The employer filed a motion for summary judgment, asserting that the restrictive covenant was a non-piracy provision because it permitted the plaintiffs to compete in the same market, as long as they didn't use the agency's customer information or contact its prospects for two years.
The plaintiffs, on the other hand, asserted that the restrictive covenant was a covenant not to compete that wrongfully foreclosed their ability to earn a livelihood as commercial insurance agents. They argued that the covenant's failure to mention any geographic or territorial limitation and to adequately define or specify the customers encompassed by the restriction rendered the covenant overly broad and unenforceable.
The employment agreement in question provided for the employees' continued employment and stated that, through their work, they would be given access to the agency's "client base and confidential information related to customer accounts, insurance needs and histories, information relating to policy expirations, insurance programs and the like." In relation to such access, the agreement contained the following restrictive covenant:
"For a period of two years after Employee's employment relationship with Employer has terminated for any reason, regardless of whether the termination was initiated by Employer or by Employee, Employee shall not, on Employee's own behalf or on behalf of any other person, firm, corporation, association or other entity, either directly or indirectly, solicit, sell, service, create, manage or implement any kind of service or product offered by Employer to any person, company, firm or corporation:
"(1) who is a client, customer or insured of Employer at the time Employee's employment with Employer is terminated;
(2) who was a client, customer or insured of Employer at any time within the two-year period immediately preceding Employee's termination; or
(3) whom Employee called upon while in the employ of Employer as a prospective client, customer or insured during the two- year period immediately preceding the termination of Employee's employment."
The agreement contained the following additional provision: "Both Employer and Employee agree that this Agreement does not prohibit Employee from leaving Employer and working directly or indirectly for a competitor or from forming a business in the same industry, so long as Employee honors the terms and conditions of this Agreement." If an employee were to breach the restrictive covenant, the agreement provided that the agency would be entitled to injunctive relief and damages.
The circuit court observed that there are two common types of restrictive covenants used in employment agreements: (1) covenants not to compete and (2) non-piracy provisions, also known as non-solicitation provisions or hands-off provisions. The court noted that whereas a covenant not to compete restricts a former employee from engaging in a business similar to that of the employer within a designated time and territory, a non-piracy provision is less restrictive and precludes the former employee from soliciting the employer's customers or using the employer's confidential information but otherwise allows the former employee to compete with the employer in the same market.
Following a hearing, the trial court concluded that the restrictive cov-enant was a non-piracy provision, rather than a covenant not to compete, and was valid and enforceable. The employees appealed.
The appellate court noted that for either a covenant not to compete or a non-piracy agreement to be valid, the employer generally must show that it has a "protectible business interest to be safeguarded in relation to the employee." The court noted that in the past it had ruled that confidential lists of an employer's customers are among the interests which may be protected by such restrictive covenants.
"Also subject to protection in conjunction with a confidential list of customers," the court said, "would be certain types of information, pertaining to the insurance industry, generated through the employer which specifically relates to each customer's account. Such information would include the date the customer's policy expires, the amount of the coverage and premiums and the property of the customer so insured. In the absence of a restrictive covenant, such information would enable a former employee of the insurance company to unfairly target a customer shortly before the policy expires in order to secure a new policy form a different insurer." Shrewsbery v. National Grange Mutual Insurance Co., 183 W.Va. 322, 326, 395 S.E.2d 745, 749 (1990)."
Although both covenants not to compete and non-piracy provisions are used to safeguard an employer's protectible business interests, non-piracy provisions, which ordinarily do not include territorial limits, are less restrictive on the employee and the economic forces of the marketplace. The court cited similar cases in other states and in federal courts.
In addition, the court held that "although a non-piracy provision in an employment agreement may appear reasonable on its face when viewed within the four corners of the agreement, the ultimate validity of such a provision is dependent upon: (1) whether the employer has a protectible business interest to be safeguarded in relation to the employee, (2) the extent to which the non-piracy provision reasonably and fairly protects that interest and (3) whether the non-piracy provision unjustly restricts the employee from engaging in the business activity he or she seeks to pursue. Whereas the burden is on the employer with regard to factors (1) and (2) above concerning the showing of a protectible business interest and the reasonableness of the non-piracy provision, the burden in on the employee with regard to factor (3) concerning whether the provision constitutes an unjust restriction."
In this case, the court said that the employer had established that it had a protectible business interest in its customers and its "confidential information related to customer accounts, insurance needs and histories, information relating to policy expirations, insurance programs and the like," and that such interest was reasonably protected by the restrictive covenant. The appellate 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).
