Summary
The Idaho Supreme Court affirmed summary judgment declaring an employment noncompete covenant unenforceable. The court held that the covenant was unreasonable and broader than necessary to protect the employer's legitimate interest in client goodwill because it covered all past, present, and pending clients and broadly prohibited services without sufficient limitations. The court also upheld the denial of a motion to disqualify the employee's counsel and the award of attorney fees under Idaho Code section 12-120(3), including fees on appeal.
Topics
Practice areas
Questions Presented
- Whether the restrictive covenant in Freiburger's employment agreement was reasonable and enforceable under Idaho law.
- Whether the covenant was so overbroad and indefinite that the court could not modify it without rewriting the parties' agreement.
- Whether Freiburger's counsel should have been disqualified under Idaho Rule of Professional Conduct 1.9(c) based on alleged confidential information obtained from J-U-B in a prior representation.
- Whether attorney fees could be awarded under Idaho Code section 12-120(3) in a declaratory judgment action involving an employment agreement.
- Whether Freiburger was entitled to attorney fees and costs incurred on appeal.
Holdings
- A restrictive covenant in an employment agreement is enforceable only if it is ancillary to a lawful contract supported by adequate consideration, consistent with public policy, and reasonable as applied to the employer, employee, and public. The covenant here was unreasonable because it was broader than necessary to protect J-U-B's legitimate interest in client goodwill.
- Although Idaho courts may modify an otherwise unreasonable restrictive covenant, they may not do so when modification would require adding essential limiting terms and effectively rewriting the parties' agreement. The covenant was therefore void and unenforceable in its entirety.
- Disqualification was not warranted under Idaho Rule of Professional Conduct 1.9(c) because the alleged information about J-U-B's general aggressiveness in defending its legal rights was not shown to be confidential or to provide Freiburger an advantage in the litigation.
- Idaho Code section 10-1210 does not provide the exclusive method for awarding costs and attorney fees in a declaratory judgment action. Attorney fees may be awarded under Idaho Code section 12-120(3) when the gravamen of the action is a commercial transaction, including an employment agreement containing a restrictive covenant.
- A party that prevailed in the district court and on appeal, and whose fee award under Idaho Code section 12-120(3) is affirmed, is entitled to attorney fees incurred on appeal.
Key quotations
“In other words, a covenant not to compete is reasonable only if the covenant: (1) is not greater than is necessary to protect the employer in some legitimate business interest; (2) is not unduly harsh and oppressive to the employee; and (3) is not injurious to the public.” (141 Idaho at 418, 111 P.3d at 103)
“However, "a covenant not to compete may not be modified to make it reasonable if the covenant is `so lacking in the essential terms which would protect the employee' such that the trial court is no longer modifying but rewriting the covenant."” (141 Idaho at 420, 111 P.3d at 105)
Factual background
J-U-B hired Stephen Freiburger in 1991 and obtained his agreement to a two-year restrictive covenant barring him from taking, joining with anyone to take, or providing services to J-U-B's past, present, or pending clients or projects. Freiburger developed client relationships and goodwill for J-U-B, including a prominent relationship with the Idaho Department of Transportation, and resigned in April 2001 before joining another engineering firm. When the new firm sought to pursue an Idaho Department of Transportation project using Freiburger's qualifications, J-U-B refused to identify which clients or projects were covered by the covenant. Freiburger then sought a declaration that the covenant was overbroad and unenforceable.
Procedural history
Freiburger filed a declaratory judgment action challenging the enforceability of a two-year restrictive covenant in his employment agreement. The district court denied J-U-B's motion to disqualify Freiburger's counsel, granted Freiburger summary judgment, declined to judicially rewrite the covenant, and awarded Freiburger costs and attorney fees under Idaho Code section 12-120(3). J-U-B timely appealed, and the Idaho Supreme Court affirmed in all respects and awarded Freiburger attorney fees and costs on appeal.