Courts across the country are increasingly scrutinizing restrictive covenants, with recent decisions signaling heightened risk for employers who rely upon restrictions contained in equity agreements and nonservice provisions. For companies managing restrictive covenants, especially across multiple portfolio companies, two developments stand out.
Massachusetts Court Rules Parent Companies Are Not “Employers”
In Anaplan Parent LP v. Brennan, Anaplan Parent LP and Anaplan Inc. sued a former employee to stop him from joining a competitor, relying on noncompetition clauses in three executive equity grant agreements. Those agreements, between the employee and the parent company (but not the employee’s direct employer), barred him from working for competitors after his employment ended. The documents included non-solicitation, confidentiality and non‑disparagement provisions. The key legal question was whether these agreements complied with the Massachusetts Noncompetition Agreement Act (MNAA), which sets strict rules for post‑employment noncompetes — most importantly, that such agreements be signed by the employee and the employer.
The Massachusetts Superior Court denied Anaplan’s request for a temporary restraining order and preliminary injunction, finding the companies were unlikely to succeed because the employer‑signature requirement was not met. Applying basic statutory interpretation and the doctrine of corporate separateness (which treats parent and subsidiary companies as distinct unless a statute clearly says otherwise), the court concluded that a parent company does not qualify as the “employer” under the MNAA. The court emphasized that expanding the definition of employer to include parent entities would undermine the statute’s protections and could improperly broaden the business interests used to justify restrictive covenants.
Nonservice and Nonacceptance Clauses Face Heightened Scrutiny
Recent decisions from Arizona, Idaho and Iowa highlight the increased scrutiny courts are employing when considering whether restrictions that bar acceptance or servicing of unsolicited business impose unreasonable restraints or conflict with public policy favoring customer choice.
In USI Insurance Services LLC v. Alliant Insurance Services Inc., two senior producers signed non‑solicitation clauses barring their direct or indirect solicitation of USI customers for two years after employment and a nonservice/nonacceptance clause that prohibited servicing or accepting work from USI customers for a competitor for two years. After the two employees resigned and went to work for a competitor, USI employees and client accounts followed, and USI sued to enforce the covenants. On cross‑motions for summary judgment, an Arizona federal court analyzed whether the covenants were enforceable under Arizona’s reasonableness test. The court ruled that the non‑solicitation covenant was enforceable, and that the two-year restriction period was reasonable because both reasonably protected a legitimate business interest: USI’s customer relationships and goodwill built through company investment.
However, the court ruled that the nonservice covenant was unenforceable because it went beyond protecting legitimate interests and unduly restricted customer choice. The court noted that although an employer may protect customer relationships for a reasonable time, a nonservice ban on business that the former employees did not solicit is different. Such a restriction severs a client’s ability to select its preferred provider even when the client has already decided to discontinue its relationship with the employer. The court emphasized that this kind of blanket restraint — especially over a two‑year period —impedes the free market and harms the public interest.
Likewise, in Insure Idaho LLC v. Horn, the Idaho Supreme Court held that mere acceptance of business, without more, does not constitute solicitation. In this case, an employee left an insurance agency, and numerous customers followed her. The Supreme Court reversed a preliminary injunction preventing the employee from accepting business from these former customers based upon a restrictive covenant prohibiting “solicitation.” The court held that “solicitation” requires an overt act by the former employee, not just communications. Although the court did not rule on whether a covenant that prohibited servicing former customers would be enforceable, it found that solicitation and servicing are distinct concepts.
However, in Choreo LLC v. Lors, an Iowa district court reached a different result. At issue were four senior advisers who agreed to restrictive covenants when they joined Choreo, a national wealth management firm. The covenants barred the advisers from soliciting or servicing clients the advisers handled or learned business information about in the two years before termination of their employment.
The four advisers resigned together and promptly joined a competitor, then contacted Choreo clients to announce their move. The advisers shared with Choreo clients their new contact details and firm information, and, in some cases, sent fee schedules and set up calls. Within weeks, more than 100 clients with nearly $400 million in assets transferred from Choreo.
The court granted Choreo a preliminary injunction. Applying Minnesota law, it found the non-solicitation and nonservice covenants enforceable because they protected legitimate interests (goodwill and confidential client data), were narrowly tailored (no ban on working for competitors, only a time‑limited bar on soliciting/servicing specific clients) and were supported by consideration. The court found the advisers’ messages to clients went beyond mere neutral “announcements” and amounted to solicitation. The advisers’ follow-up communications, the court concluded, were designed to preserve and transfer client relationships to the competitor.
These developments raise concerns for employers. Particularly in companies operating under private equity structures, it is common for restrictive covenants to be included in equity agreements issued by parent companies that are not the actual employer. Likewise, due to the difficulty of proving post-employment solicitation, employers often must rely on nonservicing provisions to prevent former employees from doing business with clients post-termination. These cases add to the increasing number of challenges in enforcing post-employment restrictions.
Considerations for Employers
Depending on the jurisdiction involved, employers seeking to use noncompetes or other forms of restrictive covenants to protect their customer relationships, goodwill and other business interests should consider the following:
- Ensure that the agreements include the proper signatories under the specific requirements of the jurisdiction.
- Consider using a combination of equity-based agreements and traditional employment-based agreements to bind employees to restrictive covenants.
- Regularly assess the language used in the company’s restrictive covenants for clarity, scope and enforceability.
Restrictive covenants remain a valuable tool — but only when they are carefully tailored to withstand judicial scrutiny. For strategic guidance, contact the authors of this article or another member of the McGuireWoods labor and employment team.