The importance of drafting non-competition and other restrictive covenant agreements narrowly in terms of geography, duration and scope of activities to reasonably meet the employer’s legitimate business interests should not be underestimated. A recent decision from the Southern District of Texas illustrates the importance of narrowly crafting post-employment restrictions.
In Cameron International Corporation v. Abbiss, Civil Action No. 4:16-cv-02117, ECF No. 49 (S.D. Tex. Sept. 27, 2016), the employee, Steven Abbiss, worked for Cameron International Corporation from 1990 to June 2016. From 2010 to 2014, Abbiss was Regional Manager for Asia, stationed in Singapore. Beginning in January 2014, Abbiss was District Manager in Oman. In June 2016, Abbiss was hired by FMC Technologies Singapore PTE Ltd., a competitor of Cameron, as its General Manager for the Middle East.
Abbiss was awarded restricted Cameron stock between 2013 and 2016 pursuant to annual Restricted Stock Unit Award Agreements. The four RSU Award Agreements, which were largely the same, precluded Abbiss for a period of one year following his resignation from Cameron from, among other things, rendering “services for any person or organization, or engaging directly or indirectly in any business, which is or becomes competitive with [Cameron] or any Subsidiary” and from “directly or indirectly soliciting the trade or business of any customer of [Cameron] or any Subsidiary.” The Agreements failed to contain a geographic scope.
Cameron filed suit against Abbiss in federal court and sought a preliminary and a permanent injunction precluding Abbiss from soliciting Cameron’s customers or otherwise competing with Cameron in the Middle East. In response, Abbiss filed a motion for summary judgment in which he argued that the non-compete and non-solicitation provisions in the Agreements were overbroad and unenforceable. The parties agreed that Delaware law controlled their dispute. Delaware law follows the usual rule of reasonableness: “for a non-compete clause to be enforceable, it must (1) be reasonable in geographic scope and temporal duration, (2) advance a legitimate economic interest of the party seeking its enforcement, and (3) survive a balancing of the equities.” Opinion p. 5. As is the law in many jurisdictions, Delaware law permits a court that determines that a restrictive covenant fails because it does not include a reasonable limitation or unreasonably restricts an overly broad scope of activity to limit the scope of the covenant to what is reasonable. Opinion p. 6-7. In ruling on Abbiss’ motion for summary judgment, the Court in Cameron used this so-called “blue-pencil rule.”
In assessing the enforceability of the non-compete and non-solicitation provisions, the Court first found, and the parties did not dispute, that the one-year restriction was a reasonable time limit under Delaware law. But because neither of the two restrictive covenants included a geographic limitation, the Court concluded that they were unenforceable as written. The Court also found that the restrictions were overbroad because they were not limited to preventing Abbiss from directly competing with Cameron in his former area of responsibility or from soliciting only those Cameron customers with whom he dealt while he was employed by Cameron. The Court noted that Cameron did not have a legitimate business interest in preventing Abbiss from rendering services or engaging in business with any entity which is or becomes a competitor of Cameron or a subsidiary, or from soliciting business from customers with whom he had no material contact while a Cameron employee. To make its point, the Court used an example that often appears in restrictive covenant decisions. Specifically, the Court explained that the covenants before it would, as written, prevent Abbiss from soliciting janitorial services contracts from Cameron customers or competitors in Norway. The Court stated that these restrictions go unreasonably beyond protecting Cameron’s legitimate economic interests and would, as written, preclude Abbiss from employment with any company in the oil and gas industry anywhere in the world.
Notwithstanding its determination that the restrictive covenants in the Agreements were overbroad as to the geographic region and the scope of activities prohibited, the Court instructed the parties to confer and attempt to reach agreement on the reasonable scope of the provisions at issue. If the parties are unable to agree, the Court will take up the reasonable scope of the restrictive covenants at the preliminary injunction hearing that is set for October 17.
Here, the employer was lucky that the judge is willing to address the reasonable scope of the agreement. Not all courts apply the blue-pencil rule to post-employment restrictions, and not all judges will exercise their discretion to blue pencil in all cases. Perhaps the Court felt so inclined as a result of the RSU’s which were granted to Abbiss, although the Court does not mention this one way or the other. On balance, employers should review their restrictive covenant agreements to confirm that the restrictions are reasonably limited in time, geographic area, and scope; that they are designed to protect the employer’s legitimate business interests; and that they extend no further than is necessary to protect those interests.