[0¶]
NOTES
Contract Law: As Clear
as Mud: The Demise of the Covenant Not to Compete in
I.
Introduction
Covenants not to
compete, and in particular, employment covenants not to compete, have provided a
steady stream of confusing and uncertain litigation since early Medieval courts
and Parliament began to address these contracts. 1 In the 2001
legislative session, the
§ 217 Restraint of Trade Void
Every contract by which any one is restrained from exercising a lawful profession, trade or business of any kind, otherwise than as provided by Sections 218 and 219 of this title, or otherwise than as provided by Section 2 of this act, is to that extent void.
§ 219A Non-Compete Employment Contracts
A. A person who makes an agreement with an employer, whether in writing or verbally, not to compete with the employer after the employment relationship has been terminated, shall be permitted to engage in the same business as that conducted by the former employer or in a similar business as that conducted by the former employer as long as the former employee does not directly solicit the sale of goods, services or a combination of goods and services from the established customers of the former employer.
B. Any provision in a contract between an employer and an employee in conflict with the provisions of this section shall be void and unenforceable. 2
While the new
amendments do not affect sections 218 or 219 of title 15, which provide
exceptions to the prohibition on restrictive covenants for the sale of the
goodwill of a business 3 and the dissolution
of a partnership, 4 respectively, the new
[*pg
492]amendments, and
section 219A in particular, make several important changes to Oklahoma's law on
noncompetitive covenants 5 between employers and
employees. 6
Senator Glenn Coffee
(R-District 30) and Representative Raymond Vaughn (R-District 81) introduced the
current amendments, bundled together with several other measures, on
Following a successful
disposition of the case, Representative Vaughn first attempted to pass an
amendment clarifying title 15, section 217 in February 2000. 11 [*pg 493]This bill, cosponsored
by Senator Mark Snyder (R-District 41), met with an interesting and somewhat
historic demise. After passing the House Judiciary Committee, a general vote of
the House, and the Senate Judiciary Committee without a single vote cast against
the measure, the bill came before the full Senate. 12 During debate, Senate
Minority Leader Mark Snyder (cosponsor) inserted a "right-to-work" amendment
into the bill. 13 The "right-to-work"
amendment thrust what had been a relatively obscure bill dealing with
restrictive covenants into the center of a political firestorm that had raged in
The current amendments
met with comparatively greater success. By
The amendments attempt
to bring clarity to noncompetitive employment covenants, 18 and this note will
argue that the amendments do just that. By bringing
In an effort to address
these issues, this note will first review the common law treatment of covenants
in restraint of trade. Next, Part III will discuss
II. Common Law History
of Employment Covenants Not to Compete
From common law
Consistent with its
English law roots, American contract law generally requires that courts enforce
contracts without reference to the fairness of the terms. 23 While American law
has given a substantial presumption of validity to most types of contracts, this
has not been the case with restrictive employment agreements. 24 In fact, most courts
and legislatures have looked with disfavor on these types of agreements and have
only allowed them, if at all, under limited circumstances. 25
A. English Common
Law
Early English courts
found all restrictive employment covenants to be void and
unenforceable. 26 This total ban on
noncompete agreements resulted, in large part, because of the guild
system. 27 During the Middle
Ages, an individual's ability to [*pg 495]succeed economically
was directly related to his ability to learn a skill as an apprentice. 28 Accordingly, the
guild system was the dominant labor force in
Even with the decline
of the guild system and the change of focus from fair conditions to the
achievement of national prominence that occurred in the sixteenth century,
English courts continued to invalidate restrictive employment
covenants. 35 In all likelihood, a
desire to encourage free trade and individual initiative motivated this
continued practice. 36
During the eighteenth
and nineteenth centuries, however, freedom of contract emerged as a dominant
policy concern, and, in reaction, English courts began to allow limited
restraints on trade. 37 Mitchel v.
Reynolds 38 is most often cited
as the watershed case of this era, ushering in a truly modern approach to
restrictive covenants. 39 In Mitchel,
the defendant assigned a five-year lease of a bakery to the plaintiff. 40 The defendant also
agreed that he would not work as a baker in the same [*pg 496]parish for the
duration of the lease. 41 In upholding the
covenant not to compete, Chief Justice Parker reasoned that "particular
restraints, if imposed upon a good and adequate consideration so as to make it a
proper and useful contract" were valid. 42 The Mitchel
court further reasoned that courts should judge such restrictions by looking to
whether the restraint "prevented [the party] from earning his livelihood
. . . or deprived the public by depriving it of the abilities of one
of its members." 43 While Mitchel
addressed a covenant not to compete formed ancillary to the sale of a business,
the line of cases following Mitchel firmly established the modern "rule
of reason" test in
B. American
Development
American courts of the
nineteenth century followed the later English rule, allowing reasonable
restraints of trade if limited by duration and geographic scope. 45 While many early
American courts refused to enforce covenants that extended to an entire state
without regard to their reasonableness, 46 this approach changed
with Oregon Steam Navigation Co. v. Winsor. 47 In Winsor, the
United States Supreme Court upheld a covenant that a former steamship owner
would not compete with its purchaser in the state of
[*pg
497]
III. Pre-Amendment
A. Evolution of Case Law from a Strict Evaluation to a Rule
of Reason Approach
Prior to the 2001 amendments,
While the statute itself may have remained relatively
unchanged for more than 100 years, its interpretation by
More than twenty years later, the Oklahoma Supreme Court
began to relax this strict reading of section 217 in Tatum v. Colonial Life & Accident Insurance
Co. 60
In Tatum, the court reviewed a covenant that
restrained an insurance salesman from selling group accident or health coverage
to known clients of his former employer for two years following
termination. 61
The Tatum court held that the covenant was valid and
enforceable. 62
The court reasoned that the Tatum covenant was
distinguishable from the Miller covenant in that the
former only partially restrained the agent's ability to sell insurance. 63
The Tatum court further reasoned that the covenant
did not violate section 217 because it did not attempt to protect the former
employer against fair competition, but only against the unfair competition that
would result from the former employee using information and relationships gained
during his employment. 64
In 1977, Board of Regents of the
University of Oklahoma v. NCAA
65
provided the next step in the evolution of the interpretation of section 217. In
NCAA, the court evaluated an NCAA rule that
prohibited participating schools from hiring more than a specified number of
assistant coaches. 66
While attacking the rule primarily on antitrust grounds, many of the coaches
argued that the prohibition on hiring assistant coaches violated section
217. 67
The Oklahoma Supreme Court held that the provision did not violate
[*pg 499]Four years later, in Crown Paint
Co. v. Bankston, 70
the Oklahoma Supreme Court provided the final blow to the strict reading of
section 217 employed in Miller. As in NCAA, Crown Paint presented
an agreement that the defendant Bankston primarily contested on antitrust
grounds; however, the defendant raised section 217 as an alternate argument to
invalidate the covenant. 71
The Crown Paint court clearly affirmed the ruling of
NCAA, holding again that section 217 only
invalidates unreasonable restraints of trade.
72
As the court would later note, the combined holdings of NCAA and Crown Paint
squarely returned
B. What Are "Reasonable" Employment Restraints Under a Rule
of Reason Analysis?
After establishing that section 217 only invalidates
unreasonable restraints of trade, it next becomes necessary to determine the
elements of a "reasonable" restraint of trade. Loewen
Group Acquisition Corp. v. Matthews clearly outlines these
elements. 75
In Loewen, the Oklahoma Court of Civil Appeals
analyzed a covenant that restricted the former employee of a funeral home from
operating funeral homes within a fifteen-mile radius of any funeral home
operated by the former employer.
76
In finding the restraint unreasonable, the court considered three factors: (1)
whether the restraint was no greater than is required for the employer's
protection; (2) whether the restraint imposed undue hardship on the employee;
and (3) whether the restraint injured the public.
77
When considering these factors, the court looked to the
geographic scope of the restraint, the duration of the restraint, and to whether
the covenant restrained all competition or only the "unfair" competition of an
employee who had gained valuable information and relationships during
employment. 78
The Loewen court went on to hold that "any agreement
that seeks to prohibit fair competition can never be reasonable." 79
Finally, the court again pointed to the non-solicitation agreement upheld in Tatum as an example of a valid restriction because it
only restrained the former employee from soliciting business from the clients of
the former employer. 80
[*pg 500]
C. Reformation by the Court of Unreasonable
Covenants
The final major development in the area of restrictive
employment covenants is the reformation of unreasonable covenants by the court.
Reformation differs from what is commonly known as the "blue-pencil" doctrine.
The "blue-pencil" doctrine derives its name from the tradition of "striking, or
penciling out, void, offensive or unreasonable language in a contract without
rendering the entire agreement unenforceable."
81
In contrast to the "striking out" of the blue-pencil doctrine,
The Oklahoma Supreme Court addressed the issue of judicial
reformation in Bayly, Martin & Fay, Inc. v.
Pickard. 83
In Bayly, the court struck down an agreement that
precluded an employee from soliciting the customers of his former employer for
three years after termination.
84
In doing so, the court recognized that judicial modification of an unreasonable
covenant is justified if the court can cure the defects by the "imposition of
reasonable limitations on the activities embraced, time, or geographic
limitations." 85
The Bayly court noted, however, that a court cannot
reform a covenant so offensive that it would require the court to supply
material terms 86
of a contract. 87
Loewen
addressed another aspect of judicial reformation. In Loewen, the Oklahoma Court of Civil Appeals reviewed a
covenant that prohibited a former employee from operating, owning, or working at
a funeral home within a fifteen-mile radius of any home owned by the former
employer. 88
The court held that the covenant was unreasonable and therefore void. 89
In refusing to reform the agreement, the court stated that it would not modify
the covenant because the employer had designed the covenant to prevent fair
competition, not to protect sensitive client information or established
relationships. 90
This holding firmly [*pg 501]establishes that an
IV. The Amendments Reconcile Statutes and Case
Law
As explained in Part I, the major addition of the 2001
amendments is section 219A, which specifically enables employers and employees
to enter into non-solicitation agreements. However, section 219A also
invalidates any other type of restrictive covenant between employers and
employees.
While these amendments initially may seem radical, a close
inspection of
For example, the Oklahoma Supreme Court upheld a
non-solicitation agreement for the first time in Tatum
v. Colonial Life & Accident Insurance Co. The non-solicitation agreement
in Tatum specifically prohibited a terminated
employee from
[s]elling, or attempting to sell, any form of accident or health insurance to or on any of the [former employer's] insureds under group policies or franchise policyholders, and from inducing, or attempting to induce, any of the [former employer's] insureds under group policies or franchise policyholders to cancel, lapse, or fail to renew their policies with [the former employer]. 96
In finding the covenant valid, the Oklahoma Supreme Court
denominated the covenant a mere "hands-off" policy, a term that is echoed in
several subsequent opinions.
97
The court reasoned that, as a "hands-off" policy with respect to the former
employer's customers, the restriction did not preclude the former employee from
exercising his profession by selling insurance to noncustomers and therefore did
not violate section 217. 98
The court further reasoned that the parties had not designed the
non-solicitation agreement to protect the former employer against legitimate
forms of competition, but rather to protect the former employer against the
unfair use of information and relationships acquired during employment. 99
The Oklahoma Court of Civil Appeals undertook a similar
analysis in Key Temporary Personnel, Inc. v.
Cox. 100
In Key, the court upheld a non-solicitation
agreement that prevented a former employee from soliciting the clients of the
[*pg 503]employer for a period of nine months following
termination. 101
The Key court recognized that the covenant in
question, like the covenant in Tatum, was merely a
"hands-off" provision with respect to a limited number of former clients and
that the non-solicitation agreement only protected against an unfair competitive
advantage. 102
A
final illustrative case is Thayne A. Hedges Regional
Speech and Hearing Center, Inc. v. Baughman.
103
In Baughman, the non-solicitation agreement required
that an employee not contract with any "group, agency, client and/or agency
contracting with or served by" the former employer for a period of two years
following termination. 104
The Oklahoma Court of Civil Appeals held that the non-solicitation agreement was
valid, in large part, because it only required a "hands-off" policy with respect
to former clients. 105
The Baughman court reasoned that the protection of
existing contracts and clients is a legitimate business concern. 106
V. Suggestions for Navigating the New
Amendments
The amendments to title 15, sections 217-219A, raise
several interesting and important drafting issues and areas of potential
litigation. Thus, courts and practitioners should be aware of potential pitfalls
in navigating the new amendments.
107
A. Courts and Practitioners Should Limit the Definition of
"Established Customers"
The recent amendments provide an "established customers"
standard for deciding which customers a former employee may not solicit. The
statute, however, does not define this standard.
108
Conversations with Representative Vaughn, the House sponsor and chief proponent
of the amendments, indicate an intent that courts should interpret the
"established customers" standard very broadly.
109
Such an interpretation, however, would create at least two problems. First, it
is a settled canon of statutory construction that courts must attempt to give
meaning to each [*pg 504]word within a statute.
110
If
While it is advisable that the legislature address this omission to provide further certainty, as it stands, courts and practitioners must look to prior case law for guidance in interpreting the "established customer" standard. 111 Key Temporary Personnel, Inc. v. Cox, discussed previously, involved a standard similar to the "established client" language of section 219A. 112 In Key, the non-solicitation agreement provided that upon termination, for a term of nine months, the former employee would not
directly or indirectly solicit, divert or attempt to solicit or divert any client of the Company, provided that client was a client of the Company at the time of the Employee's termination and provided further the client remains a client of the Company during the nine month non-solicitation period. 113
In granting a preliminary injunction, the trial judge
enjoined the former employee from soliciting (1) Key clients assigned to the
employee during her employment and (2) Key clients who, although not assigned to
the former employee, were known by the employee to be Key clients. 114
The order further provided that a business would only be
considered a client if it had purchased services from Key within the previous
six months. 115
The order also required Key to provide the former employee with a list of
clients assigned to her during her employment and a list of clients that the
former employee knew to be Key clients.
116
Finally, the order required Key to update the list twice a month to reflect
clients who had not purchased services during the previous six months. 117
On appeal, the Oklahoma Court of Civil Appeals affirmed the trial court's
interpretation of "client" as reasonable and upheld the injunction. 118
[*pg 505]While the covenant in Key did
not specifically use the term "established clients," the functional definition
affirmed by the court as reasonable provides two principles for navigating
section 219A. First, the court defined "clients" to include both clients
assigned to the former employee and those merely known to be clients by the
former employee. 119
Following this guidance, it seems reasonable that practitioners need not limit
non-solicitation agreements to only restrict contact with clients assigned to
the employee during employment, but may draft covenants to include all known
clients of the former employer.
120
Second, the Key court limited
"clients" to those businesses that had purchased services within the past six
months. 121
It seems reasonable, following this guidance, that practitioners should employ a
similar limitation in drafting and litigating the "established" standard of
section 219A. At the very least, courts and practitioners should limit the
restricted clients to those clients who frequently conduct business with the
former employer. By limiting the restricted clients, courts will protect
employees from overbroad non-solicitation agreements that restrict access to all
clients who have ever conducted business with the former employer regardless of
the current status of the business relationship. In addition, a "frequency of
business" limitation will provide some assurance to an employer that a court may
not invalidate its covenant as outside of the "established client" language of
section 219A.
Finally, in drafting covenants that attempt to meet the
"established client" standard of section 219A, practitioners should include a
severability or judicial modification clause. Under pre-amendment law, the
Oklahoma Supreme Court clearly affirmed the ability of a court to judicially
modify an offensive covenant,
122
and there is little reason to believe that a court faced with a good-faith
attempt to meet the "established client" standard of 219A would not do so today.
It seems especially likely that a court would modify an overbroad
non-solicitation agreement when the parties themselves have included a provision
expressly calling for such modification. An appropriate provision could read:
"The parties agree that each sentence, term, or provision of the agreement shall
be considered severable and/or open to judicial modification and that should one
portion of the agreement be deemed not in accord with
B. Limitations as to Time and Geographic Scope Under
Section 219A
The language of section 219A does not address whether
non-solicitation agreements under the new amendments must accord with the
pre-amendment reasonableness standards as to duration and geographic scope.
However, because courts will likely at least continue to employ a reasonable
duration standard, practitioners must look to prior case law for guidance.
[*pg 506]While unique circumstances may persuade them to do so in
the future, to date,
A
comparison of the holdings of two recent pre-amendment decisions will expose the
inconsistency imposed by the pre-amendment geographic standard. In the Loewen decision, the Oklahoma Court of Civil Appeals
invalidated a restrictive covenant that prohibited a nursing home employee from
operating a nursing home within a fifteen-mile radius of any existing nursing
home owned by the employer.
131
The court reasoned that this restriction would preclude operation of any nursing
home within nearly the entire
Considering these seemingly contradictory holdings,
however, the latter reasoning is more appropriate for non-solicitation
agreements. Employers use non-solicitation agreements to protect against the
unfair competitive advantage that employees gain by exposure to information and
relationships during their employment,
135
and it is reasonable that this need for protection could extend to the entire
state, or even entire nation, depending on the scope of the employer's
business. 136
Because the interests protected by non-solicitation agreements are not
necessarily bounded by geographic boundaries,
[*pg 508]
C. Courts Should Not Apply the Amendments Retroactively to
Invalidate Pre-Amendment Covenants
There is justified concern among businesses and
practitioners as to the effect of section 219A on covenants formed before
Second, section 219A should only apply prospectively
because a retroactive application would raise serious questions regarding
section 219A's constitutionality. It is a fundamental canon of statutory
interpretation that between two competing statutory interpretations, courts
prefer an interpretation that avoids possible constitutional
infirmities. 147
While an exhaustive review of Contract Clause
148
jurisprudence is beyond the scope of this note,
149
even a cursory review indicates that a retroactive application of section 219A
would raise serious issues regarding the unconstitutional impairment of vested
contractual obligations. The Oklahoma Supreme Court provided guidance on the
issue of the impairment of contractual rights in Baker
v. Tulsa Building & Loan Ass'n.
150
In Baker, the court addressed whether the repeal of
a statute could change contractual relationships formed prior to the
repeal. 151
In refusing to evaluate the contract in light of the repeal, the Baker court noted that "'[u]nder section 10, art. 1, of
the Constitution of the
[*pg 510]Accordingly, section 219A should not affect the validity of
covenants formed prior to
VI. The Amendments Adversely Affect
Businesses
by Excluding Desirable Covenants
Much of the criticism surrounding the amendments to title
15, sections 217 and 219A, relate to the types of covenants the amendments
specifically invalidate. 154
This criticism, however, may be unfairly directed at the recent amendments. Even
before the amendments,
First, while the recent amendments do allow
non-solicitation agreements, they do not allow general noncompete agreements.
For example, Company A could prohibit one of its
salesmen from soliciting A's established customers
when the salesman goes to work for Competitor B.
But, Company A could not prohibit the salesman from
going to work for Competitor B in a nonsales
capacity, or even from working in a sales capacity that did not solicit A's "established clients."
155
The real problem of this limitation is seen clearly in areas of employment that
do not involve client contact. For example, a non-solicitation agreement could
not prohibit an executive officer of Corporation A
from becoming an executive officer of a competing corporation, because
executives almost never "directly solicit" clients.
156
This result is unreasonable given section 219A's apparent policy concerns of
protecting against an unfair competitive advantage gained by exposure to client
information and client relationships.
157
Surely, the concern regarding client information and relationships would be
greater with an executive than for an average employee, because an executive has
access to all client information and likely has established relationships
[*pg 511]with the executive officers of the former employer's
clients. 158
Yet, it seems that the recent amendments invalidate this type of covenant.
Furthermore, while specifically allowing non-solicitation
agreements directed at "established clients," the amendments arguably invalidate
several other types of important non-solicitation agreements. The most notable
are provisions that prohibit a former employee from contacting the employees of
the former employer. 159
This type of "nonpiracy" provision seeks to reduce the "pied piper" phenomenon
in which several lower level employees follow a highly ranked or respected
employee to a competitor. 160
While nonpiracy covenants are motivated in part by concerns beyond the
protection of client information and established relationships, 161
established client relationships are at even greater risk when large groups of
employees defect to a competitor.
162
Accordingly, it would be reasonable to allow this type of agreement. However,
because nonpiracy provisions are not aimed at the solicitation of "established
clients" and arguably serve to restrict competition, amended section 219A
invalidates these agreements.
163
Finally, while the amendments provide guidance as to the
permissibility of employment noncompete agreements, they do not address several
other areas in which noncompete agreements are common. 164
For example, the amendments do not address noncompete agreements in association
with "distributor agreements, dealer agreements, franchise agreements, agencies,
technology sharing arrangements and joint ventures."
165
There are two possibilities with regard to these types of agreements. First, in
light of the apparent intent of the amendments to return to a more literal
reading of the statutes, 166
the amendments could invalidate these types of agreements. However, a more
plausible scenario is that courts will recognize that the amendments in question
specifically address employer-employee restrictive covenants and no other type
of restrictive covenant. With cases like NCAA, Crown Paint, and Bayly
clearly establishing a rule of reason analysis for all restrictive [*pg 512]covenants in
Even though the amendments specifically forbid several
types of noncompete agreements, all hope is not lost. Businesses can protect
sensitive information through the use of confidentiality agreements, which the
amendments arguably do not disallow.
168
Further, businesses should consider using common law claims, such as tortious
interference with contractual relations, to protect interests that are
unprotectable via noncompete agreements under the recent amendments. 169
VII. Conclusion
The recent amendments to title 15, sections 217 and 219A,
bring some clarity to restrictive employment covenants by aligning
Jeb Boatman
1
Harlan M. Blake, Employee Agreements Not to Compete,
73 Harv. L. Rev. 625, 626 (1960).
2
15
3
Section 218 reads:
One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business within a specified county and any county or counties contiguous thereto, or a specified city or town or any part thereof, so long as the buyer, or any person deriving title to the goodwill from him carries on a like business therein. Provided, that any such agreement which is otherwise lawful but which exceeds the territorial limitations specified by this section may be deemed valid, but only within the county comprising the primary place of the conduct of the subject business and within any counties contiguous thereto.
15
4
Section 219 reads:
Partners may, upon or in anticipation of a dissolution of the partnership, agree that none of them will carry on a similar business within a specified county and any county or counties contiguous thereto, or a specified city or town or any part thereof. Provided, that any such agreement which is otherwise lawful but which exceeds the territorial limitations specified by this section may be deemed valid, but only within the county comprising the primary place of the conduct of the business of the subject partnership and within any counties contiguous thereto.
5
Throughout this note, the terms "covenants in restraint of trade," "covenants
not to compete," "noncompetitive covenants," and "restrictive covenants" will be
used interchangeably. A covenant not to compete is a contract in which one party
agrees not to engage in certain activities that are in competition with another
party, usually a former employer. Gerald T. Laurie & David A. Harbeck, Balancing Business Protection with the Freedom to Work: A
Review of Noncompete Agreements in
6
15
7
8
Interview with Representative Raymond A. Vaughn, House Sponsor of SB 662, in
9
2000 OK CIV APP 109, 12 P.3d 977.
10
Vaughn Interview, supra note 8.
11
12
Vaughn Interview, supra note 8.
13
Chuck Ervin, Senate Resurrects Bill, Then Defeats
Measure, Daily Oklahoman,
14
15
In the aftermath of this vote, the work of the Senate came
to a screeching halt over the right-to-work issue, with Democrats walking out en
masse to protest the calling of Lieutenant Governor Mary Fallin to preside over
the contentious issue. Ervin, supra note 13.
16
17
18
Vaughn Interview, supra note 8.
19
Blake, supra note 1, at 626; see also Arthur Murray Dance Studios v. Witter, 105
N.E.2d 685 (Ohio Ct. Com. Pl. 1952) (outlining the development of restrictive
covenants in
20
Blake, supra note 1, at 627.
21
22
Id.; see also Mel
Bracht, KOCO-5 Settles with Former Reporter, Daily
Oklahoman, Apr. 3, 2000, at A14; Kris Maher, The Jungle:
Focus on Recruitment, Pay and Getting Ahead, Wall St. J., Oct. 23, 2001, at
B14. In addition to the noted social policy concerns, an intense economic debate
rages over the utility of restrictive employment covenants to promote economic
growth. For a detailed discussion on this point see Christine M. O'Malley, Covenants Not to Compete in the Massachusetts Hi-Tech
Industry: Assessing the Need for a Legislative Solution, 79 B.U. L. Rev.
1215 (1999); Jason S. Wood, A Comparison of the
Enforceability of Covenants Not to Compete and Recent Economic Histories of Four
High Technology Regions, 5 Va. J.L. & Tech. 14 (2000).
23
1 Farnsworth, supra note 19, §§
2.2, 2.7.
24
Blake, supra note 1, at 629.
25
26
27
28
Michael L. Agee, Comment, Covenants Not to Compete in
29
Blake, supra note 1, at 632.
Professor Blake further argues that the customary rules of apprenticeship played
a decisive role in the reasoning of these early decisions striking down all
restrictive employment covenants.
30
31
32
33
8 William S. Holdsworth, A History of English Law 56-57 (2d ed. 1937).
34
These motivations led one Medieval judge, in striking down
a restrictive employment covenant, to exclaim, "'By God, if the plaintiff were
here he should go to prison until he paid a fine to the King.'" Blake, supra note 1, at 636 n.33 (quoting Dyer's Case, Y.B. 2
Hen. 5, 5, Mich. 26 (C.P. 1414)).
35
8 Holdsworth, supra note 33, at
61.
36
37
Agee, supra note 28, at 348-49.
38
1 P. Wms. 181, 24
39
8 Holdsworth, supra note 33, at
60-61. Indeed, Professor Blake notes that early "cases which failed to cite [Mitchel v. Reynolds] are difficult to find." Blake, supra note 1, at 639.
40
Mitchel,
24
41
42
43
44
See
Nordenfelt v. Maxim Nordenfelt Guns & Ammunition
45
See
Pike v. Thomas, 7 Ky. (4 Bibb) 486, 488 (1817); Pierce v. Woodward, 23 Mass. (6
Pick.) 206, 208 (1828) (sale of grocery store with verbal agreement not to
compete within certain distance); Palmer v. Stebbins, 20 Mass. (3 Pick.) 188,
193 (1825) (exclusive agreement to carry all goods of obligor and not encourage
competition with boatman to carry goods); Pierce v. Fuller, 8 Mass. 223, 225
& note [a] (1811) (purchase of stage line between Boston and Providence,
Rhode Island); Nobles v. Bates, 7 Cow. 307, 309 (N.Y. 1827).
46
See
47
87
48
49
Blake, supra note 1, at 644.
50
In Addyston, the government
charged six cast-iron manufacturers with dividing territory and fixing prices.
The court, while partially relying on a naked/ancillary
distinction, held that the activities of the manufacturers violated the Sherman
Act because they were an unreasonable restraint of trade.
Many commentators have urged that courts should apply a
stricter standard to restrictive employment covenants in light of the federal
antitrust laws; however, these suggestions have gone largely unheeded. See Charles A. Sullivan, Revisiting the "Neglected Stepchild": Antitrust Treatment
of Postemployment Restraints of Trade, 1977 U. Ill. L. Rev. 621, 647-50 (as
noted in Agee, supra note 28, at 351); see also Blake, supra note
1, at 628. While the law that governs antitrust cases is different than the law
applied to employment covenants not to compete, the use of the rule of reason by
the United States Supreme Court in the former context has greatly influenced
courts in using that same test to evaluate the latter. Agee, supra note 28, at 351-52.
51
The 1890 version reads:
Section 7. Every Contract by which any one is restrained
from exercising a lawful profession, trade or business of any kind, otherwise
than as provided by the next two sections, is to that extent void.
Section 8. One who sells the goodwill of a business may
agree with the buyer to refrain from carrying on a similar business within a
specified county, city or part thereof, so long as the buyer, or any person
deriving title to the goodwill from him carries on a like business therein.
Section 9. Partners may, upon or in anticipation of a
dissolution of the partnership, agree that none of them will carry on a similar
business within the same city or town where the partnership business has been
transacted, or within a specified part thereof.
For the text of the Law of the
52
12
53
The 1989 amendment substituted the phrase "Sections 218 and
219 of this title" for the phrase "the next two sections" in section 217. 15
54
On the evolution of interpretation see generally Robert C.
Smith, Jr., Survey of the Law: V. The Meaning of
Restraint From Exercising a Lawful Profession, Trade, Business & Restraint
of Trade Under the Oklahoma Statutes, 4 Okla. City U. L. Rev. 208 (1979).
56
57
58
59
61
62
63
64
66
67
68
69
71
72
73
For cases from other jurisdictions employing the rule of
reason approach see Millard v. Elec. Cable Specialists, 790 F. Supp. 857, 860
(D. Minn. 1992); Donahue v. Permacel Tape Corp., 127 N.E.2d 235, 239
(
74
Bayly, Martin & Fay, Inc. v. Pickard, 1989 OK 122, ¶ 12, 780 P.2d 1168,
1171.
75
2000 OK CIV APP 109, 12 P.3d 977.
76
77
78
79
80
81
John W. Bowers et al., Covenants Not to Compete: Their
Use and Enforcement in
82
Many commentators argue that judicial modification gives
greater effect to the intent of the parties than merely striking the offensive
provision and enforcing what remains. See, e.g., 6A
Arthur Linton Corbin, Corbin on Contracts § 1390 (1962), reprinted in 15 Arthur Linton Corbin, Corbin on
Contracts § 1390 (interim ed. 1993).
83
1989 OK 122, 780 P.2d 1168. On judicial modification see also Loewen, ¶ 24, 12 P.3d at 982 (refusing to modify a
covenant because it would require material alteration of essential elements);
Key Temp. Pers., Inc. v. Cox, 1994 OK CIV APP 123, ¶ 17, 884 P.2d 1213, 1217
(upholding a trial court's modification of a restrictive covenant); Cohen
Realty, Inc. v. Marinick, 1991 OK CIV APP 71, ¶ 7, 817 P.2d 747, 749 (finding
that a covenant was "incurable").
84
Bayly,
¶ 3, 780 P.2d at 1169.
85
86
See
Medline Indus., Inc. v. Grubb, 670 F. Supp. 831, 837 (N.D.
87
Bayly,
¶ 19, 780 P.2d at 1175.
88
Loewen Group Acquisition Corp. v. Matthews, 2000 OK CIV APP
109, ¶ 3, 12 P.3d 977, 979.
89
90
91
92
At first glance, it may seem that
93
See supra
Part III.A; see also Neal v. Penn. Life Ins. Co.,
1970 OK 13, 480 P.2d 923; Cohen Realty, Inc. v. Marinick, 1991 OK CIV APP 71,
817 P.2d 747.
94
It is important to recognize that NCAA is essentially an antitrust case. While the court
does in fact uphold a restrictive agreement that is not a non-solicitation
agreement, it does so summarily and without any meaningful analysis.
95
See Crown Paint Co. v. Bankston, 1981 OK 104, ¶ 1,
640 P.2d 948, 949; Tatum v. Colonial Life & Accident Ins. Co., 1970 OK 27, ¶
7, 465 P.2d 448, 451; Thayne A. Hedges Reg'l Speech & Hearing Ctr., Inc. v.
Baughman, 1998 OK CIV APP 122, ¶¶ 1, 3, 996 P.2d 939, 940-41; Key Temp. Pers.,
Inc. v. Cox, 1994 OK CIV APP 123, ¶ 9, 884 P.2d 1213, 1215-16; see also Bayly, Martin & Fay, Inc. v. Pickard, 1989
OK 122, ¶¶ 15-17, 780 P.2d 1168, 1173-74 (striking down a non-solicitation
agreement that included overly broad restrictions on the acceptance of work from
businesses not clients at the time of termination and a restriction on several
types of business activities).
The Oklahoma Supreme Court recently bolstered this
conclusion in Cardiovascular Surgical Specialists, Corp.
v. Mammana, 2002 OK 27, ¶ 14, 2002 WL 530188, at *3 (Okla. Apr. 9, 2002)
(noting that pre-amendment Oklahoma law only upheld non-solicitation agreements,
not general covenants not to compete).
96
Tatum, ¶ 7, 465 P.2d at 450.
97
98
Tatum, ¶¶ 7-8, 12, 465 P.2d at 451-52.
99
100
1994 OK CIV APP 123, 884 P.2d 1213.
101
102
103
1998 OK CIV APP 122, 996 P.2d 939.
104
105
106
107
For general guidance on drafting covenants not to compete
see 2 Farnsworth, supra note 19, § 5.3a.
108
Courts have defined "customer" in another context to mean
"one who has had repeated dealings with another." Lyons v. Otter Tail Power Co.,
297 N.W. 691, 693 (N.D. 1941). Although this definition did not deal with
restrictive employment covenants, it still supports the idea that practitioners,
and ultimately
109
Vaughn Interview, supra note 8.
In fact, Representative Vaughn suggests that the amendments preclude
solicitation of any client on the business' "customer list," meaning any client
that the business has ever served.
110
In re
Siegmann, 1988 OK 59, ¶ 12, 757 P.2d 820, 824.
111
Importantly, no other state's statutory law on covenants
not to compete uses the phrase "established customer." See generally Covenants Not to Compete: A
State-by-State Survey (Brian M. Malsberger ed., 2d ed. 1996).
112
1994 OK CIV APP 123, 884 P.2d 1213.
113
114
115
116
117
118
119
120
Employers could receive maximum protection by providing new
employees with a list of all clients considered "established" at the time of
hiring, thus ensuring that every client of the former employer would fall into
the limitation employed in Key.
121
122
See
supra note 83-85 and accompanying text.
123
See
Bowers et al., supra note 81, at 88.
124
See
Tatum v. Colonial Life & Accident Ins. Co., 1970 OK 27, 465 P.2d 448
(upholding restrictions of two years as reasonable); Thayne A. Hedges Reg'l
Speech and Hearing Ctr., Inc. v. Baughman, 1998 OK CIV APP 122, 996 P.2d 939
(same).
125
Loewen Group Acquisition Corp. v. Matthews, 2000 OK CIV APP
109, ¶ 24, 12 P.3d 977, 982.
126
127
Because of the reluctance of
128
Key Temp. Pers., Inc. v. Cox, 1994 OK CIV APP 123, ¶ 10, 884 P.2d 1213, 1216.
129
Loewen,
¶ 15, 12 P.3d at 980.
130
See
supra note 96 and accompanying text.
131
Loewen,
¶ 18, 12 P.3d at 981.
132
133
1998 OK CIV APP 122, ¶ 1, 996 P.2d 939, 940.
134
135
See
supra note 129 and accompanying text.
136
The issue of nationwide enforcement raises interesting and
complex conflict of laws issues. For example, in Fort
Smith Paper Co., Inc. v. Sadler Paper Co., 482 F. Supp. 355, 356-57 (E.D.
Okla. 1979), the plaintiff argued that the court should apply Arkansas law,
which allowed restrictive employment covenants, to the challenge of a covenant
by an Oklahoma citizen in a federal court sitting in diversity. The court
reasoned that, even if the covenant were valid under
137
See
Research & Trading Corp. v. Pfuhl, CIV No. 12527, 1992 WL 345465, at *12
(Del. Ch. Nov. 18, 1992) ("If . . . the employer's customer base . . . extends
throughout the nation, or indeed even internationally, . . . then it is
appropriate that an employee subject to a non-competition agreement be
prohibited from soliciting those customers on behalf of a competitor regardless
of their geographic location."); Ellis v. James V. Hurson Assoc., Inc., 565 A.2d
615, 620 (D.C. 1989) ("[T]he territorial limitation requirement is generally
inapposite where the preliminary injunction entered by the trial court enjoins
[an employee], not generally from competing in the same field as [the former
employer], but merely from soliciting [the former employer's] customers.");
Sentry Ins. v. Dunn, 411 So. 2d 336, 337 (Fla. Dist. Ct. App. 1982) (holding
that an employer need not limit the geographic scope of a non-solicitation
agreement); W.R. Grace & Co. v. Mouyal, 422 S.E.2d 529, 533 (Ga. 1992)
("Requiring an express geographic territorial description in all cases is not in
keeping with the reality of the modern business world in which an employee's
'territory' knows no geographic bounds, as the technology of today permits an
employee to service clients located throughout the country and the world.").
138
Paula Burkes Erickson, New State
Law Poses Questions, Not Solutions, Daily Oklahoman, July 22, 2001, at B8
(quoting Oklahoma City attorney Mike Joseph stating that retroactive application
would invalidate numerous covenants established before June 4, 2001, and could
raise serious constitutional questions).
139
While this approach may ensure that courts will evaluate
covenants formed prior to
141
Id. ¶ 30, 291 P. at 515; see
also Baker v. Tulsa Bldg. & Loan Ass'n, 1936 OK 568, ¶ 8, 66 P.2d 45, 49
(refusing to apply a statute retroactively because courts generally should
construe contracts in light of the law in effect at the time they were created).
142
143
144
145
146
Even the language "is to that extent void" found in section
217, which seems to indicate a present intent to make void, must be "construed
and resolved" against retroactivity because, in light of the overwhelming use of
the future tense, the legislature has not employed words that are "so clear,
strong, and imperative" that no other interpretation is reasonable.
Cardiovascular Surgical Specialists, Corp. v.
Mammana,
2002 OK 27, 2002 WL 530188 (
147
See Tull v.
148
Article 1, Section 10 of the United States Constitution reads:
No State shall enter into any Treaty, Alliance, or
Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of
Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts;
pass any Bill of Attainder, ex post facto Law, or Law
impairing the Obligation of Contracts, or grant any Title of Nobility.
Article 2, Section 15 of the Oklahoma Constitution
reads:
No bill of attainder, ex post facto law, nor any law impairing the obligation of contracts,
shall ever be passed. No conviction shall work a corruption of blood or
forfeiture of estate: Provided, that this provision shall not prohibit the
imposition of pecuniary penalties.
149
For an in-depth discussion of Contract Clause jurisprudence
see John E. Nowack & Ronald D. Rotunda, Constitutional Law § 11.8 (5th ed.
1995); see also Allied Structural Steel Co. v.
Spannaus, 438 U.S. 234, 244-45 (1978); United States Trust Co. v.
151
152
Id.
¶ 13, 66 P.2d at 50 (quoting Justice Osborn in Security Bank & Trust Co. v.
Barnett, 1934 OK 429, 36 P.2d 874).
153
See
supra note 140-141 and accompanying text.
154
Memorandum from Gary W. Derrick, Chair, Oklahoma General Corporation Act
Committee (
155
156
157
See
supra note 129 and accompanying text.
158
Additionally, executives may possess nonproprietary
information, such as business strategies, that would enhance the risks of losing
established clients. For example, if a departing executive left a business only
to implement identical business plans and strategies at a competitor, knowing
full well that those specific strategies ensure the loyalty of the former
employer's established clients, the risks are great that such conduct would
attract at least some of these established clients.
159
Memorandum from Gary W. Derrick, supra note 155. Mr. Derrick notes the existence of
similar issues with the solicitation of vendors as well.
160
Bowers et al., supra note 81,
at 87.
161
162
See
Owens v. Penn Mut. Life Ins. Co., 851 F.2d 1053, 1055 (8th Cir. 1988) (upholding
a noncompete agreement as reasonable under Arkansas law when an insurance agent
left his employer and took ten other insurance agents with him. These agents, in
turn, encouraged their former clients to change insurance companies).
163
See
Communication Tech. Sys., Inc. v. Densmore, 583 N.W.2d 125, 128 (S.D. 1998)
(holding that South Dakota's law allowing limited non-solicitation agreements
does not allow nonpiracy agreements because the plain language of the statute
only covers conduct between a former employee and a customer, not a former
employee and his employer).
164
Memorandum from Gary W. Derrick, supra note 155.
165
166
167
However, after the discussion in Part IV noting that
Oklahoma courts rarely enforce true covenants not to compete, regardless of
their reasonableness, the assertion that courts should continue to analyze all
other covenants not to compete under a rule of reason approach may be more
structure than actual substance.
168
See
Mai Basic Four, Inc. v. Basics Inc., 880 F.2d 286, 287-88 (10th Cir. 1989)
(holding that a confidentiality agreement "cannot be characterized as [a]
restrictive covenant[] and must be treated separate and apart from agreements
not to compete"; enforcing the confidentiality agreement).
169
See
Brock v. Thompson, 1997 OK 127, ¶¶ 31-33, 948 P.2d 279, 293.
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