The Polly
case helps guide what could happen in our case because in Polly the former employee became the
office manager for a former account of the previous employer.
In the Polly case the Nebraska Supreme Court
reviewed several cases and announced that a covenant that involves protecting
good will, and working with former clients, may be valid “only if it restricts
the former employee from working for or soliciting the former employer's
clients or accounts with whom the former employee actually did business and has
personal contact. This is in accord with our decision in Boisen v. Petersen Flying Serv., 222 Neb. 239, 383 N.W.2d 29
(1986), in which we determined that one of the reasons a covenant not to
compete was unreasonable and unenforceable was because the employee had no
personal and business-based contact with the employer's customers or
prospective customers. Because the covenant not to compete in this case
attempts to restrict Polly from soliciting or working for Hilderman's clients
with whom Polly did not work and did not even know, it is greater than is
reasonably necessary to protect Hilderman's legitimate interest in customer
goodwill, and is thus unreasonable and unenforceable.” Based on Nebraska case law, I believe that a
court would likely find the Non-Competition agreement impermissibly broad and
would find it invalid. While it will be
a bit more difficult if my client begins working for a former client that
he worked with while working as a contractor for the Company, the Polly case shows that a court should
likely still find the clause unenforceable.
Would
a court reform, or re-write, the clause to be valid?
Sometimes a
former employer will ask a court to re-write a Non-Competition Covenant so that
it is enforceable. It is unlikely that a Nebraska Court would
re-write this clause to only restrict my client to only working with clients that he actually worked with in a limited geographic region because
the clause attempts to restrict my client from contacting potential clients
also.
In Polly, the court elected to not reform
the agreement because “First, the covenant itself is so ambiguous that we are
not even sure it is a true covenant not to compete. Second, Hilderman did not
request reformation in its answer and cross-petition and did not argue that
issue either at the trial court level or on appeal.” Polly at
669. This means that the Company would have
to ask for reformation of the covenant in its very first pleading with the
court.
Additionally, Nebraska courts will not
reform Non-Competition agreements that attempt to restrict ordinary competition
as this clause has here, by attempting to restrict you from contacting potential
clients. For example, in the case of Boisen v. Petersen Flying Service, Inc.,
383 N.W.2d 29, 222 Neb. 239 (Neb. 1986), the Nebraska court held that the
former employer was not entitled to avail itself of the restrictive covenant as
protection against the threat of ordinary competition. The purpose or effect of
eliminating or preventing ordinary competition invalidated the restrictive
covenant in question. Consideration of propriety or availability of judicial
modification concerning the covenant's restraints based on time and place
becomes unnecessary on account of the questioned covenant's invalidity. The court held that “whatever a more narrow
draft of the questioned covenant might have been or may be, thereby decreasing
the limitation of time or space involved in the restriction under examination,
is irrelevant. Any modification in diminution of the restrictions on time and
space still pertains to a restriction on a form of competition against which
Petersen Flying is not entitled to protection.”
If you have questions regarding whether the covenant not to compete, or Non-Compete agreement that you signed is valid in Nebraska, contact Angela Madathil, and Madathil Law Office, for a free consultation.
Madathil Law Office, LLC
Nebraska Non-Compete Attorney
Serving clients throughout Nebraska
In Omaha
1625 Farnam Street #830
Omaha, NE 68102
In Lincoln
285 South 68th Street Place, Suite 322
Lincoln, NE 68510
angela@madathil-law.com
http://www.madathil-law.com/
T: 402.577.0686
F: 402.415.0635
No comments:
Post a Comment