Friday, August 11, 2017

Covenants Not to Compete: Not Too Restrictive, Not Too Broad, But Must Be Just Right.

We previously wrote in June 2016, about the dangers employers face when requiring their employees to sign non-compete agreements with the company. While that case brought light to the issue of overly restrictive agreements with employees, recently the Chicago-based Nordstrom subsidiary company, Trunk Club, Inc., became the subject of a suit over their company’s overly broad non-compete agreement required for their entry-level employees.

Trunk Club is a personal shopping service selling middle to high-end adult men and women’s fashion. The company began in 2009 and over the years has grown. Its practice is to hire numerous entry-level employees for various positions throughout the company. Molly Dowell, who represents similarly situated employees in this class action lawsuit, began working as a personal stylist for The Trunk Club almost immediately after she graduated college. She had years of experience in retail and earned a degree in retail management.

Dowell was an entry-level, at-will employee when she began with the company in early June 2016. She was required to sign an employment agreement containing a non-compete clause barring her, as it would for any other of Trunk Club’s entry-level worker, from seeking employment with a Trunk Club or Nordstrom competitor for the duration of one year after the end of her employment.

In January 2017, Dowell chose to end her employment with the company. After leaving, she sought employment with Mac & Mia, another Chicago-based personal shopping service. Mac & Mia’s services are similar to the Trunk Club in how it is provided to their customers, but the company only sells clothing for children who are six years of age or younger. Showing interest in Dowell, but prior to discussing employment opportunities with her, Mac & Mia expressed concern for potential litigation stemming from Dowell’s covenant not to compete with The Trunk Club.

In an effort to avoid future problems, Dowell emailed the Senior Director of Human Resources at The Trunk Club requesting to proceed with the employment process at Mac & Mia. The representative responded to Dowell’s email stating that she would not allow an exception to the covenant not to compete due to Mac & Mia being a competitor of its parent company, Nordstrom. She added that the reason for the denial, and the covenant in general, was to protect Trunk Club’s interest in its business relationships, employees, and confidential information. 

Dowell sued, arguing that due to Nordstrom’s department store nature, and the broad scope of products sold, she is precluded from seeking employment from nearly any and every retail business out there. As a result, she is prohibited from looking for work in any area of retail without risking future litigation by The Trunk Club against either or both her and any potential future employer.

Additionally, Dowell argues that Mac & Mia is not a competitor of The Trunk Club considering the two companies have entirely different target age groups as their customers. As far as Mac & Mia goes to being a competitor of the parent company, Nordstrom, there is no reasonable expectation that Dowell’s employment would negatively affect Nordstrom’s sales in their children’s clothing department.

Dowell also argues that she did not have access to confidential information as an entry-level employee, and if she did for any reason obtain such, it was protected by a separate confidentiality agreement signed when she began working for The Trunk Club.

Courts around the country are taking increasing interest in these covenants not to compete for entry level employees. The premise is simple. In the hiring process between companies and entry level employees, the company generally has more leverage. After all, entry level employees are at least perceived to be plentiful so if a job candidate is not willing to sign a broad non-compete, the company will at least indicate that it will just move on to the next candidate. Additionally, entry level job candidates likely do not have access to confidential information of the employer, so that courts are becoming more skeptical of the real purpose of non-compete agreements. What employers likely want to avoid is entry level employees learning the business, gaining experience and then leaving for another job.

While non-compete agreements have their place in employment relationships, employers must tailor these covenants around the many fine lines that may make a covenant too restrictive, and what may make it too broad. They cannot effectively preclude an employee from working in the industry, especially when an employee had no access to company secrets or leaves with an advantage other than the work experience they gained. 

Although this case has only just begun, we are interested to see what the trial court will say about both parties’ arguments.