Employment: Non-Competes Still Subject to Rule of Reason

04.01.09

Although we have debated for years over the terms under which an employer may prohibit a former employee from doing things like competing or soliciting other employees from leaving the employer, the Oklahoma Legislature passed a law in 2001 which attempted to address (and limit) the rights of the employer. Now, the Oklahoma Court of Appeals has issued the first written opinion interpreting this law. The law reads:

A. A person who makes an agreement with an employer, whether in writing or verbally, not to compete with the employer after the employment relationship has been terminated, shall be permitted to engage in the same business as that conducted by the former employer or in a similar business as that conducted by the former employer as long as the former employee does not directly solicit the sale of goods, services or a combination of goods and services from the established customers of the former employer.

In the March 2009 case of Inergy Propane, LLC v. David L. Lundy, the Oklahoma Court of Appeals was squarely faced with how to interpret this provision.

Here are the facts. In 1992, Mr. Lundy sold his propane business to Beck & Root (who later sold to Inergy). As part of this sale, Mr. Lundy and Beck & Root entered into a non-compete agreement (concerning the sale of good will which is governed by a different law not discussed here). In June 2002, Lundy accepted a position with Inergy. As partial consideration for that job, he signed a Non-solicitation Agreement (a rose by any name and all that . . . ).

For purposes of this article, the Non-solicitation Agreement prohibited Lundy, for two years following termination, from soliciting or diverting the business of any Inergy customer which was defined as a business (1) located within 50 miles of the office to which Lundy was assigned and (2) that was either an Inergy customer within the 12 months prior to Lundy’s termination or received a proposal from Inergy within 6 months prior to Lundy’s termination.

In January 2005, Lundy left Inergy and opened a new propane business. Inergy filed a lawsuit and sought a preliminary injunction to stop Lundy. Lundy acknowledges that some of his customers were customers of Inergy, but argues that he did not solicit the customers, but they voluntarily sought him.

Rule of Reason. Prior to Section 219A, courts determined the validity of these non-competes under the rule of reason. Basically, the courts would look to what is the relevant market, what is the effect of the restraint on competition in that market, and if the effect is “anticompetitive,” are there any procompetitive benefits that outweigh the anticompetitive effects? This was a very fact intensive analysis and often led to unpredictable and contrary results.

Section 219A and the Rule of Reason. So the Oklahoma Legislature adopted Section 219A. While you might think it does away with the Rule of Reason, the Oklahoma Court of Appeals does not agree. The Court noted that Section 219A addresses the third question of the Rule of Reason but does not provide enough guidance to fully answer the question. For example, Section 219A does not address the appropriate time of such a restriction. Is one year okay? What about ten years? What about forever? Section 219A does not address geographic boundaries. The Court believes that Section 219A expresses the Legislature’s position on the procompetitive versus anticompetitive effects, but still leaves in place prior case law regarding the Rule of Reason. For Lundy, the Court found enough likelihood that Inergy would prevail on its position and left the preliminary injunction in place pending the trial court’s resolution of the entire matter.

Your takeaway. Section 219A is not the end of the game. Any agreement you give to a prospective employee must, at a minimum, comply with Section 219A. However, that is not all. Any other provisions you include as well as the overall effect must pass the Rule of Reason. Unfortunately, since the Rule of Reason is not settled until a court says it is, employers must carefully draft these agreements to maximize enforceability. Like in life, there are no guarantees.

By Kristen L. Brightmire, kbrightmire@dsda.com

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Rebecca D. Bullard

Rebecca D. Bullard

Rebecca represents clients primarily in labor and employment litigation and counsels clients regarding everyday employment matters. 

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