Wholesaler loses non-compete court case against ex-employee

by 11 Nov 2015
by Shreya Kalra

When William Schmitt left wholesale broker Assured Partners in 2013 he’d built up a sizeable book of business, having joined the firm in 2006 from another wholesaler, ProQuest, in the same market. Specializing in the lawyer’s professional liability insurance market (LPLI) he serviced clients in 12 US states and the United Kingdom.  As a Senior VP he was well paid, with a base of $240,000 and a number of bonuses and other incentives. He’d also had to sign a new contract with a non-compete clause (restrictive covenant) in it;

[3](a) Noncompetition. During the Employment Period and during the period beginning on the date of Separation and ending on the later of (x) the end of the Term and (y) the anniversary of the date of Separation (collectively, the 'Restricted Period'), Executive shall not, directly or indirectly, own, manage, control, participate in, consult with, render services for, or in any manner engage in the Restricted Business anywhere in the Restricted Area. Nothing herein shall prohibit Executive from being a passive owner of not more than 5% of the outstanding stock of any class of a corporation that is publicly traded, so long as Executive has no active participation in the business of such corporation. 
(b) Nonsolicitation. During the Restricted Period, Executive shall not directly or indirectly through another entity *** (iii) induce or attempt to induce any Potential Target, customer, supplier, licensee or other business relation of the Company, Employer or any of their respective Subsidiaries to cease doing or not do business with the Company, Employer or such Subsidiary or in any way interfere with the relationship between any such Potential Target, customer, supplier, licensee or business relation and the Company, Employer or any such Subsidiary ***." 
Schmitt resigned and the firm turned to the courts when he began brokering wholesale insurance and sending his new contact information to the customers named in the firm’s customer expiration list that he had serviced during his employment. Assured filed a lawsuit to receive compensation for damages caused by a breach of the employment agreement, and also to get injunctive relief. 

The circuit court, however, denied their request for a temporary restraining order stating that the non-competition, non-solicitation and confidentiality clauses of the employee’s contract were vague and unreasonable. 

Assured appealed and the Court of Appeals stated the language of the non-competition clause did not properly limit the former employee’s prohibited activities to those related to the specific kind of his professional liability insurance practice he had developed during his employment. 

Also, the court found the non-solicitation to be broader than necessary as it prohibited the former employee from servicing clients with whom he had never had contact while working at the firm. 

Finally the court judged the confidentiality clause as one that could not enforced because it claimed to protect almost all information that the employee might have learnt while working for the wholesale insurance brokerage firm, including information that might be non-confidential. 

But what does that mean for the rest of us trying to prevent unfair competition from ex-employees? Don’t make your non-compete clauses too broad.

Law firm Ogletree and Deakins has given the following tips for drafting restrictive clauses to save your firm from a similar mishap: 

1.    Employers should devote care and attention when drafting these agreements from the very beginning. Identify the interests to be protected and draft the agreement to protect those interests and nothing more.
2.    When drafting a non-competition provision, limit the prohibition to those activities the employee developed during employment and avoid blanket prohibitions on competition.
3.    When drafting a non-solicitation provision, ensure that the agreement does not extend to customers with whom the employee never had contact.
4.    Fourth, take care in defining “confidential information” in your confidentiality provision. Defining everything under the sun as “confidential,” when it isn’t, will not protect you and may be unenforceable even as to the use of truly confidential information.
5.    Lastly, don’t think that a provision in an agreement permitting a court to judicially modify any overbroad provision will save the day from sloppy draftsmanship. In determining whether modification is appropriate, the fairness of the restraints in the agreement is a key consideration. If the deficiencies in the agreement are too great, a court may refuse to modify it, leaving the employer without remedy.