October 24th, 2014

The expression “you cannot make a silk purse out of a sow’s ear,” apparently applies to restrictive covenants as well. The court’s decision in Genex Corp., v. Contreras, et al., 2014 BL 279888 (2:13-cv-3008, E.D.W, Oct. 3, 2014), although specific to Washington and Wisconsin, is of some note because of the court’s reluctance to enforce restrictive covenants applicable to line-level, at-will, employees both because at-will employment may lack sufficient consideration for enforcement of the promise and because they are inherently “unreasonable.”

The case involved a team of “Breeding Program Specialists” (BPS) who serviced dairy farmers in the Sunnyside area of the State of Washington. The job of the BPS, which will make us city folk a bit uneasy, was to determine when a farmer’s dairy cows would go into heat and then to artificially inseminate the cows using “arm service,” which involves physically inseminating the cows using Genex semen. (Yes, your mental image is correct).

The defendants, Jorge Contreras, Danile Senn, and Erasmo Verduzco, were all former employees of Genex Cooperative, Inc., (“Genex”). Each, signed restrictive covenants as a condition of their employment. Displeased with their compensation and working conditions, they signed identical letters of resignation in December of 2012 and jumped ship to a competitor, CRV USA (“CRV”). Nearly all of the farmers in Sunnyside followed the defendants to CRV. Thus, the day after their resignation from Genex, all three defendants were back at work, servicing the same farms they did as Genex employees, but now they were using CRV product—allegedly in violation of the terms of their non-compete and non-solicitation agreements.

Genex sued and eventually moved for summary judgment. Applying the Restatement 2d of Contracts, the court found the test to determine the validity of restrictive covenants is reasonableness, the elements of which are: (i) whether the restraint is needed for protection of plaintiff’s business or goodwill; (ii) whether the restraint is reasonable and needed to secure such business and goodwill; and (iii) whether the degree of injury to the public as a result of the loss of the services and skill of the employee warrants non-enforcement of the covenant.

While the court took issue with, and refused to enforce, all three agreements because they were overly-broad and not reasonable, its discussion about Contreras’ agreement is the most interesting. First, the court found that Contreras was a low-level, at-will, agricultural worker, who could neither speak nor write English. Second, it questioned whether Contreras’ status as a lessor skilled, at-will, employee meant that his restrictive covenant lacked consideration. In dicta that will send a chill down the neck of employers, the Court stated, or depending on how you read it, held:

Whether non-compete agreements can ever be enforceable against at-will employees, without providing specific consideration such as a promise for future employment or training, is an open question in Washington…Indeed, the Supreme Court of Washington has ‘never held that continued employment alone is sufficient consideration to uphold a non-compete agreement….’ At-will employment is merely ‘continued employment’ and does not promise an employee future employment, an analytically distinct form of consideration.…Thus, for consideration purposes, an at-will employee signing a restrictive covenant at the time he is first hired is indistinguishable from a contract employee signing restrictive covenant after beginning his employment. (emphasis added)

Because non-competes preclude employees from seeking new employment in their chosen profession in a given area, the court stated, in what can be fairly categorized as a general rule, that “Restrictive covenants against employees who may be terminated for any reason-including the employer’s withdrawal from the region-are unreasonable.” Given Contreras’ circumstances, the court held that his agreement was unenforceable as a matter of law.

The opinion is not the clearest. Read one way, the court seems to be holding that absent specific, additional consideration, an at-will employee cannot be bound by a restrictive covenant. And, that regardless of whether there is adequate consideration, employers will face a tough road in the Eastern District of Washington if they want to enforce a non-compete against an at-will employee given that they are inherently “unreasonable.” Read a different way, the opinion is merely discussing, in-dicta, whether an at-will employee can or should be bound by a non-compete if there is no additional consideration. Even then, if an initial offer of employment is not consideration, the question arises as to what would constitute adequate consideration. It is hard to fathom why payment of $500 or $1000 upon hiring would overcome the court’s bias against at-will employee non-compete agreements. Either way, the opinion seems to be among the farthest reaching in its efforts to limit enforcement of non-competes for line, at-will employees simply because of their employment status, without regard to a review of circumstances or the need to protect trade secrets or business opportunities.

Posted in: Of Interest to the Street