by Lincoln C. McElroy
In recent years, lawsuits involving noncompetition and nonsolicitation agreements between employers and key employees have resulted in the development of significant Oklahoma law regarding the enforceability of such contracts. Although Oklahoma statutes and case law prohibit agreements that restrain trade, the Oklahoma Legislature has carved out certain exceptions, including the enforceability of noncompetes when agreed to as part of the sale of a business. The state also has adopted a statute allowing enforcement of what is often referred to as a nonsolicitation agreement — a clause prohibiting a former employee from soliciting business from the employer's established customers after his employment ends.
Changes in Oklahoma's statutory scheme, as well as several recently published decisions from Oklahoma appellate courts, have resulted in some uncertainty about restrictions on former employees' activities. In a recent decision, the Oklahoma Court of Civil Appeals clarified the existing law. In doing so, it also provided some insight for employers and drafters of employment agreements regarding what kinds of provisions may and may not be enforceable.
An Overly Broad Restriction
Misty Lynn Curler worked for Vanguard Environmental, Inc., which specializes in environmental and safety compliance. When she resigned in 2005, she was accountable to an employment agreement she had signed five years earlier. The agreement was aimed at restricting her posttermination activities and included the following provisions:
- clients previously served by Curler were the "property" of Vanguard Environmental;
- Curler released any and all rights to the marketing of environmental and safety compliance serves to Vanguard;
- Curler couldn't make any contact with "clients" regarding Vanguard's services; and
- Curler could not, for five years, contact any client that "has carried on business" in the environmental compliance business in which Vanguard operated.
When Curler left Vanguard to work for a competitor in Tulsa, she was sued by her former employer.
Under Oklahoma law, an agreement prohibiting an employee from soliciting the employer's established customers for a reasonable period of time will usually be upheld. However, the agreement Vanguard sought to enforce failed to meet that standard for a number of reasons. For one thing, it was written in a way that effectively prevented Curler from approaching established customers as well as potential customers or prospects.
Oklahoma courts are also unwilling to enforce agreements that are unreasonable in duration. The court found that the Vanguard agreement prevented Curler from working in her profession in any capacity throughout most of the UNited States. Additionally, it attempted to prevent competition in all parts of Vanguard's business, rather than the areas Curler was involved with when she was employed with the company. The overreaching nature of the agreement and its effect of essentially preventing Curler from competing in any fashion made it virtually unenforceable.
Selling a Business
The idea of reasonable and fair restrictive provisions continues to appear in Oklahoma law. While agreements restricting an employee's ability to work have not been favored, the courts will enforce agreements involving the sale of a business when they protect fair competition. The Tenth Circuit (which covers Oklahoma) recently upheld a 15-year noncompete and a separate nonsolicitation agreement in a case in which I represented the employer.
You probably made the same face I did when I first read the agreements and thought, "Fifteen years? How can anyone expect to enforce that?" After some talking and some digging, things began to look better. That's because the agreements were tailored to individual's circumstances, and he received compensation in exchange for the sale of his business.
In the case, David Lundy sold his propane business to Beck & Root Fuel Company. The sale agreement restricted Lundy from opening a competing business in four adjacent counties for a period of 15 years. During that time, he was to receive installment payments from Beck & Root for the purchase of his business. He also agreed to continue to work for Beck & Root after it took over. Once he was employed by the new company, he signed a confidentiality and nonsolicitation agreement, preventing him from using confidential information and from soliciting established customers who had purchased goods from the company in the event that he left.
As you may have already guessed, Lundy resigned his employment and almost immediately opened a competing business approximately one mile away. He then began operating in the area prohibited by the noncompete and soliciting at least some of his former employer's customers. Soon after, Beck & Root filed a lawsuit seeking to enforce the agreements.
The court enforced the noncompete and nonsolicitation agreements signed by Lundy. As in every case involving a noncompete, the outcome was fact-dependent and there were few hard-and-fast rules. The court found no problem with a 15-year noncompete in connection with the sale of a business when the agreement is limited geographically and complies with Oklahoma law. In this case, the time period was linked to the duration of the payments by Beck & Root to Lundy for the purchase of his business.
Focus then shifted to the nonsolicitation agreement prohibiting Lundy's solicitation for two years of customers who had purchased products within 12 months and within a 50-mile radius of the location where he worked. Provisions restricting only the solicitation of established customers fall within the exception to Oklahoma law allowing for enforcement of a nonsolicitation agreement. In the Lundy case, the agreement was enforced because it was reasonably limited in duration and geographically reasonable to prevent unfair competition — in part because it prohibited Lundy from contacting established customers whom he had served while employed by Beck & Root.
The agreement allowed Lundy to compete using general knowledge he possessed, provided he didn't solicit established customers. Given the value placed on this part of the agreement by the court, it seems wise for anyone drafting an agreement or trying to determine enforceaility to consider whether the agreement should or does contain a clause allowing the former employee to compete — but just not solicit former customers. Inergy Propane, LLC v. David L. Lundy, Case No. 05-6149 (10th Cir., 8/13/08).
The Point Of It All
Oklahoma courts will clearly enforce covenants not to compete and nonsolicitation agreements when they involve the sale of a business so long as the agreements are reasonable and fair under the circumstances. When preparing the agreement, a little common sense and consideration of basic fairness to both the employee and the employer will go miles toward actually being able to enforce the contract when an employee breaks his end of the bargain.
The author can be reached at email@example.com.