Important Lessons Regarding Non-Competition and Non-Solicitation Agreements from the Kent County Business Court

(August 3, 2015) Since his appointment to the Kent County Specialized Business Docket (“Business Court”), Judge Christopher Yates has issued multiple opinions regarding the enforcement of non-competition and non-solicitation clauses. Those opinions provide important insight for any entity or individual seeking to enforce or avoid a non-competition or non-solicitation clause in the Business Court.

For one, it is clear that the Business Court will strictly enforce the plain language of non-competition and non-solicitation agreements, meaning that imprecise drafting can create problems for employers and loopholes for former employees.

For example, in Checklist Building Services Inc v Krystal Klear Cleaning Services,¹ Checklist Building Services Inc. (“Checklist”) sued two former employees for breaching the non-solicitation clause in their employment contracts by operating a competing cleaning business. The restriction included a two-year ban on “call[ing] upon any customer or customers of Checklist…for the purpose of soliciting or selling disaster restoration services or similar services.” The former employees, however, argued that they were not soliciting customers of Checklist for disaster restoration services. Rather, they were soliciting for routine cleaning services which, according to the former employees, were not similar to disaster restoration services. The Business Court accepted this argument, stating that janitorial services and restoration services were distinct activities. Thus, despite the enforceability of the non-solicitation clause, its language did not apply to the actions of the two former employees and they were able to avoid liability.

Imprecise drafting can also blur the line between a non-competition clause and a non-solicitation clause, leading to narrower coverage than intended. That is what happened in Outbreak Customz LLC v Wray,² another case decided by the Business Court. There, Outbreak Customz LLC (“Outbreak”) suspected that a former employee was soliciting its customers, thereby violating a non-competition and non-solicitation clause in an independent contractor agreement. Looking at the specific language of the independent contractor agreement, however, the Business Court determined that it only contained a non-solicitation clause, not a non-competition clause. So although the Business Court enforced the non-solicitation clause, determining that it prohibited the former employee from divulging trade secrets, contacting Outbreak’s customers, and recruiting Outbreak’s current staff, the former employee was still allowed to continue working in the same industry as Outbreak.

Importantly, when the Business Court grants a preliminary injunction stopping a former employee from violating a non-competition clause, it does not always require the former employee to stop working for the competitor. Furthermore, it does not always require the former employee to stop contact with clients the employee already convinced to switch to the competitor. This situation played out in Financial Advisory Corp v Janson,³ where a former employee of Financial Advisory Corporation (“FAC”) took client information, solicited clients while still working for FAC, and gave FAC no prior notice of his plans to leave FAC. Although the Business Court stated that the former employee blatantly violated his employment agreement, the Court only prohibited the former employee from having contact with “current” clients of FAC, allowing him to keep both his new job and clients he already secured from FAC. The Business Court justified this limitation by taking into account the public’s interest in free commerce and the client’s right to choose their financial services provider.

Non-competition and non-solicitation clauses can be an effective way to prevent former employees from taking advantage of an employer’s good will and taking clients and confidential information. To effectively use a non-competition or non-solicitation clause in the Kent County Business Court, however, it is vital for the employer to precisely draft the language and to act quickly when a former employee violates the restrictions.

For assistance drafting the appropriate agreement to protect your organization, contact Mary Ann Cartwright, Chair of the Rhoades McKee Employment Law Practice Group. For more information regarding these or other rulings from the Business Court, contact Stephen J. Hulst, Chair of the Rhoades McKee Commercial Litigation Group.

¹ Case No. 13-01483-CKB

² Case No. 15-04840-CKB

³ Case No. 14-08806-CKB