The Mighty Python of Employment Agreements Tightens Its Squeeze

By Nicholas A. Murray

In “Metals Group” the Tenth Circuit upheld the validity of a non-compete agreement, and thus reminded employees everywhere of the power employers can wield over future employment.  Southwest Stainless, LP v. Sappington, D.C. No. 4:07-CV-00334-CVE-FHM (Sept. 21, 2009)

The Plaintiffs-Appellees Metals Group, Inc. attempted to enforce various employment agreements signed by former partial owners, Defendants-Appellants Sappington, Emmer, and Siegenthaler.  Among these agreements was a Non-competition Agreement, which stated that in the event that an employee left the company, “he would not ‘engage in any business within the States of Missouri, Texas, Oklahoma, Tennessee, Louisiana, Alabama, and Florida . . . which competes in any manner with any business conducted by any constituent corporation of the Metals Group for a period of one year.’” 

Some time after, Siegenthaler left Metals Group and “took a hiatus from the metals industry” for more than the year required by the Non-compete.  In 2007, following negotiations with Rolled Alloys, a competitor of Metals Group, Siegenthaler opened a Rolled Alloys office in Tulsa.  Shortly after, Sappington and Emmer left Metals Group to join Rolled Alloys.  After Sappington and Emmer began their tenure at Rolled Alloys, the metals competitor won business from various Tulsa-area customers that had traditionally done business with Metals Group.

In pertinent part, the trial court found in favor of the plaintiffs on the breach of non-competition agreement claim.  The court ordered relief in actual damages for lost profits on two specific orders taken by Rolled Alloys.  In addition to monetary damages, the court ordered injunctive relief “‘permanently restraining [Sappington and Emmer] for a period of one (1) year . . . from directly or indirectly . . . engaging in any business within [Tulsa-area counties], which competes in any manner with any business conducted by plaintiffs . . . .'” 

On appeal, Rolled Alloys asserted that injunctive relief was inappropriate.  Rolled Alloys argued that the trial court “erred in concluding that Metals would suffer irreparable harm” because Metals continued to conduct some business with the customers at issue after Sappington and Emmer left.  The Tenth Circuit disagreed.  The Court cited an Oklahoma Supreme Court case, which held that the irreparable injury requirement is satisfied when either (1) the injury is “incapable of being fully compensated for in damages,” or (2) “the measure of damages is so speculative that it would be difficult if not impossible to correctly arrive at the amount of damages.”  Hines v. Indep. Sch. Dist. No. 50, 380 P.2d 943 (Okla. 1963). 

The Court then elaborated on “failure to compensate.”  In Equifax Servs., Inc., v. Hitz, 905 F.2d 1355 (10th Cir. 1990), the Court held that damages may not fully compensate a plaintiff when the business “is based on personal contacts and a knowledge of the special needs and requirements of customers . . . .”  In applying this standard to the Metals Group case, the Court found that the value of customer goodwill may constitute irreparable harm.  Noting that Sappington and Emmer were “long-standing and respected players in the Tulsa metals market,” the Court found that customer goodwill is a valuable commodity worth protecting.  The Court went further and found that this incalculable value of goodwill is precisely what the Non-competition Agreements at issue were designed to protect.  In finding that the lost goodwill constituted irreparable harm, the Court affirmed the trial court and held that Sappington and Emmer were permanently enjoined for one year from engaging in similar business in the Tulsa area.     

This case presents an interesting issue: the scope of power that an employer can wield over its former employees.  Non-competition agreements vary in strength on a state-by-state basis.  For example, in Colorado, a non-compete is practically unenforceable unless the former employee was considered an executive with enough power to make decisions on behalf of the company.  In Oklahoma, as shown in Metals Group, the protection that a non-compete affords an employer is broad, including the safeguard of customer goodwill.    The practical effects of decisions like Metals Group may seem insignificant during a recession because very few employees are actively searching for new jobs.  However, because most employees are likely keeping their heads down and biding their time through the recession before pursuing greener career pastures, these powerful employment agreements will likely show their teeth as soon as the economy recovers.  Cases like Metals Group force us to question the amount of power granted to employers through agreements like non-competes.  

As the economy returns to its normal state, will employees begin the mobility to which the job market has become accustomed?  Or, with the knowledge that courts will uphold these restrictive covenants, will employers abuse non-competes to restrain employees and regain market dominance? 

Will the future of business look more like Boston’s Route 128, where non-competes are as ubiquitous as Red Sox caps, or will it look more like Silicon Valley, where California courts refuse to enforce these demonstrably constraining agreements? The Tenth Circuit's opinion in Metals Group seems to suggest the former.