In Deere Employees Credit Union v. Smith, an Illinois court recently refused to enforce a restrictive covenant in an employment agreement, finding that it was overly broad. Reference to the terms of that agreement and the court’s finding offer reminders of traps to be mindful of in drafting restrictive covenants, as well as in evaluating restrictions and exposure presented by potential new hires.

In Deere Employees Credit Union, the plaintiff credit union hired the defendant to provide investment information to its members in his capacity as a member of its in-house investment division. The Deere Employees Credit Union (DECU) employment contract contained the following non-competition and non-solicitation clauses:

Representative agrees that for the two (2) year period immediately following the termination of this Contract, Representative shall not for any reason directly or indirectly, by any means or device whatsoever, for himself/herself or on behalf of or in conjunction with any person partnership corporation or association, market to, sell to, or solicit for the purpose of selling to or marketing to any of DECU’s clients and members which Representative served while employed by DECU within the twenty-four (24) month period immediately preceding the termination of this Contract, any insurance product, annuity, mutual fund, securities brokerage product or service or any other financial product or service that is similar to any product or service marketed through the MEMBERS Financial Services program. As used in this Section Q1, DECU’s clients shall include a) any person who has purchased a product or service or established a securities brokerage account through the MEMBERS Financial Services program (whether sold or established by Representative or by another representative); and b) any person who within the thirty (30) day period immediately preceding the termination of this Contract had contact with Representative having as its purpose (or one of its purposes) the discussion of products and/or services (including but not limited to securities brokerage services) offered through the MEMBERS Financial Services program.

Representative further agrees that for the two (2) year period immediately following the termination of this Contract, Representative shall not target members of DECU at which Representative was located or whose members Representative served while employed by DECU within the twenty-four (24) month period immediately preceding the termination of this Contract for the purpose of selling to or marketing to such DECU members any insurance product, annuity, mutual fund or securities brokerage service or other financial product or service that is similar to any product or service marketed through the MEMBERS Financial Services program. (Emphasis added).

After working for DECU for approximately six years, the defendant resigned. At that time, he was DECU’s senior financial advisor and managed approximately 73 percent of the plaintiff’s investment accounts, valued at $110 million, serving about 468 of DECU’s members. The defendant immediately began working for another financial services company after his resignation and departure from DECU. To market his services on behalf of his new employer, he sent letters to 200 to 250 of DECU’s members he had served during his time there, notifying his former clients of his new employment situation and contact information.

Less than two weeks after the defendant’s resignation, DECU filed a complaint seeking certain injunctive relief to stop him from violating his restrictive covenants. DECU’s lawsuit pointed to the defendant’s solicitation of his former clients as well as his attempt to raid his former employer. DECU sought an injunction prohibiting the defendant from soliciting or selling to any of DECU’s clients and members, including those he served in the 24 months before his resignation.

The trial court found that “there is no question that the restrictive covenant is impermissibly overly board, imposes undue hardship upon Smith and impairs the public’s interest in an efficient marketplace, which makes it patently unreasonable and therefore unenforceable.” However, based on equitable considerations, the trial court entered an order that enjoined the defendant from marketing to or soliciting a narrower category of people, i.e., those of DECU’s clients and members that he served while employed by DECU.

The appellate court found that DECU had a “protectable interest to maintain goodwill, continue ongoing investment relationships with existing DECU members, and to facilitate the confidentiality of their clients’ investment preferences.” But the appellate court found that the restrictive covenant was overly broad because it prevented DECU members without any prior professional relationship with the defendant from choosing him as their investment advisor and negatively impacted the defendant’s ability to engage in his profession by accepting past or current DECU members to whom he had never provided services.

The appellate court found that the language in the restrictive covenant that is underlined above had the “intent to discourage, if not prevent, Smith from targeting any, and therefore every, DECU member affiliated with the Moline main branch regardless of whether Smith had any contact with those members.” In addition, the court found that DECU’s definition of clients to include “any person who had purchased a product or service or established a securities brokerage account … (whether sold or established by Representative or by another representative)” was not limited to the smallest group of people the defendant serviced in the 24 months before his resignation.

Therefore, the appellate court found that the defendant’s contract and the restrictions within it were unenforceable because the covenants foreclosed any of the plaintiff’s members and clients, including those without any previous professional relationship with the defendant, from choosing him as their investment advisor. Further, the covenants prevented the defendant from accepting new customers who may have been current or past clients or members of DECU, even if the defendant had not provided services to those individuals within the last 24 months of his employment there.

In addition, the appellate court vacated the injunctive relief that had been entered against the defendant. The court found that because the contract did not contain severability language, otherwise enforceable portions of the contract could not be salvaged where, as here, select provisions were found to be unenforceable. Finally, the appellate court found that the overly broad restrictive language could not be modified by the court because it “would give employers an incentive to draft restrictive covenants as broadly as possible, since the courts would automatically amend and enforce them to the extent that they were reasonable in the particular circumstances of each case.”

This case is another example of a company mistakenly believing that the company is better protected with broader restrictions. As a result, there are several enterprise risk management points companies can take away from this decision:

  1. Review the restrictive covenants in your agreements to make sure they are appropriately tailored to that employee’s employment situation. In this case, if the restrictions had been narrowed to those clients the defendant had actually served and or from whom he had gained confidential information in the 24 months prior to his resignation, there is a much greater likelihood the court would have enforced the restrictions.
  2. If the restrictive covenants are not appropriately tailored, consult with your attorney to draft new tailored restrictions and devise a plan to get your employees to sign new agreements containing these new restrictions. There is nothing wrong with restricting employees from competing against you or from soliciting your clients, but the restrictions need to be narrowly tailored to apply only to activities that threaten the company’s interest and are reasonably related to the company’s interest in protecting customer relationships the employee developed while employed.
  3. Make sure your agreements, even if they are not employment agreements, contain severability clauses. That way, if a portion of the agreement is found to be unenforceable, you are in a better position to enforce the remainder of the agreement.