Written by Gerard Stowers
The West Virginia Supreme Court of Appeals on July 7, 2005 upheld the validity of “non-piracy” provisions in employment contracts. This is the first Supreme Court decision to address “non-piracy” provisions in contracts and the first in many years to uphold the validity of a non-physician restrictive covenant in favor of an employer. The 4-1 opinion, Wood v. Acordia of West Virginia, written by Justice Benjamin, with Justice Starcher dissenting, noted that “an inherently reasonable restrictive covenant is presumptively enforceable in its entirety upon a showing by the employer that he has interests requiring protection from the employee.” Acordia’s employment contract provided:
“For a period of two years after Employee’s employment relationship with Employer has terminated for any reason … Employee shall not … 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 of 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.”
This provision was characterized by the Court as being an “anti-piracy” or “hands off” agreement. The Court indicated that a covenant not to compete precludes former employees from working in the same business as the employer for a certain time period in a specified area (geographical and territorial restrictions apply). An “anti-piracy” agreement, on the other hand, restricts the terminated employee from only soliciting customers of his former employer or making use of confidential information from his previous employment. According to the Court, because it is less restrictive on the employee (and thus on free market forces) than a covenant not to complete, an anti-piracy agreement ordinarily is not deemed unreasonable or oppressive.
The decision reiterates that there is a two step procedure for courts in reviewing restrictive covenants. First, a court must determine whether the employer has a protectible business interest to be safeguarded in relation to the employee. Without a protectible business interest, any restrictive covenant would be invalided by the court even if reasonable. If the Court determines that the employer has a protectible business interest then the court should look to the actual restrictive covenant to determine if it is reasonable and the extent to which the provision reasonably and fairly protects that interest. Notwithstanding this two step test, the Court noted that “non-piracy” covenants that do not have territorial restrictions “ordinarily are not deemed unreasonable or oppressive.”
The Court also noted in its opinion that “customer lists” and, in the insurance industry, certain other types of information which specifically relate to each customer’s account (policy expiration dates, coverage and premium amounts and insured property) are protectible interests. According to the Court, Acordia established that it had a protectible business interest in its customer and contacted prospective customer accounts and its “confidential information related to customer accounts, insurance needs and histories.” In upholding the “non-piracy” provision, the Court warned that “had the plaintiffs been prevented from engaging in work for which they had been trained, or permanently prevented from contacting customers…then this Court’s decision would have been different.”
Bowles Rice is pleased to have had the opportunity to successfully represent Acordia in this case. To read the opinion in full, visit the West Virginia Supreme Court of Appeals opinions page or contact the undersigned to receive additional information on non-piracy and other restrictive covenants.
The author presents these materials with the understanding that the information provided is not legal advice. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using these materials should always research original sources of authority and update this information to ensure accuracy when dealing with a specific matter. No person should act or rely upon the information contained in this publication without seeking the advice of an attorney.
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