Agency Loses Lawsuit Over Its Non-Compete Agreement
- August 04, 2020
Insurance agencies commonly include non-compete agreements in their producer contracts in order to protect their books of business. Written properly, these agreements can protect an agency’s interests while allowing a departing producer to earn a living. However, many courts take a dim view of poorly conceived non-competes. An agency in Delaware used one such agreement.
A producer with 15 years’ experience joined the agency in 2014. Upon joining, she signed a “Confidentiality and Non-Solicitation Agreement.” One section of the agreement carried stiff consequences: If her employment with the agency ended for any reason, and within two years she went to work for a competing agency or started her own, and any of her accounts moved to her new agency, she would have to pay the agency “an amount equal to 1.5 times the Moved Business.” The agreement defined “Moved Business” as "the annualized amount of commissions generated by” the account at the time it was moved. The wording of the agreement required her to pay this amount even if she did not cause the account to move.
The agency gave her a book of business to service when she started, but her tenure turned out to be a short one. She left the agency not quite two and a half years after starting. Six months after that, she began working for a competing agency. That same month, one of the accounts she handled at her old agency concluded the service it was receiving was unacceptable. Her contact at the company (Debra Rouse) decided to put its insurance program out to bid with no intention of keeping the business with the old agency.
Rouse contacted the producer at her new agency to invite them to participate in the bidding. The producer had not spoken with Rouse since leaving the old agency; she told her that the non-compete agreement prohibited her from participating in the bidding. When Rouse told her that the old agency was losing the account regardless, the producer took the matter to her senior management. They decided to bid for the business without the producer’s initial involvement.
The insured eliminated half the bidding agencies, including the incumbent, after the first round. Once the producer had been assured that her old agency had been informed of this decision, she became involved in the bidding. Her new agency was eventually chosen with her as the primary contact.
When the producer failed to pay the 1.5 times commissions to her old agency, the agency sued her and her new agency for breach of the non-compete agreement. They sought the stipulated amount. Both sides moved for summary judgment, meaning there was no dispute over the facts and that the question should be decided based on the law.
The judge ruled that the stipulated damages requirement was unenforceable. “Section 4.1 is unreasonable,” he wrote, “to the extent it purports to impose fixed damages untethered from any act or behavior by (the producer) beyond that of choosing to work for a competitor ...” He found the agreement to be against public policy because it unreasonably restricted competition.
Had the first agency written the agreement in such a way that the producer would owe the payment if she caused or participated in the movement of an account, they might have stood a better chance of winning this lawsuit. Non-competes restrict individuals’ activities, and courts uphold them if they appear reasonable. Penalizing a former employee who did not participate in taking an account until after it was already gone was unreasonable. Agencies must keep the issue of reasonableness in mind when they draft non-compete agreements.