We’ve written about this issue before, but it bears repeating: as a general matter, the more narrowly tailored and economically justifiable a non-compete agreement is, the more likely it is to be enforced (assuming state law allows it at all). The same standard applies to the closely related “non-contact” clause that keeps former employees from luring their old colleagues away to new positions.
An Arizona appellate court’s decision earlier this month reinforces this principle. That court held – in Quicken Loan v. Beale – that a “non-contact” clause that kept former Quicken loan managers from contacting current loan managers for two years wasn’t narrowly tailored to protect Quicken’s financial interests, and was an unreasonable restriction on the former employees’ speech rights. And, on a purely financial note, the court affirmed that Quicken had to pay its former employees’ attorney’s fees – as well as the fees the former employees’ new company, loanDepot, incurred when it jumped into Quicken’s suit.
Here’s the background. The well-known Quicken Loans (whose slogan is “Engineered to Amaze”) has its mortgage bankers sign an employment agreement that includes a non-compete clause, as well as a clause precluding them from trying to get other colleagues to leave Quicken for two full years after they themselves leave Quicken. Seven Quicken bankers left the firm and joined competitor loanDepot. Quicken, alleging that these seven employees tried to bring some former colleagues over to loanDepot, filed suit in Arizona against them for breach of the agreement, seeking money damages and injunctive relief. loanDepot intervened in the suit. After some discovery, the employees and loanDepot moved for summary judgment, arguing that Quicken’s non-contact provision was overbroad and unreasonably restrictive on the employees, and that Quicken hadn’t shown a legitimate interest justifying such a provision – something the Michigan law which governed the agreement required it do.
The trial court agreed, and granted judgment to the employees and loanDepot. It also applied an Arizona statute that allows a court to award the winner in a contract dispute its legal fees, paid by the losing side. So, the court ordered Quicken to pay the employees’ fees, as well as loanDepot’s fees – even though loanDepot hadn’t been sued by Quicken originally, and had voluntarily come into the suit to stand by its new hires.
Quicken appealed, but without success. It argued that because it spent a significant amount of time – eight weeks or so – and money training new mortgage bankers, it had a legitimate business interest in not allowing a competitor like loanDepot to steal away those trained employees. The appellate court disagreed: the two-year no-contact provision in the agreement, it reasoned, was several times longer than the amount of time Quicken actually spent training the bankers, so the provision wasn’t narrowly tied to Quicken’s actual investment of time and money. It also affirmed that the provision was too broad as applied to the speech of the former employees: as it was written, the non-contact clause kept former and current Quicken bankers from “speaking about any job opportunities – even if those opportunities have nothing to do with the mortgage-related industry.” That restriction, the court held, was simply too broad.
Quicken sought to have both the trial court and the appellate court simply trim down the non-contact clause to an enforceable interpretation, but both courts declined. The appellate court also held that Quicken would have to reimburse the former employees’ attorney’s fees and loanDepot’s fees, rejecting Quicken’s argument that it hadn’t actually sued loanDepot: loanDepot was, the court reasoned, a “successful party” within the meaning of the governing statute and had a vested interest in the outcome. Quicken is, it seems, in the awkward position of paying a competitor’s attorneys’ fees for a lawsuit where it didn’t even sue the competitor.
Surely Quicken will now consider re-designing its employment agreements to ensure they are properly engineered to be enforceable – if not “amaze” departing employees.