Most employee restrictive covenant disputes arise as a result of an employer’s concern about the potential loss of customer relationships and customer goodwill.  These disputes generally involve sales representatives or high level business executives that have relationships with key customers; these disputes also frequently involve defenses that the employees had pre-existing business relationships with the customers that should fall outside the non-compete or non-solicitation agreement at issue.  These disputes can be very fact-driven and the subject of very different recollections.  For these reasons, non-solicitation cases can be especially messy.  Unfortunately, a recent case out of the U.S. Court of Appeals for the Sixth Circuit, Hall v. Edgewood Partners Insurance Center, Inc., Case No. 18-3481/3482, highlights a doctrine — that an employee has rights to clients he/she acquired on his/her own time and dime — that may make these cases more complicated, expensive and problematic.

Legal Backdrop:  It is important to remember the guiding principle for restrictive covenants when the issue of customer goodwill or relationships is involved — namely, whether the employer has a legitimate business interest in the disputed relationships.  Non-competes and non-solicitation agreements are permitted for this reason because employers have assigned customer relationships to the employee to manage and grow.  In essence, because the employee has served as a steward for that customer relationship, courts have reasoned that he or she would have an unfair advantage over the employer because he or she was the primary point of contact and the employer relied on the employee to manage that relationship on its behalf.  For these reasons, courts have determined that an employee should not be able to exploit that opportunity for his/her personal benefit when he/she leaves their employer to join a potential competitor.  Similarly, if the employer has funded or reimbursed the employee to bring in other clients, the employer’s expectation is that it should have a reasonable opportunity to retain those relationships.

However, many courts have been reluctant to grant these restrictions in situations where the employee can demonstrate that the employer has no legitimate business interest in that customer relationship.  For example, if a sales representative had a pre-existing business relationship with a customer and brought that customer with him/her, an employer would be hard-pressed to claim any special entitlement to that relationship and justify the restriction that would come with a non-compete or non-solicitation agreement.  Similarly, if the employer has been terminated by the customer through no misconduct of the employee, or if the employer has abandoned a particular line of business that the former employee wants to pursue, courts have been reluctant to enforce agreements that would prevent the former employee from servicing customers in these situations.

Noteworthy Legal Issues in the Hall case:  The dispute in the Hall case involved in an interesting factual overlay — that the employment agreements including the non-solicitation provisions had been executed in connection with the sale of a business.  Although the employees in question were not owners of the business and therefore did not benefit from the sale of any assets, they did sign agreements in which they gave up ownership interest in their old clients and agreed that they would refrain from soliciting their old clients for two years.  As a result, the trial court initially entered a preliminary injunction on behalf of the employer USI and Edgewood Partners, a company that subsequently purchased USI’s business line.

The employees appealed, arguing that USI and Edgewood Partners had no entitlement to their “old clients” that they brought with them.  In an initial appeal, the Sixth Circuit sided with the employees on many of the non-solicitation issues.  Applying New York law, the Sixth Circuit recognized that one of the former employees, Michael Thompson, could have the right to pursue his old clients if those clients were the result of his own “independent recruitment efforts” that were “neither subsidized or formally supported as part of a program of client development” by his former employer.  The Sixth Circuit directed the trial court to determine which clients were recruited and developed solely on Thompson’s accord and exclude them from any injunction.

After the trial court determined that 37 clients should be carved out from the preliminary injunction, Edgewood then appealed.  The Sixth Circuit again sided with the former employee Thompson, noting that Thompson testified and produced evidence that he acquired those 37 clients independently “without financial assistance from either [Edgewood] or USI,” although the opinion did not provide any detail as to the circumstances or timing of those efforts (in other words, it was unclear whether Thompson brought any of those clients with him to USI).  Significantly, the Sixth Circuit noted that “Edgewood did not try to rebut the testimony with any evidence of its own” and instead focused its attack on the legal argument that Thompson knowingly sold his interest in those former clients as part of the asset sale.

Takeaways from the decision:  Many courts have declined to extend a non-compete or non-solicitation agreement to customers that an employee brought with him or her.  To the extent that was in issue in Hall, that reasoning has solid footing and is grounded in common sense; after all, how can an employer reasonably argue that it has any greater interest in that relationship than the employee who serviced the customer before joining that employer?

However, the test affirmed by the Sixth Circuit could go potentially further and could be extended to situations where an employee claims that it was his/her efforts, without the support of his employer, that led to the relationship while he or she was an employee, and that the customer relationship therefore should fall outside any agreement.  For example, if a sales rep claims he recruited a customer on the weekends and paid for the golf out of his own pocket, would that mean he acquired the customer independently?  Allowing such a doctrine would of course undermine the duty of loyalty that an employee owes to his employer and could be construed as a usurpation of a business opportunity that should have been shared with his employer.  Unfortunately, in its present form, this test will likely promote less certainty and add another factual overly sure to make non-solicitation cases under New York law more expensive for all parties.