It has been some time since this newsletter addressed how courts in Idaho view non-compete agreements, which, as you might imagine, are routinely entered into by employers and employees.  A refresher is in order.  Typically non-compete agreements prohibit former employees from working for a competitor within a particular geographic area for a designated period of time after the employment relationship ends.  This article will review a number of recent court decisions and provide you with some issues to keep in mind when reviewing your non-compete agreements.
 

The Idaho Legislature takes action 

            In July, 2008, and in response to a trend by Idaho courts to limit the enforceability of non-compete agreements, the Idaho Legislature enacted laws which both set forth presumptions for enforceable non-compete agreements and reduced the burdens on employers who are forced to file lawsuits to enforce non-compete agreements.  The title of the law, which is “Agreements and Covenants Protecting Legitimate Business Interests” (APLBI), seemingly confirmed the Idaho Legislature’s intent to protect Idaho employers rather than employees.  But has the APLBI changed the trend?            

            Under the APLBI, Idaho employers may use non-compete agreements to protect their “legitimate business interests” by precluding “key” employees (or independent contractors) from engaging in employment that is in “direct competition with the employer’s business after termination of employment.”  The APLBI has provided definitions for “key” employees and “legitimate business interests.”  Non-compete agreements are also required to be reasonable in duration, geographical area, and type of employment. In other words, a non-compete agreement must not impose a greater restraint than is reasonably necessary to protect an employer’s business interests. 

            The APLBI also sets forth a number of important presumptions: First, a non-compete agreement’s duration of eighteen months or less is presumed to be reasonable.  Second, it is presumed that a geographical limitation is reasonable if it is restricted to the areas in which an employee provided services or had a significant presence or influence.  Third, it is presumed reasonable if a non-compete agreement is limited to the type of employment or line of business conducted by the key employee while working for the employer.  Finally, an employee that is among the highest paid five percent of an employer’s employees is considered to be “key.” 

            Significantly, the APLBI expressly authorizes, and arguably requires, a court to “limit or modify” an otherwise unreasonable and unenforceable non-compete agreement in order to make it reasonable and enforceable.  This is commonly referred to as the “blue pencil rule.”  But the question remains: Will courts be more willing to modifying parties’ contractual agreements given that they are now statutorily authorized to?  We shall see. 

Court finds a non-compete agreement unenforceable and refuses to “blue pencil” 

            In AMX International, Inc. v. Battelle Energy Alliance, LLC, an information technology consulting company, AMX, required all newly hired employees to sign non-compete agreements that prohibited them from directly or indirectly working for an Active Client for a period of 12 months following employment with AMX.  The non-compete agreements defined an “Active Client” as “a person, business or entity that AMX has sent an invoice to or concerning within the prior twenty-four months and who is listed in the invoice as a “client” or under the “Bill to.” 

            In March, 2006, AMX began providing IT services to Battelle.  Notably, AMX’s service contracts did not prohibit Battelle from hiring former AMX employees, but Battelle did know that each AMX employee had a non-compete agreement. 

            In 2008, and after numerous AMX employees applied with and were hired by Battelle, AMX filed a lawsuit alleging that Battelle tortuously interfered with the non-compete agreements by “hiring away AMX employees.”  AMX went on to allege that, because of Battelle’s conduct, AMX had been damaged in excess of $2 million dollars. 

            The issue before the court was whether the non-compete agreements were unreasonable, and, therefore, unenforceable because, if so, then AMX’s claim against Battelle failed.  In making this determination, the court first addressed whether AMX’s non-compete agreements were too broad as to which clients AMX’s prior employees were prohibited from contacting.  The resounding answer: “yes.” Why? 

            The court found that the non-compete agreements were overly broad because they did not limit prior employees from contacting those clients with whom the prior employees actually had contact with; rather, AMX’s prior employees were prohibited from contacting any client to which AMX sent an invoice.  Similarly, the court found that AMX’s non-compete agreement failed to define the “work” its prior employees were prohibited from performing and failed to restrict the geographical area to those areas where the AMX employee actually provided services or in which he had a significant presence or influence.  Accordingly, the court found AMX’s non-compete agreements unreasonable and unenforceable. 

            The court also refused AMX’s request to “blue pencil” the non-compete agreements because AMX “cast its net too wide,” and “reforming the agreements to make them reasonable would require a substantial rewrite of the contracts,” which the court expressly declined to do. 

Court finds a non-compete agreement to likely be enforceable 

            In Timberline Drilling, Inc. v. American Drilling Corp., LLC, Steven Elloway worked for Timberline from approximately January, 1997, until he resigned in July, 2008.  During his employment, Elloway entered into an agreement that contained non-compete language.  Shortly after he resigned, Elloway became affiliated (as either an owner or corporate officer) with American – an apparent competitor of Timberline.  Timberline sought a preliminary injunction against American, which required the court to determine if Timberline had a probable chance of success on its breach of contract claim that related to Elloway’s non-compete agreement.  Accordingly, the primary issue before the court was whether Elloway was in violation of the terms of the non-compete agreement.  Tellingly, and before reaching the issue, the court acknowledged its authority to “blue pencil” an otherwise unreasonable non-compete agreement.  

            The court first found that Elloway was the “type of employee” with whom an employer would want to have a non-compete agreement because he had extensive experience in the mining industry prior to going to work for Timberline.  Second, the court recognized that the non-compete agreement would serve to “ensure that Elloway would stay with Timberline and would not compete against Timberline for a period of time” after the employment relationship ended.  For these reasons, the court found that Timberline had a “protectable business interest.”  

            Regarding the duration of the non-compete, which was five years, the court found that it was “probably unreasonable.”  In making this determination, the court looked to the APLBI’s presumption that a non-compete agreement’s “term of eighteen months or less is reasonable as to duration” and acknowledged that “it could apply the blue pencil rule to modify the duration” in order to keep the non-compete agreement enforceable.  The court also found that the geographical scope of the non-compete agreement, which was limited to one-hundred miles from where Timberline was operating at the time Elloway retired, was likely reasonable.  

            The court next considered the scope of the activities Elloway was prohibited from performing under the non-compete agreement and found that it was reasonable to restrict Elloway from providing mining services to Timberline’s clients and from hiring Timberline’s employees; however, the court was concerned about Elloway being precluded from selling products or drilling services similar to those sold and provided by Timberline.  Nevertheless, the court again recognized that it could apply the “blue pencil rule to clarify this section if necessary to make the covenant reasonable.” 

            In sum, the court found that it was likely that Timberline could succeed on its breach of contract claim, but that it would be up to a jury as to whether the essential terms of the non-compete were reasonable.  

Take aways 

  • It has yet to be determined whether the APLBI altered the trend by courts to limit the enforceability of non-compete agreements.  Courts have acknowledged that the “blue pencil rule” can be used to render an otherwise unenforceable noncompete agreement enforceable.  But the court will not re-write the agreement or create essential provisions which were missing. 
  • It would serve you well to review your non-compete agreements and make sure that they fall within the presumptions set forth by the APLBI – i.e., duration, geographical area, type of employment, key employees.  This is critical because having your non-compete agreements fall within these presumptions will place the burden on your prior employee to show that their non-compete agreement is unreasonable.  Further, you cannot rely upon courts to completely rewrite your non-compete agreements using the “blue pencil rule.”  
  • Make sure that your non-compete agreements are directed at “key” employees, and it may be in your best interests to have an attorney actually draft the non-compete agreements for your high-level employees.  
  • There are many other issues that can arise when addressing non-compete agreements in Idaho.  If you have any questions or concerns, consult your attorney for advice.  It may save you time and money in the long run.

 

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