In two unrelated cases decided earlier this month, employers failed in their attempts to enjoin former employees from competing. The Texas First District Court of Appeals vacated parts of the lower court’s injunction order, one part because it did not detail with sufficient specificity the conduct that was enjoined, and another part where the order was sufficiently specific but erroneously enjoined activities that were permissible. Lasser v. Amistco Separation Products, Inc., No. 01-13-00690-CV (Tex. Court of App., 1st Dist., Feb. 6, 2014). The North Carolina Court of Appeals held that a covenant’s array of prohibited activities was too broad to be enforceable. CopyPro, Inc. v. Musgrove, Case No. CCA13-297 (N.C. Court of App., Feb. 4, 2014).
Lasser v. Amistco Separation Products, Inc.
Summary of the case
The appellate court held that “The requirements of Rule [of Civil Procedure] 683 are mandatory and must be strictly followed.” The injunction order here violated the mandate of Rule 683 that orders “shall be specific in terms.”
Lasser, a salesman for ACS, signed a covenant which prohibited him — for two years after his termination — from (a) copying or using for his personal benefit ACS’ “confidential information,” and (b) soliciting “sales of competing goods to customers of ACS.” Thereafter, ACS sold its assets, including Lasser’s covenant, to Amistco, a company which makes metal separation and connection products. He became one of its salesmen. He resigned 15 months later and went to work for a new employer which then opened a division Amistco considered to be a competitor.
The lawsuit and injunction
Amistco made a forensic examination of Lasser’s company-owned laptop and concluded that he had accessed confidential information before he resigned. Amistco sued him for breach of contract, misappropriation of trade secrets, and other misconduct. The company obtained a preliminary injunction which directed Lasser to cease using, and to return, all of Amistco’s “confidential information and trade secrets,” without specifying what intellectual property was encompassed. In addition, the order prohibited him from deleting any files or communications from any electronic device in his possession, regardless of whether the files or communications relate to allegations of wrongdoing. Finally, he was enjoined from soliciting any of Amistco’s customers. Lasser appealed.
The appeals court held that the injunction order violated Rule 683 by “failing to identify, define, explain, or otherwise describe” what proprietary data Lasser was directed to return. The purpose of Rule 683’s specificity requirement for injunctions “is to ensure that parties are adequately informed of the acts they are enjoined from doing and the reasons.”
The injunction also was faulty because it compelled him to refrain from deleting his personal electronic records unrelated to the litigation. Moreover, the injunction was improper because it prohibited all solicitation of Amistco’s customers whereas the restrictive covenant precluded only solicitation of orders for competing goods.
CopyPro, Inc. v. Musgrove
Summary of the case
Restrictive covenants prohibiting employees from associating with a business rival of the employer in a vast geographic area for three years after termination were unenforceable.
The non-compete agreement
CopyPro, a company primarily engaged in leasing office equipment in 33 North Carolina counties, required its employees to sign a nondisclosure agreement and a covenant not to compete. The covenant prohibited the employee from having any connection with a CopyPro competitor operating anywhere in those 33 counties. Musgrove was a CopyPro salesman whose customers were almost exclusively in just two of the 33 counties.
The lawsuit, injunction, and reversal
When Musgrove resigned and became employed by a competitor, CopyPro sued him and obtained a preliminary injunction that encompassed the entire territory referenced in the covenant. The Appellate Court held that entry of the injunction order constituted reversible error. It “far exceeds [restrictions] necessary to protect [CopyPro’s] legitimate business interests” since the company had no right to restrain Musgrove “from working in a capacity unrelated to that in which” he previously was employed.
Care should be taken not to over-reach when drafting confidentiality, non-compete, and non-solicitation covenants, and when filing motions for injunctive relief to enforce the covenants. There is a societal benefit in enforcement of contracts, but courts will invalidate covenants that serve only the interests of the person or entity seeking enforcement without regard to the public interest or interests of the person or entity resisting enforcement. The longer the covenant’s duration, the wider its territorial restriction, and/or the more extensive its limitation on activities, the less likely it is to be enforced. Over-reaching can lead not only to an adverse court ruling but also to expense and generation of ill will among the parties.