by Brad Cave
Brad Cave
The Wyoming Supreme Court decided four cases in the last 12 months against the enforcement of employees’ agreements not to compete with their former employer. Although each case was unique, the tenor and direction of these decisions are bad news for Wyoming employers who rely on noncompete agreements. In addition, one of the rulings requires Wyoming employers to immediately review the reasonableness of the geographic scope and time covered by their noncompete agreements and perhaps modify those terms, or they risk being unable to enforce the agreement at all. You should act now to improve your odds of enforcing the agreements against disloyal former employees. Here’s our take on the steps you should take.
Confirm your noncompetes are supported by consideration
Contracts must be based on consideration—something of value—exchanged between the parties. All employees have employment contracts with their employers, which are supported by consideration of the job itself with its promise of payment of wages. When noncompete agreements are signed at the time of hiring, the job is the consideration. When an employer asks employees to sign a noncompete after employment begins, they must give new consideration beyond just keeping the job. Consideration can consist of anything of value that is specifically offered and accepted in exchange for the noncompete, but without new consideration, the post-hire noncompete is not enforceable.
Best Home Health & Hospice sued four of its former nurses to enforce their noncompete agreements after they went to work for one of Best Home’s competitors. Two of the nurses signed their noncompete agreements when their employment began, but the other two signed the agreements after their employment started.
The trial court entered a preliminary order to stop the nurses from working for Best Homes’ competitors. After the nurses appealed, the Wyoming Supreme Court reversed the order in part because the noncompete agreements weren’t supported by consideration for the two nurses who signed those agreements after their employment began.
Best Home argued the two nurses had received consideration because they were permitted to earn additional consideration by working in its psychiatric unit. The Court disagreed. Best Homes required all its employees to sign the agreements, not just those working in the psychiatric unit. One of the two nurses had been working in the psychiatric unit before the noncompetes were signed, so work on that unit could not be new consideration.
The other nurse did not begin to work in the psych unit until several months after she signed the noncompete agreement, undermining any argument that this arrangement was offered in exchange for that agreement. As a result, Best Home failed to demonstrate its agreements were supported by consideration. Brown, Youngren and Wolfe v. Best Home Health & Hospice, LLC, 2021 WY 83 (Wyo. 2021).
If your noncompete agreements are presented to new employees before they begin employment and signed before the start date or as part of the new-hire process, you should have a good argument the agreements are supported by consideration.
On the other hand, if you required all your employees to sign noncompete agreements at some point during their employment or included a noncompete policy in your employee handbook, without giving some new money or valuable benefit as consideration specifically for the noncompete, those terms may not be enforceable under Wyoming law. In this situation, consider asking employees to sign a noncompete agreement in exchange for a raise, a discretionary bonus, or as part of the terms of a promotion.
Define your special business need for a noncompete
Noncompete agreements create a restriction on employees’ freedom to work and are presumed to be invalid under Wyoming law, unless the employer can demonstrate that special circumstances justified the agreement to protect their interests. Those special circumstances can include employee access to trade secrets or confidential information, special relationships with customers, or access to innovative technology. They must prove such special circumstances make it reasonable as a matter of public policy to restrict the employee’s ability to work in the same industry.
Jorge Malave worked as a salesman for a Pepsi distributor, Western Wyoming Beverages, Inc. When Malave quit and took a job with the Coke distributor in the same region, Western Wyoming sued him to enforce his noncompete agreement. The trial court entered a preliminary injunction against Malave because he used his relationship with a particular convenience store operator to obtain some shelf space for Coke products that Western Wyoming believed it was entitled to use. The trial court found the company would suffer irreparable harm to its customer relationships and goodwill if Malave was allowed to work for the competition.
The Supreme Court disagreed, however, because Western Wyoming failed to show that Malave got any trade secrets from it or had special relationships or influence over its customers, and the customers he served were readily identifiable. The court specifically rejected the argument that the shelf space change with one customer constituted irreparable harm because those decisions were just as likely driven by product sales appeal, rather than Malave’s relationship with the customer. Malave v. Western Wyoming Beverages, Inc., 2022 WY 14 (Wyo. 2022).
Learning from this case, Wyoming employers should use noncompetes only when truly necessary and draft their agreements to help prove it. Noncompete agreements should specifically describe the trade secrets or confidential information the employee will receive, and they should be prepared to prove the employee received it.
Likewise, employers should be ready to show that the information is truly confidential or proprietary, and disclosure to a competitor would harm the employer’s business. That burden often requires the employer to show that they have taken other measures to protect the confidentiality of that information far in advance of a lawsuit to enforce a noncompete. And, finally, they should limit their use of noncompetes to employees in those positions that really have access to confidential information.
Match your geographic and time restrictions to your business interests
Wyoming law has always required that a noncompete’s restrictions must be limited to a reasonable geographic area, apply for a reasonable time after termination, and be only as broad as necessary to protect the employer’s legitimate business interests.
For thirty years, judges have been permitted under Wyoming law to effectively revise noncompete terms if the geographic scope was too broad or the covenant applied too long after employment. This so-called “blue pencil” rule allowed judges to enforce narrower terms as an alternative to declaring the entire noncompete void as an unreasonable restraint on competition. This is no longer true, as the Wyoming Supreme Court recently decided that employers should bear the risk if they require overly broad noncompete covenants, and judges should declare overly broad noncompetes to be void and not rewrite those terms.
Charlene Hassler worked for Circle C Resources as a CNA providing residential habilitation services in her home to a disabled adult client of Circle C. Hassler signed a noncompete agreement when she was hired that restricted her from working for twenty-four months after termination for any business that competed with it in four Wyoming counties. The company was authorized by the Wyoming Department of Health to provide its services in all those counties but did business only in two of them.
Hassler provided services for the same client through her entire employment with Circle C. The company received revenue of $121,142 annually for her services to the client but paid her only $26,400 per year. When the client’s mother became dissatisfied with the company, she persuaded Hassler to quit her job and continue to provide services to the client personally.
After she started doing so, Circle C sued Hassler. The company asked the trial judge to enforce the noncompete only in the two counties in which it conducted business. Hassler’s home, where she took care of the client, was in one of these counties. The company asked the trial judge to enforce the full 24-month term of the noncompete, but the judge decided that was too long and limited enforcement to 12 months. The trial court also found she had breached the agreement, and the company was entitled to just under $95,000 in damages for their lost profits for the 12-month period the noncompete was violated. Hassler appealed.
The Wyoming Supreme Court threw out the judgment and ruled in Hassler’s favor. The court decided that the blue pencil rule placed an unfair burden on employees who were constrained by widespread noncompetes required by their employers. The rule encouraged employers to draft overly broad noncompetes and rely on the courts to redraft the agreements to be reasonable. As a result, the employee had to sue the employer or risk being sued to challenge the covenant, and the employee’s new employer faced the risk of also being sued.
As a result of these and other reasons, the court decided that Wyoming no longer recognized the blue pencil rule to save unreasonable noncompetes, and agreements with unreasonable noncompetes were invalid as a violation of public policy. Hassler v. Circle C Resources, 2022 WY 28 (Wyo. 2022).
Important implications
Wyoming employers should immediately review the reasonableness of the geographic scope and time of their noncompete agreements. This change in Wyoming law means employers bear the risk of noncompetes being invalid due to unreasonable terms in current agreements. Also, reasonableness is not determined based on an employer’s desire to prevent competition. Rather, reasonableness of geographic scope and time depend on the nature of the employer’s special business interests.
For example, an employee’s awareness of a secret business strategy may justify a noncompete for time it would reasonably require for the employer to implement the strategy. To protect special customer relationships, an employer may be able to argue the noncompete should endure for several months for a replacement to get to know those customers.
On the other hand, a noncompete that extends into geographic territory where the employer does little or no business will be harder to justify as reasonable. Employers need to objectively assess their noncompetes considering their actual business interests they can prove in court, rather than the dire circumstances their competitive imaginations can conjure up.
Always keep in mind that noncompetes are strongly disfavored
The Wyoming Supreme Court has firmly reinforced the long-time rule that noncompetes are strongly disfavored and will always be interpreted against the employer.
Dr. Michel Skaf was an employee and shareholder of Wyoming Cardiopulmonary Services (WCS). When he became a shareholder, he signed a new employment agreement and received a substantial increase in salary. The new agreement included a noncompete provision restricting him from practicing medicine for two years in any location within 100 miles of Casper. After WCS fired Skaf, he immediately set up his own practice in Casper, which led WCS to sue him. Because the employment agreement had an arbitration provision, the case was first decided by a panel of three arbitrators.
The arbitrators used the blue pencil rule, later to be thrown out in the Hassler case discussed above, to revise the 100-mile scope to county boundaries and eliminate certain cities from the restriction, and to change the activity from the practice of medicine to the practice of cardiology. The panel also awarded WCS $221,000 in damages for patients Skaf began to treat in violation of the noncompete.
While the Supreme Court believed the arbitrators’ revisions of the noncompete exceed how the blue pencil rule was intended to apply, the court’s primary concern was the panel’s “manifest error of law” regarding the status of noncompete agreements under Wyoming law. The panel’s decision stated, “Wyoming law strongly supports covenants not to compete and the enforcement of the same permits public policy to be served.” If this sounds contradictory to the opinion the Wyoming Supreme Court has on noncompetes, it’s because it is.
The Supreme Court found that statement to be absolutely contrary to the clear Wyoming law that noncompete covenants are invalid on their face unless necessary for the reasonable protection of the employer’s interests. Because the panel began its analysis of the terms on the wrong premise—that Wyoming law supported enforcement—the panel decision could not survive and the award in favor of WCS was reversed. Skaf v. Wyoming Cardiopulmonary Services, P.C., 2021 WY 105 (Wyo. 2021).
The overarching theme of this case bears repetition: Wyoming law strongly disfavors noncompetes, and always has. Employers bear a heavy burden to prove the requirements to enforce noncompetes. And, after Skaf, trial judges will know that the safe course of action is to deny enforcement and require the employer to prove its case at trial.
Lessons learned
If you have noncompete agreements with employees, you should immediately consult with your counsel to determine whether those agreements remain valid after this series of Wyoming Supreme Court opinions. Keep in mind that the employee’s signature on the agreement is meaningless in determining whether the noncompete terms are reasonable. Enforcement requires evidence of a company’s business interests and a solid rationale of why the noncompete is necessary to protect those interests.
You can improve your chances of success by evaluating these key issues now, revising your noncompete agreements to match your business interests and circumstances, and limiting the scope of the noncompete terms as justified by business reality.
