Several ex-employees now may compete with their former employer, and may solicit its employees and customers, after a federal judge in the Eastern District of Washington held that the restrictive provisions in their employment agreements are unenforceable.
The agreements, drafted by the former employer, contained a choice-of-law provision which the former employer tried unsuccessfully to invalidate. The court also held that a low-level at-will employee’s non-compete covenant lacked sufficient consideration to be enforceable where all he received for signing it was a job offer. Genex Cooperative, Inc. v. Contreras, Case No. 2:13-cv-03008-SAB (Oct. 3, 2014) (Bastian, J.).
Summary of the Case
Genex was in the business of, among other activities, inseminating dairy cows and marketing bovine semen. Four of its employees resigned and the next day began servicing its customers on behalf of its competitor. Genex filed a complaint against all four, seeking in part to enforce non-competition covenants signed by three of the four defendants and non-solicitation covenants signed by two of the four. The court invalidated all of the covenants on the ground that they were unnecessary in order to provide reasonable protection to Genex or were otherwise contrary to applicable law.
Choice of Law Provision in Defendant Verduzco’s Agreement.
The employment agreement signed by Verduzco stated that it was governed by Wisconsin law (Genex is incorporated there). Although the provision was drafted by Genex, the company argued that the court should apply the law of the forum, Washington, for three reasons: (a) Verduzco worked there both for Genex and, subsequently, for its competitor, (b) he signed the agreement there, and (c) Wisconsin law violated “a fundamental policy” of Washington because its judges have the power to blue pencil otherwise unenforceable contracts whereas Wisconsin jurists are not permitted to do so. Judge Bastian held that judicial discretion to blue-pencil is a “general rule of contract law” in Washington, not “a fundamental policy.” Therefore, the agreement’s designation of Wisconsin law is enforceable.
Covenants Not to Do Business with Genex Customers.
Defendant Contreras’ non-compete agreement prohibited him, for one year after termination, from doing business with any Genex customer with whom he had had contact during the 18 months prior to his leaving Genex. Judge Bastion held that Genex failed “to meet its burden to establish reasonableness of the covenant.” He noted that “Contreras — who cannot read or write in English — was a low-level agricultural worker with an at-will employment relationship with Genex.” The question of “Whether non-compete agreements can ever be enforceable against at-will employees, without providing specific consideration such as a promise for future employment or training, is an open question in Washington.” However, both nationwide and in Washington, a covenant with “an at-will employee who did not have unique or professional skills” is unlikely to be deemed reasonable.
Verduzco’s covenant prohibited post-termination solicitation of anyone from whom he had sought new or increased business in the last 18 months of his Genex employment. The court observed that this prohibition forbad him from soliciting prospects who placed no orders with him during those 18 months, and that such a covenant is unenforceable under the law applicable to his agreement, that of Wisconsin.
Defendant Senn’s agreement restricted him, for 18 months after termination, from engaging “in either the artificial insemination of cattle or the sale of semen in the area in which [he] has been employed [by Genex] and rendered service.” Because, once again, even local dairy farms not previously serviced by Genex were out of bounds, the court held that the covenant was not “necessary for the protection of Genex’s business or goodwill.”
Covenants Not to Solicit Genex’s Employees.
The non-solicitation clause in Verduzco’s employment agreement directed him not “to induce or attempt to induce” any Genex employee to terminate his or her employment with Genex. Judge Bastian stated that under Wisconsin law a “no-hire” prohibition like that is invalid because it constitutes “a ‘harsh and oppressive’ restriction on the rights of an employee.”
Contreras’ agreement committed him not to “directly or indirectly encourage any Genex employee to terminate his/her employment with Genex.” The company admitted that this provision was intended to prohibit him from seeking to “inspire” employees to leave Genex’s employ. The court held this restriction was unenforceable, especially since his “decision to terminate his at-will employment may have inspired the other defendants with the courage to quit as well.” Emphasis added.
The Genex opinion deals with and resolves a variety of issues. It teaches that the draftsperson of a rational choice of law provision in an employment agreement has an uphill battle trying to avoid it. Further, the opinion tells us that employers should be wary of trying to enforce covenants signed by low-level employees or those without separate, meaningful consideration. Finally, restrictive employment covenants are less likely to be enforced if they are intended to expand the prohibitions beyond those necessary to provide the former employer with reasonable protection.