Employment Noncompete Agreements Enforced Badly

I like to write about court decisions that go against the employer because I think they are more instructive to companies than ones where the employer wins.

Today’s case is about a non-compete agreement that was signed by two lower level employees who began working for a new startup competitor. That is where the plot thickens in Dillon Energy Services, Inc v Asaro, a recent unpublished decision of the Michigan Court of Appeals that arose in Macomb County.

First, some background. Dillon Energy Services (DES) supplies natural gas and electricity in Macomb County and other parts of the state. There are two defendants/former employees in this case: Angela Asaro, who was hired back in 2003, and Joseph Blahut, who began working for DES in 2016.

Apparently, numerous DES employees, including Asaro and Blahut, ended their employment after DES suddenly, and without explanation, terminated Jan Rosso and soon thereafter Dan Rosso resigned. They both had been long-term key employees at DES. Dan started a competitor called Transparent Energy and a few months later hired both Asaro and Blahut, initially as part time employees.

DES produced a considerable amount of evidence intended to prove that Asaro and Blahut violated their one-year noncompete agreements and that it had been harmed by their violations. So why did DES not prevail? Glad you asked, or I wouldn’t have much to write about today.

The evidence actually showed that “although many of [DES’] former customers eventually transferred to Transparent, they did so for reasons unrelated to Asaro or Blahut, some of them because [DES’] remaining principals actively drove them away.” Well, that’s not a good business practice.

Let’s dive deeper. Asaro had been the DES “Director of Natural Gas and Electric Choice,” but she had only functioned in a back-office capacity, overseeing programs, getting involved with tariffs, some gas customer billing, creating reports, etc. She also had helped prepare spreadsheets and databases that included the customers’ names and gas purchases (which included volume, costs, sale price and supplier for that customer), among other information. However, she did not have any involvement with the management of the portfolio, development of processes or systems or sending letters to customers about their expiring contracts.

Blahut had known Dan Rosso and other employees of DES since they were children. After a DES employee had left, Dan started sending Blahut information about natural gas and the market’s fundamentals. Eventually, Dan offered Blahut a job because he thought he would be a good fit. Once hired, Blahut became a gas scheduler which basically involved reviewing meter reading information to determine if the customer was using too much or too little energy to stay within the utility threshold, and “nominate” customers for penalties based on projections of the customer’s usage.

Both employees signed one-year non-competition agreements that were fairly lengthy and quoted in the appellate court’s opinion. The appellate court also provided a significant amount of factual details about the jobs they had previously performed at DES and what they then did at Transparent, far more than could be contained in this article.

Bottom line? Both defendants left after Jan Rosso was fired and others left the company. Both denied taking any documents with them or sending information to others when they quit. Both also denied knowing why Jan was fired, why Dan left, whether they had made plans to start a competitor or target any of DES’ customers, or whether they had taken any information with them. Both denied being encouraged to quit DES or being asked to take any information with them when they did. Both testified that they initially began working at Transparent part-time, and neither became full-time during their non-compete agreement’s one-year restrictive period.

Both defendants eventually became aware that some of Transparent’s customers had previously been customers of DES. Neither defendant was involved in moving the customers to Transparent or involved in sales or marketing.

Approximately 15 customers left DES for Transparent. Some testified that once the Rossos left DES, there was no one left with whom they had a relationship. Others testified that they went to Transparent because it had better proposals. Several stated that they thought the owners of DES were either untrustworthy or difficult and one said an owner had actually called and threatened him. Several testified that the defendants had nothing to do with their departure from DES.

DES produced no affidavits or testimony from former customers blaming the defendants for their departure and none of its evidence demonstrated the defendants had the kind of importance to Transparent that DES was claiming they had in this lawsuit.

DES brought five claims against the defendants, including breach of contract, violation of Michigan’s Uniform Trade Secrets Act, etc. The defendants argued, among other things, that DES had not established any damages. The trial court found that defendants had breached their agreements by starting work with Transparent within a year of leaving DES. However, given that it also found that defendants had not done anything to cause harm to DES, it granted the defendants’ motion to dismiss.

The appellate court agreed with the result. There was no evidence that the defendants solicited any of DES’ customers or employees or had disparaged DES or its owners. The evidence actually showed that customers went to Transparent because of their relationship with the Rossos or due to DES’ hostile behavior or higher prices. At best, the evidence show that the defendants may have had the ability to help “facilitate” the transfer of the customers, but they didn’t cause that to happen. The evidence was that Transparent was just the better energy company.  

However, the appellate court disagreed with the trial court’s findings that the defendants had violated the noncompete by starting work within the one-year restrictive period. Because “rendering services” was found within the same paragraph in the agreement as discussions concerning owning stock, controlling interests or sharing in profits, it is not clear that the restriction against “rendering services” was intended to apply broadly to every kind of employment.

While that issue seems like a drafting error, there was a broader problem with the noncompete. These agreements can only be enforced to the extent they are reasonable. They are intended to protect companies against competition that is unfair, not all competition in general.

An agreement can restrict the use of trade secrets but not the use of all general information acquired during the course of employment. Such agreements must be reasonable between the parties and any prohibition restricting all competition is an impermissible restraint of trade. An agreement can only reasonably prohibit a former employee from exploiting information that is confidential, but it can’t prevent the employee from simply getting another job.

In addition, non-competition agreements may not generally prohibit an employee from working for a competitor without considering the nature and character of that employment. The kind of work that the defendants performed during the one-year restricted period while part-time was low-level office work. DES was relying on evidence concerning the nature of their jobs after they had become full time which was after their noncompetes had ended.

Perhaps more importantly, there was no evidence that the defendants’ employment or their actions caused DES any damages which is an essential element of a breach of contract claim. DES failed to show any specific confidential information that the defendants had acquired which they then conveyed to Transparent or that was used by it that could not have already been known to the Rossos. Thus, the trial court had erred in finding that the defendants had violated any aspect of their agreements and, even if there had been a violation, there were no damages caused by the breach. 

The court had a scathing conclusion to its opinion, finding that the evidence shows DES:

lost its customers to Transparent because the Rossos had been the reason for [its] prior success, [DES’] principals lacked the Rossos’ abilities, and [DES’] principals would prefer to believe they have been intentionally wronged – to the point of pursuing clearly meritless claims against low-level employees out of apparent spite – instead of facing up to their own mistakes and failures. Hiring qualified and competent employees, and treating them with respect (not to mention refraining from affirmatively abusing one’s customers), can certainly be a competitive advantage. However, it is difficult to imagine how doing so could constitute an unfair competitive advantage, and plaintiffs have not presented a scintilla of evidence that doing so here conferred upon Transparent any such unfair competitive advantage.

With that, the appellate court affirmed dismissal and allowed the defendants to tax costs. Wow. I just wish our court of appeals wouldn’t hold back and just start saying what it really means!    

There are several lessons to be learned from this case. One is to carefully consider who you require to sign non-competition agreements and another is to consider who you want to enforce it against. Not all employees are in a position to cause harm to their employer when they go to competitors. In fact, some employees you may want to wish on your competitors. Don’t just enforce the noncompete because you have one. Sometimes it’s best to seek counsel from an attorney, rather than face aggressive litigation.

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