When it comes to post employment restrictions, non-compete agreements often get all the attention. In fact, such restrictions are a frequent subject of discussion on our law firm’s blog (Noncompete Restrictions: The First Line of Defense for Protecting the Company from Unfair Competition).
However, as explained below, a carefully drafted non-solicitation provision should be in every employer’s toolbox when it comes to protecting relationships and customers critical for business success.
How Non-Solicitation Restrictions Protect a Business
Take for example a recent case involving the enforcement of a non-solicitation provision in an insurance agent agreement (American Family Mutual Insurance Company v. Graham 7/5/2015). Specifically, the individual defendant, Stephen Graham, sold insurance for American Family Mutual Insurance Company for over 20 years. However, in January 2011, American Family terminated Mr. Graham’s agency agreement.
That agency agreement contained a non-solicitation provision which prohibited Mr. Graham from “directly or indirectly” inducing or attempting to induce any policyholder of American Family to cancel his or her policy with American Family.
Not to be deterred by this restriction, Mr. Graham formed an independent insurance agency and came up with a creative “work around,” to the non-solicitation restrictions, which included the following:
- In February 2011 he sent approximately a letter to 1,500 of his former American Family customers letting them know he no longer represented American Family Insurance Company.
- He further noted in this letter that he could not solicit or induce any of his former customers to leave American Family, except he could offer policies for insurance needs that were not covered by an existing American Family policy.
- Email communications revealed discussions such as, “[w]hen you get some time, just complete and return [the waiver form] and I can run some quotes which I really think will make you smile” or “[j]ust wondering if you got the form you requested. I would love to work some quotes up for you if it works to send [the waiver] back.”
- He further described how he could offer his former clients “more choices, expanded coverage, an excellent rates” that were “better suited for your needs.”
- And if a former American Family customer contacted Mr. Graham, the customer was asked to sign a “non-inducement form,” which provided that Mr. Graham had not solicited or induced that customer to “replace, lapse or cancel any American Family Insurance policies.”
American Family, not impressed or amused by Mr. Graham’s creative efforts, sued him in 2012 for violating the agent agreement with the above actions. The company further claimed his actions amounted to inducing or attempting to induce those customers to cancel their American Family insurance policies.
In October 2013, a jury agreed with American Family and found in its favor on all claims. Mr. Graham was ordered to pay $523,153.70 plus interest and he appealed this decision, but he did not fare any better on appeal, which upheld the jury verdict.
The Take-Away for Employers and Employees
Well-drafted non-compete restrictions offer significant protections for employers. But, as we previously discussed here, such restrictions are not always a silver bullet defense to competition by former employees. For this reasons, we recommend that employers consider non-compete restrictions and non-solicitation provisions as a valuable 1-2 punch when it comes to protecting your company’s competitive interests. Having both in place offers employers with alternative theories of recovery – restricting unfair competition by enforcement of the non-compete restriction and protecting customer valuable relationships through non-solicitation provisions.
For employees, Mr. Graham’s efforts bring to mind the saying that ‘pigs get fat, hogs get slaughtered.’ Specifically, Mr. Graham could have simply notified his former customers that he left American Family to start his own agency and left it at that, which could may have avoided the lawsuit and judgment. At least this is the conclusion to be drawn from the Court of Appeals decision. That decision noted that while Mr. Graham’s letter specifically informed customers about his restrictions and intent to “honor that agreement,” it also informed customers that the agreement did not restrict him from offering a “broader range of insurance products” through “other companies that may be better suited for your needs.”
For more information about implementing or improving your company’s protection of competitive advantages and other intellectual property or for a thorough assessment of your obligations under non-compete/non-solicitation restrictions, contact attorney Jason Shinn. Since 2001, he has worked with companies and individuals to address legal issues and enforcement of post-employment obligations under non-compete and non-solicitation agreements.