On Thursday February 17, 2022, the Hawai’i Supreme Court issued only its third significant ruling since the mid-1970s on the enforceability of post-employment restrictive covenants. The majority opinion refused to enforce a non-compete agreement on behalf of Prudential Locations Hawai’i, LLC against a former employee who left to form her own real estate brokerage. The court did not strike down a non-solicitation provision, but held that an employer must show the former employee engaged in “active initiation of contact” with a client or employee of the former employer in order to prove a violation.
Before 2008, Lorna Gagnon had been a licensed real estate salesperson and broker in New Hampshire, and owned and operated her own RE/MAX franchise there. Then she came to work on Oahu as a “sales coach” for Locations. When she began working for Locations, Gagnon entered a “Confidentiality and Non-Competition Agreement.” That agreement restricted Gagnon for a year after her employment ended with Locations. It prevented her from (i) opening her own brokerage in Hawai’i (but not working as a real estate salesperson), and (ii) soliciting a Location’s affiliate or employee to leave Locations.
In 2013 Gagnon left Locations and began her own RE/MAX franchise in Hawai’i called Prestige Realty Group, LLC. Several Locations agents joined Gagnon at Prestige. Locations sued Gagnon for violation of her agreement’s non-compete and non-solicitation provisions.
The Hawai’i Supreme Court noted the national trend away from the enforcement of non-compete provisions. The court observed that such restrictions must be supported by a “legitimate purpose” (simply protecting the business from additional competition is NOT a legitimate purpose). Protecting trade secrets may be a legitimate purpose. Also, the Court noted its 2006 decision holding that protecting specialized training that provides skills beyond those of a general nature may support a legitimate purpose, “when combined with other factors weighing in favor of a protectable business interest such as trade secrets, confidential information, or special customer relationships.”
The Court said Locations claimed to have an interest in “protecting … its proprietary systems, its customer management, the training modules it’s developed over 40 years, the information that was provided on a system-wide basis, including managerial reports to Ms. Gagnon about how to optimize the success of its sales force” and Gagnon’s “access to confidential materials, proprietary materials that were the secret sauce, if you will, of why Locations is one of, if not the most successful local real estate companies in Hawai’i.”
The Court concluded, however, that this information was not actually “confidential” as Locations alleged, because (i) “Other Locations employees and managers with similar or more access to the allegedly confidential information were not restricted by non-compete agreements”, and (ii) “the non-compete clause only prohibited Gagnon from starting her own firm, but permitted her to work for an existing brokerage firm even within one year of leaving locations.”
As a result, the Court found there was no protectable interest to support the non-compete and upheld the trial courts dismissal on summary judgment of Location’s claims Gagnon violated the non-compete clause.
Non-solicitation has a shot
Locations fared better with its non-solicitation provision. The Court acknowledged that such provisions may be supported as protecting the legitimate interests of “workforce stability and customer relationships” and indicated agreement with a New York court’s observation that, “A covenant not to solicit employees is inherently more reasonable and less restrictive than a covenant not to compete”.
Per the language of the agreement Gagnon signed, she was not permitted to “induce or encourage any other persons employed or affiliated with [Locations] to terminate their relationship with [Locations].” The Court dismissed the idea that merely “encouraging” someone to leave employment could constitute solicitation as family and friends may “encourage” an individual to switch employers for various reasons.
The Court noted that Hawai’i law has never defined “solicitation” and adopted the position that it must involve “actively initiated contact” by the former employee.
In Gagnon’s case, she had invited a Locations agent to lunch, told the agent of her plans to leave Locations and open her own brokerage, and told the agent there was no one she would rather have as a partner. Although the agent testified she’d left Locations of her own volition, the Court found there to be enough evidence Gagnon “actively initiated contact” that Location’s claim Gagnon violated the non-solicitation agreement should not be dismissed.
Employers should carefully review their use of post-employment covenants with the following in mind:
- Consider the trends away from enforcement of non-compete provisions and whether the business can be adequately protected with a non-solicitation agreement
- Be aware that an employer that fails in an attempt to enforce a non-compete will have to pay the former employee’s attorneys’ fees, which are often substantial
- Ensure any non-compete agreement is supported by a legitimate business purpose (protecting trade secrets, customer relationships etc.), and is otherwise reasonable in terms of scope (activities constrained and, generally, geographically) and duration
- Ensure enforceability of non-compete provisions is not undermined by inconsistent implementation – require them of all similarly situated employees where they are warranted, and do not require them of employees whose positions do not pose a realistic threat of unfairly taking business if they depart
- Ensure enforceability of non-compete provisions is not undermined by inconsistent provisions within the agreement itself – i.e., prohibiting certain competitive activity, but allowing other types of competitive activity that pose similar risks of unfair competition
If you have any questions regarding post-employment covenants, please contact a Goodsill employment lawyer.
John S. Mackey