Non-piracy agreement covering agency's clients andprospects ruled enforceable In April 2001, five agencyemployees asked a circuit court to invalidate a restrictivecovenant in their employment agreement. The covenant provided that,upon termination of em- ployment, such an employee shall notsolicit the agency's customers or pros-pects for two years.

The employer filed a motion for summary judgment, asserting thatthe restrictive covenant was a non-piracy provision because itpermitted the plaintiffs to compete in the same market, as long asthey didn't use the agency's customer information or contact itsprospects for two years.

The plaintiffs, on the other hand, asserted that the restrictivecovenant was a covenant not to compete that wrongfully foreclosedtheir ability to earn a livelihood as commercial insurance agents.They argued that the covenant's failure to mention any geographicor territorial limitation and to adequately define or specify thecustomers encompassed by the restriction rendered the covenantoverly broad and unenforceable.

The employment agreement in question provided for the employees'continued employment and stated that, through their work, theywould be given access to the agency's “client base and confidentialinformation related to customer accounts, insurance needs andhistories, information relating to policy expirations, insuranceprograms and the like.” In relation to such access, the agreementcontained the following restrictive covenant:

“For a period of two years after Employee's employmentrelationship with Employer has terminated for any reason,regardless of whether the termination was initiated by Employer orby Employee, Employee shall not, on Employee's own behalf or onbehalf of any other person, firm, corporation, association or otherentity, either directly or indirectly, solicit, sell, service,create, manage or implement any kind of service or product offeredby Employer to any person, company, firm or corporation:

“(1) who is a client, customer or insured of Employer at thetime Employee's employment with Employer is terminated;

(2) who was a client, customer or insured of Employer at anytime within the two-year period immediately preceding Employee'stermination; or

(3) whom Employee called upon while in the employ of Employer asa prospective client, customer or insured during the two- yearperiod immediately preceding the termination of Employee'semployment.”

The agreement contained the following additional provision:“Both Employer and Employee agree that this Agreement does notprohibit Employee from leaving Employer and working directly orindirectly for a competitor or from forming a business in the sameindustry, so long as Employee honors the terms and conditions ofthis Agreement.” If an employee were to breach the restrictivecovenant, the agreement provided that the agency would be entitledto injunctive relief and damages.

The circuit court observed that there are two common types ofrestrictive covenants used in employment agreements: (1) covenantsnot to compete and (2) non-piracy provisions, also known asnon-solicitation provisions or hands-off provisions. The courtnoted that whereas a covenant not to compete restricts a formeremployee from engaging in a business similar to that of theemployer within a designated time and territory, a non-piracyprovision is less restrictive and precludes the former employeefrom soliciting the employer's customers or using the employer'sconfidential information but otherwise allows the former employeeto compete with the employer in the same market.

Following a hearing, the trial court concluded that therestrictive cov-enant was a non-piracy provision, rather than acovenant not to compete, and was valid and enforceable. Theemployees appealed.

The appellate court noted that for either a covenant not tocompete or a non-piracy agreement to be valid, the employergenerally must show that it has a “protectible business interest tobe safeguarded in relation to the employee.” The court noted thatin the past it had ruled that confidential lists of an employer'scustomers are among the interests which may be protected by suchrestrictive covenants.

“Also subject to protection in conjunction with a confidentiallist of customers,” the court said, “would be certain types ofinformation, pertaining to the insurance industry, generatedthrough the employer which specifically relates to each customer'saccount. Such information would include the date the customer'spolicy expires, the amount of the coverage and premiums and theproperty of the customer so insured. In the absence of arestrictive covenant, such information would enable a formeremployee of the insurance company to unfairly target a customershortly before the policy expires in order to secure a new policyform a different insurer.” Shrewsbery v. National Grange MutualInsurance Co., 183 W.Va. 322, 326, 395 S.E.2d 745, 749(1990).”

Although both covenants not to compete and non-piracy provisionsare used to safeguard an employer's protectible business interests,non-piracy provisions, which ordinarily do not include territoriallimits, are less restrictive on the employee and the economicforces of the marketplace. The court cited similar cases in otherstates and in federal courts.

In addition, the court held that “although a non-piracyprovision in an employment agreement may appear reasonable on itsface when viewed within the four corners of the agreement, theultimate validity of such a provision is dependent upon: (1)whether the employer has a protectible business interest to besafeguarded in relation to the employee, (2) the extent to whichthe non-piracy provision reasonably and fairly protects thatinterest and (3) whether the non-piracy provision unjustlyrestricts the employee from engaging in the business activity he orshe seeks to pursue. Whereas the burden is on the employer withregard to factors (1) and (2) above concerning the showing of aprotectible business interest and the reasonableness of thenon-piracy provision, the burden in on the employee with regard tofactor (3) concerning whether the provision constitutes an unjustrestriction.”

In this case, the court said that the employer had establishedthat it had a protectible business interest in its customers andits “confidential information related to customer accounts,insurance needs and histories, information relating to policyexpirations, insurance programs and the like,” and that suchinterest was reasonably protected by the restrictive covenant. Theappellate court upheld the lower court in favor of the agency.

Wood v. Acordia of West Virginia, Inc., No. 31863 (W.Va.07/07/2005) 2005.WV.0000092 www.versuslaw. com).