Case Law Update: Louisiana, Pennsylvania; Regulatory Update: NLRB Holds Non-Compete, Employee Non-Solicit Violate NLRA; Court Declines Hearing in Ryan Case
Case Law Update
Arthur J. Gallagher & Co. v. Annison, Case No. 2023 CA 0770 (La. Ct. App. June 13, 2024)
Read the full opinion here.
Categories: Insurance Brokerage Industry; Appeal; Preliminary Injunction; Statutory Interpretation; Blue Pencil/Reformation; Bond
Tags: Louisiana law applied; Preliminary injunction granted; Blue pencil request allowed
Types of restrictions in case: Non-compete; Customer non-solicitation; Customer non-servicing
Summary
Litigation Strategy Alert! A subtle feature of Louisiana law generally requires an employment relationship to exist before a restrictive covenant may be entered. Here, the appellate court held that contracts signed before employment began, but which had an “effective date” on the first day of employment, were compliant with Louisiana law. The court also affirmed the trial court’s entry of a preliminary injunction after severing unenforceable provisions from a group of insurance brokers’ non-compete agreements.
The plaintiff (“Gallagher”) was an insurance brokerage that sued several former brokers for allegedly breaching their non-compete and customer non-solicitation provisions.
Relying on the severance provision in the employees’ agreements, the trial court severed certain aspects of the restrictions it found unenforceable, but granted Gallagher’s motion for a preliminary injunction enforcing the remainder. The employees appealed.
The trial court also denied Gallagher’s motion for a preliminary injunction against two employees who signed their agreements before their employment with Gallagher began. Gallagher appealed this aspect of the court’s decision.
The appellate court affirmed entry of the preliminary injunction enforcing the restrictive covenants as revised by the trial court, and reversed the trial court’s decision denying a preliminary injunction against the two employees who signed their contracts before their first day of employment.
Severance Provision Enforced
Before the trial court, Gallagher submitted the testimony of a witness who testified that Gallagher’s intent was to prohibit the former employees from soliciting or competing everywhere Gallagher does business. The employees argued this evidence showed the trial court’s decision to sever certain portions of their restrictions to cabin them to certain Louisiana parishes and other counties was contrary to the parties’ intent.
The severability clause in the contracts at issue directed the court to sever any offending provision "'so as to afford [Gallagher] the fullest protection commensurate with making this Agreement, as modified, legal and enforceable under applicable laws.”
The appellate court concluded that Gallagher’s intent, as testified to by its witness, was inadmissible extrinsic evidence, and the severance provision clearly articulated the parties’ intent to allow severance and grant Gallagher the fullest protection under the law. The court therefore rejected the employees’ argument that the trial court’s compliance with the severance provision was against the parties’ intent.
Bond
The trial court issued the preliminary injunctions without requiring Gallagher to furnish security, in violation of Louisiana law.
The court found the “interests of justice and judicial economy” were best served by remanding the matter to the trial court to have Gallagher furnish a security, rather than setting aside the preliminary injunctions.
Timing of Agreement
Under Louisiana law, an employment relationship must exist in order for there to be an enforceable restrictive covenant. Louisiana courts have invalidated covenants executed before the employment relationship existed. “The plaint text [of the Louisiana restrictive covenant statute] permits non-compete agreements between employees and their ‘employer.’ It does not allow for non-compete agreements between job applicants and potential employers.”
Here, two of the employees signed their contracts with Gallagher before their employment had begun. However, their contracts specified that they would only become effective on the first date of employment.
In light of the parties’ “express common intent to effectuate the employment agreements on the date [the employees] commenced employment,” the court held it was error for the trial court to deny the preliminary injunctions against them on this ground.
Scope of Covenants Enforced
The court affirmed the preliminary injunctions that prohibited the brokers for two years following their departures from soliciting, servicing or accepting business from any Gallagher client for which they provided services while employed at Gallagher, within certain parishes specified in their agreements.
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West Shore Home, LLC v. Chappell, 1:22-CV-00204 (M.D. Pa. June 12, 2024)
Read the full opinion here.
Categories: Summary Judgment; Reasonableness of Covenants; Permanent Injunction; Damages; Choice of Law Provision
Tags: Choice of law provision enforced; Permanent injunction denied; Overbroad geographic scope; Pennsylvania law applied; Delaware law applied
Types of restrictions in case: Non-compete; Non-disclosure
Summary
Plaintiffs West Shore Home, LLC (“WSH”) and West Shore Home Holdings, LLC (“Holdings”) (collectively, “West Shore”) filed a motion for summary judgment and a permanent injunction against former employee defendant Craig Chappell (“Chappell”).
Chappell and WSH executed an employment agreement which included a Pennsylvania choice of law provision and a non-competition clause, which would apply if Chappell was terminated for cause. Under the non-competition clause, Chappell could not work for a competitor of WSH within 250 miles of any of WSH’s locations.
Chappell also signed a Phantom Unit Agreement (“PUA”) with Holdings, also containing a non-competition provision and restrictions regarding the use of proprietary information. The PUA contained a Delaware choice of law provision.
Chappell was terminated for cause and subsequently worked for multiple WSH direct competitors. Chappell also obtained WSH confidential information and provided it to WSH’s direct competitors.
West Shore filed a complaint and the court issued a preliminary injunction by consent of the parties, which enjoined Chappell from doing any work for any West Shore competitor for a period of 24 months or misappropriating or using any West Shore confidential information or trade secrets. That same day, Chappell created Evolve Advertising, LLC (“Evolve”). Through Evolve, Chappell continued performing work for a direct competitor of WSH.
Employment Agreement Non-Compete Restriction
The parties did not dispute that the restrictive covenants in the employment agreement were enforceable, but Chappell argued that the geographic scope was unreasonable, which the court ultimately rejected.
The court rejected Chappell’s argument that the non-compete was effectively unlimited in geography because it was only premised on his assertions in his own affidavit.
It also found that based on the nature of Chappell’s work, the restriction was reasonable, and regardless, Chappell would have violated the non-compete agreement with a narrower geographic scope.
Employment Agreement Non-Disclosure Restriction
The court found that Chappell breached his non-disclosure obligations contained in the employment agreement when he impermissibly used WSH proprietary information when working with WSH direct competitors, as well as used WSH’s confidential information to pursue work with another WSH competitor.
Employment Agreement Damages
The court denied WSH’s claim for unjust enrichment damages on the basis that it is a separate claim and not a basis for damages under a breach of contract claim.
The court did find that Chappell’s own bankruptcy filings stating he owed WSH damages because of his conduct in the matter at hand was a judicial admission sufficient to establish his breach of the employment agreement resulted in damages.
Breach of the PUA
First, the court found, and Chappell did not dispute, that Delaware law applies under the choice of law provision in the PUA.
The court also found that the PUA was enforceable and supported by sufficient consideration. Delaware courts have held that “continued employment of an employee whose position is terminable at will constitutes sufficient consideration to support an enforceable contract.”
The court next found, and Chappell did not dispute, that the two-year non-compete was reasonable in duration under Delaware law, and that the geographic limit was reasonable due to a prohibition only on ownership in or work with a business engaged in competition with WSH, i.e., Chappell could perform services in any geographic area for companies that provide goods of any sort or services other than remodeling wet bath replacement, or window and door replacement.
The court made the same determination that Chappell breached the PUA non-disclosure provision based on the same facts as his breach of the employment agreement non-disclosure provision.
However, the court ultimately denied summary judgment after it determined that West Shore failed to show additional factual or legal basis for damages under the PUA than it did under the employment agreement.
Permanent Injunction
West Shore moved the court to permanently enjoin Chappell from competing with West Shore.
The court rejected West Shore’s request for a permanent injunction because:
the preliminary injunction was issued by the consent of the parties without the court making independent and explicit findings and conclusions;
the preliminary injunction did not provide sufficient findings and conclusions to support a permanent injunction; and
West Shore did not demonstrate the first two elements of a permanent injunction - that it had suffered irreparable injury and remedies at law are inadequate.
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West Shore Home, LLC v. Chappell, 1:22-CV-00204 (M.D. Pa. June 12, 2024)
Read the full opinion here.
Categories: Sanctions; Damages
Tags: Federal law applied; Contempt
Types of restrictions in case: Non-compete; non-disclosure
Summary
Plaintiffs West Shore Home, LLC (“WSH”) and West Shore Home Holdings, LLC (“Holdings”) (collectively, “West Shore”) filed a complaint against former employee defendant Craig Chappell (“Chappell”).
West Shore alleged that, after leaving its employee, Chappell violated a covenant not to compete and retained commercially valuable proprietary information.
The court issued a preliminary injunction by consent of the parties, which enjoined Chappell from being employed or performing services for a competitor of West Shore for a period of twenty-four months. It also enjoined Chappell from possessing any of West Shore’s confidential information and trade secrets.
Subsequently, West Shore requested a hearing for civil contempt due to Chappell’s violation of the preliminary injunction.
Within a day of the preliminary injunction’s issuance, Chappell created Evolve Advertising, LLC (“Evolve”) for the purpose of violating the preliminary injunction.
Through Evolve, Chappell engaged in business with a West Shore competitor.
The court found that Chappell had violated the preliminary injunction by working for a competitor of WSH.
Disgorgement of Profits
The court denied West Shore’s request for disgorgement of Chappell’s profits earned in violation of the preliminary injunction.
West Shore conceded that there was no directly competitive conduct and they did not suffer a direct loss of business due to Chappell’s work with a competitor.
Because West Shore did not show a loss, the court determined disgorgement of profits would be punitive.
Unjust Enrichment
The court determined that, although West Shore made “a competent and well-supported legal and factual case for why the court should aware just enrichment damages,” it decided that it is not an appropriate sanction for civil contempt in the Third Circuit.
Legislative Update
No legislative update.
Regulatory Update
NLRB ALJ Finds Non-Compete, Employee Non-Solicit Violate NLRA
An Administrative Law Judge with the National Labor Relations Board ruled that an employer’s non-competition and employee non-solicitation provisions unlawfully restricted employees in the exercise of their Section 7 rights to engage in union and other concerted activities under the National Labor Relations Act. Read the full decision here.
The ALJ applied the recent Stericycle standard to the provisions, under which the General Counsel must first demonstrate that the provision has a “reasonable tendency to chill employees from exercising their Section 7 rights,” viewed from the perspective of an employee who is subject to the rule, economically dependent on the employer, and contemplates engaging in protected concerted activity. Then, if the General Counsel meets this burden, the employer may rebut the presumption of illegality by showing that the provision “advances a legitimate and substantial business interest” that it is unable to advance with a “more narrowly tailored rule.”
The provisions held unlawful, and the ALJ’s conclusion regarding them, are set out below.
The employee non-solicitation provision, which stated: “During the term of this Agreement and for a period of 24 months after termination of employment for any reason, Employee will not, either directly or indirectly for himself or on behalf of others, solicit, encourage, or attempt to persuade any other employee of Employer to leave the employ of Employer. This is intended to prevent “pirating” of Employer employees.
ALJ conclusion: “The prohibition . . . on soliciting employees to leave Respondent’s employ would dissuade a reasonable employee from engaging in protected activity like telling their coworkers about the wages and benefits offered by the Union out of a reasonable fear that Respondent might accuse them of inducing other employees to quit.”
The “notice” provision, which stated: “During the term of this Agreement, Employee agrees to keep Employer informed concerning any and all offers or solicitations of employment that Employee may receive from third-parties so that Employer may protect its rights under this Agreement.”
ALJ conclusion: “By requiring in Provision 1(E) that employees report “any and all offers or solicitations of employment that Employee may receive from third-parties,” with no limitation for union or other protected activities, Respondent is promulgating an overly broad rule that may require employees to report on their own protected activities (and potentially those of other employees). For example, it may require an employee to reveal to his supervisor that he is engaged in a union salting campaign by requiring him to report any job offers he receives as part of that campaign. It is unlawful to require employees to report protected activity to their employers.
The non-compete, which stated: For a period of twelve (12) months following termination or separation of employment for any reason, Employee will not directly or indirectly, on Employee's behalf or on behalf of others: Engage in, be employed by, or become interested in, in any manner or capacity, as a principal, agent, partner, officer, director, employee, consultant, independent contractor, advisor or in any other capacity, with any insurance agency, insurance business or in any other business similar or competitive with Employer’s business as the same may exist at any time during the term of this Agreement, this covenant restricting Employee’s employment being limited to Employer’s service area which is defined as the county of the office where the Employee is located and to all contiguous counties thereto. If, during Employee’s employment, Employee is employed in any other of Employer’s locations, then these restrictions shall also apply to the county in which such office is located, and to all contiguous counties to that location.
ALJ conclusion: The non-compete provision in Provision 2(A) is overly broad in scope and would deter a reasonable employee from engaging in protected activity by barring employees from directly or indirectly, and in any capacity, engaging in, being employed by, or becoming interested in any enterprise that is “similar or competitive” to the employer’s business. Not only is this provision ridiculously broad in scope (could an employee indirectly engage with a competitor by sending a family member to buy something from its store?), but it would also cause a reasonable employee to refrain from engaging in protected activities that come with a risk of retaliation. If an employee knows they are barred from being involved in any capacity with any company that operates a similar business to Respondent, they will logically be more fearful of being fired and less willing to rock the boat because they face the prospect of being unable to find any work in their geographic area if they are fired or forced to leave their job.
The ALJ also concluded the employer failed to demonstrate these provisions advanced a legitimate and substantial business interest. The employee non-solicitation provision stated it was designed to prevent “pirating,” and the other provisions were in place because “employees may have information about its customers, employees, and business arrangements.” But the ALJ concluded there were other “unchallenged” portions of the agreement that addressed these concerns–the confidentiality provision and the customer non-solicitation provision. Accordingly, the ALJ concluded the stated justifications were insufficient to rebut the presumption of illegality.
Among other remedies, the ALJ ordered the Respondent to rescind the challenged portions of its employment agreements.
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Court Declines to Hold Hearing in Ryan Case
The Court in Ryan v. FTC has determined that it does not require a hearing on the plaintiffs’ motion to stay the FTC”s final rule banning non-compete agreements.
Whether this is good or bad for the plaintiffs remains to be seen. The Court previously indicated it would rule on the merits by July 3, so stay tuned.
