Reasonable noncompete agreements can be enforceable
A recent decision from the Sixth Circuit upholding a district court’s preliminary injunction in litigation involving a non-compete clause demonstrates why an employee should sometimes be wary of legal advice from a new employer. In Firstenergy Solutions Corp. v. Flerick, 2013 WL 1500452 (6th Cir. 2013), Paul Flerick (“Flerick”) was employed as a salesman in the electric energy and natural gas industries by First Energy Solutions Corporation (“FirstEnergy”). Flerick started with FirstEnergy around October of 2009, working in mid-level accounts in the Illinois, Maryland, Michigan, New Jersey, Ohio, and Pennsylvania areas.
As part of the process of accepting employment with FirstEnergy, Flerick was required to sign a non-compete agreement that stated, among other things, he would not provide sales services within the area he serviced for any entity other than First Energy in the products that he sold for FirstEnergy during his employment and for twelve months after termination of his employment for any reason. Firstenergy Solutions Corp., 2013 WL 1500452 at *2. Flerick expressed some reservations about the non-compete clause, instead suggesting that he simply be prohibited from contacting FirstEnergy’s customers after termination. However, FirstEnergy insisted on the non-compete clause as a term of employment, and Flerick relented and signed the agreement.
Although Flerick was initially successful with FirstEnergy, his performance began to suffer after a period of time, around 2011. Slowly but steadily, FirstEnergy began to assign agents to other salespersons and he received a negative performance review. Subsequently, as he was about to be placed on a performance improvement plan, he was transferred to a different sales group, this one focusing on sales to municipalities. Around this time Flerick began discussions with competitor Reliant Energy Retail Services, LLC (“Reliant”) to accept a similar position. Apparently, personnel at Reliant were familiar with Flerick’s record and he worked with some of them in the past. When he brought up the non-compete clause to Reliant, they informed him that it was unenforceable. Shortly afterward, Flerick resigned and accepted the position with Reliant.
Despite Flerick not informing FirstEnergy about his plans after resigning his position, FirstEnergy later discovered that he had taken the new position with Reliant. FirstEnergy’s counsel then sent Reliant a cease-and-desist letter, informing Reliant that Flerick was violating a non-compete agreement. Reliant, for its part, responded that Flerick did not use any confidential information from FirstEnergy in his new position and the non-compete was unenforceable as overbroad.
In the subsequent lawsuit that ensued, FirstEnergy succeeded in convincing the district court to grant a temporary restraining order, preventing Flerick from violating the non-compete. The district court did, however, limit the geographic scope to Illinois. Later, the district court granted a preliminary injunction, in this instance granting the entire six-state prohibition against competition. Flerick subsequently appealed the order to the Sixth Circuit Court of Appeals.
In reviewing the preliminary injunction, the Court first noted that it would review the factual findings on a clearly erroneous standard and the legal conclusions on a de novo basis. Accordingly, the Court determined that the order was properly granted. First, FirstEnergy had shown that it could succeed on the merits with respect to the claim for breach of the non-compete clause. The non-compete agreement itself was reasonable, the court held, because it did not impose any greater restrictions on Flerick than necessary to protect FirstEnergy’s legitimate business interests. The confidential information that Flerick had obtained during his tenure at FirstEnergy, such as training, how the company utilized the marketplace, and prospective client lists, would provide an insider prospective to an individual who was employed by a rival company. Moreover, Flerick himself initiated potential sales agreements with one of FirstEnergy’s biggest customers, Duke Realty, after he moved to Reliant. This, the court reasoned, was the exact type of unfair competition that the agreement sought to prevent.
Turning next to the potential for undue hardship on Flerick, the Court determined that there were alternatives for Flerick to earn a livelihood. While Flerick did previously work as a salesperson prior to his employment at FirstEnergy, it was his specialized training in the electricity field that FirstEnergy provided that the non-compete sought to protect. Further, the non-compete did not restrict him from either working in the other forty-four states or working in a sales industry outside of the electricity industry.
Flerick, for his part, attempted to argue that the standard the district court had used was incorrect, and it should have instead focused upon whether he had misused proprietary information or trade secrets. However, the Court reasoned that this overemphasized one factor of Ohio law and ignored others. Instead, FirstEnergy was simply trying to prevent an employee that it had given specialized training to from competing with it. This, among the other factors the district court had used in granting the preliminary injunction, was sufficient to uphold the order.
Thus, the Court ultimately upheld the preliminary injunction, prohibiting Flerick from violating the non-compete clause. Because the non-compete clause was limited to one year and limited to the geographic scope of his work with FirstEnergy, it was construed to be a valid and enforceable contract.