A preliminary injunction was entered against a fired executive of a roofer who, immediately after he was discharged, went to work for an alleged competitor. The district court held, and the Seventh Circuit agreed, that his non-compete and non-solicit agreements were overbroad and confusing, but that some injunctive relief nonetheless was warranted in this case. Turnell v. CentiMark Corp., No. 14-2758 (7th Cir., July 29, 2015).
Summary of the Case
Turnell joined CentiMark, a national roofing product and servicing company, as a laborer and rose to Senior Vice President and Midwest Regional Manager. Contemporaneously with one of his promotions and salary increases, he signed non-compete and non-solicit agreements required of management-level personnel. He was terminated 25 years later for alleged misconduct and immediately was hired by Woodward, a small Chicago-area roofer. CentiMark sued Turnell for breach of contract, and he sued the company for employment discrimination. The company moved for entry of a preliminary injunction. Applying Pennsylvania law (the agreements so specified as CentiMark is incorporated and headquartered there), the district court judge blue-penciled the covenants and enjoined him but only to the extent she determined to be “reasonably necessary” to protect CentiMark. Recently, on Turnell’s interlocutory appeal, her ruling was affirmed.
Both the non-compete and the non-solicit lasted for two years after termination. Both provided for tolling during any period of competition.
The non-competition provision prohibited engaging “in any competing business” to that of CentiMark. “Competing business” was defined as selling the same or “similar” products to those sold by CentiMark. The geographic scope of the provision was wherever he had “operated” as a CentiMark employee.
The non-solicitation clause forbad soliciting “competing business” both from CentiMark’s customers or suppliers, and from its “prospective customers or suppliers.” The term “prospective customers” was defined as anyone “contacted” by CentiMark during specified periods. The clause contained no geographic limit.
The District Court’s Rulings
CentiMark asked the district court judge to bar Turnell from performing any work for Windward, but she deemed that request unreasonable. However, she also declined to enter the order Turnell sought which would have invalidated the covenants altogether as overbroad and oppressive.
Even though CentiMark’s and Windward’s sales territories and roofing product lines were far from identical, the district court held that the companies were competitors. But the court modified the prohibition in the non-solicitation clause against marketing to CentiMark’s “prospective customers” who CentiMark has “contacted.” Her reasons, as summarized by the Seventh Circuit, were that the prohibition was “too vague (what kinds of contact count?), too broad (what relationship can CentiMark legitimately seek to safeguard with a prospect it merely called a few years ago?), and impractical (Turnell cannot know everyone his former employer contacted).” Instead, the injunction ordered him, for two years from the date of issuance, not to sell, attempt to sell, or help to sell products or services related to “commercial roofing.” Even though his territory had covered the entirety of four states and only parts of three others, the injunction applied to any actual customer of CentiMark as of the date he was fired who was located anywhere in those seven states. CentiMark was required to post a $250,000 bond.
Opinion on Appeal
The Seventh Circuit explained that the only issues on appeal were (a) the likelihood of CentiMark prevailing in its effort to enforce the covenants, and (b) the balance of potential harms to the parties. Turnell did not challenge on appeal the scope of the injunction, just the fact that it was issued at all. So, some of the panel’s comments concerning the ambiguity of scope terms used in the covenant might seem to be dicta. However, in a footnote the panel directed the district court judge to consider those comments if she chose “to modify the preliminary injunction” and “when and if [she] issues a permanent injunction.”
Noting that Pennsylvania jurists have discretion to blue-pencil but also to refuse to enforce an oppressive covenant, the appeals court stated that “Not every overbroad covenant is oppressive . . .. In many cases, overbreadth has a more benign cause (such as poor drafting).” Here, the covenants’ purported coverage of products and services “similar” to CentiMark’s was acceptable although it “might benefit from more precision (what counts as similar?) or a narrower focus (similar products do not necessarily compete).” The restriction to locales where Turnell “operated” as a CentiMark employee also was criticized as imprecise but acceptable, and he was “free to work in other product and geographical markets.”
In the Seventh Circuit’s view, the district court judge “could have narrowed Turnell’s restrictive covenants even further than [she] did.” For example, the prohibition against selling “‘commercial roofing’ is too broad, as CentiMark sells a more specific [product:] commercial flat single-ply roofing.” Further, the injunction need not have pertained to the entirety of seven states because, with respect to three of them, Turnell’s territory only encompassed a portion. But, recognizing that the covenants were executed a quarter-century earlier, and that neither the company nor Turnell could have anticipated precisely what the two of them would be doing many years later, the appeals court held that the covenants were “overbroad but not oppressively so.” In sum, the district court judge “exercised [her] equitable discretion under Pennsylvania law to blue pencil the restrictions . . . and properly concluded that CentiMark has a strong chance of enforcing them, as narrowed.” Finally, “the balance of harms favors Turnell, if at all, only slightly. It is not enough to overcome CentiMark’s likelihood of success on the merits.”
The lesson of this case is that employers and their attorneys should take care in choosing the words and phrases used in restrictive covenants. The terms “competing business,” “similar products,” places where an employee “operated,” “prospective customers,” and potential customers who were “contacted” all were held to be ambiguous. Further, two companies are not necessarily “competitors” just because they have some product overlap. Also, trying to extend the reach of a covenant beyond the territory where the employee actually worked may make a covenant unenforceable. A court, particularly one in a jurisdiction that does not permit blue-penciling, might conclude that the former employer’s use of vague terms such as these renders a non-compete or non-solicit so oppressive as to warrant its invalidation.