Is our non-compete enforceable in Nebraska, and will a court narrow it if it is too broad?
Enforceable only if it is already reasonable as written, and no: a Nebraska court will not narrow it, blue-pencil it, sever it or reform it, even if your contract expressly says it may. The one exception is a FRANCHISE covenant, where a 2016 statute now requires reformation. The test, as Aon Consulting v. Midlands Financial states it, asks “whether the restriction is (1) reasonable in the sense that it is not injurious to the public, (2) not greater than is reasonably necessary to protect the employer in some legitimate interest, and (3) not unduly harsh and oppressive on the employee.” The no-repair rule comes from CAE Vanguard, Inc. v. Newman: “We find the minority view the most reasonable view and the view which is most in harmony with existing precedent”; “The provision of the agreement which states that a court may reform the covenant is of no effect. Private parties may not confer upon the court powers which it does not possess”; and “Because we find that the covenant is not subject to modification, we must either enforce it as written or not enforce it at all.” Unlimited Opportunity, Inc. v. Waadah says Nebraska knows it is in the minority (“Though this position against the severability of noncompete covenants is the minority one, it is backed by important public policy considerations”), and H & R Block Tax Services, Inc. v. Circle A Enterprises, Inc. adds that “Our jurisprudence thus reflects a consistent refusal to strike or alter the language of an integrated covenant not to compete in order to make it enforceable.” In employment, what makes a covenant overbroad is the customer-contact line: a covenant “may be valid only if it restricts the former employee from working for or soliciting the former employer's clients or accounts with whom the former employee actually did business and has personal contact” (Polly v. Ray D. Hilderman & Co.), and Vlasin v. Len Johnson & Co., Inc. struck a covenant because it “attempts to restrict Vlasin from soliciting or working with anyone, rather than just Johnson's clients with whom Vlasin did business and had personal contact”. A covenant ancillary to a SALE OF A BUSINESS is judged differently: H & R Block holds that “Nebraska courts are generally more willing to uphold promises to refrain from competition made in the context of the sale of goodwill as a business asset than those made in connection with contracts of employment”, and that for such a covenant “a restraint is enforceable if it is reasonable in both time and scope” with the customer-specific rule inapplicable. Since April 8, 2016 a franchise covenant is different again: Neb. Rev. Stat. § 87-404(2) says that if the restrictions “are found by an arbitrator or a court to be unreasonable in restraining competition, the arbitrator or court shall reform the terms of the noncompete agreement to the extent necessary to cause the restrictions contained therein to be reasonable and enforceable.”
The trap
One bad sub-clause takes the whole covenant with it, and your savings clause is expressly void. That is literally what happened in Waadah: an ordinary two-year covenant in the franchise territory died because a separate one-year clause reaching “any other territory in which a Jani-King franchise operates” was attached to it and could not be severed. CAE Vanguard had a clause offering the court “such lesser period of time or geographical area restriction as a court of law might later determine”, and the Supreme Court held it “is of no effect”. Second trap: the customer-contact line is not only a drafting rule, it is an evidentiary burden. Professional Business Services Co. v. Rosno holds that a covenant reaching “any of Employer's clients” survives only if the employer proves personal contact with virtually all of them: “We limit PBS to the allegations made in its petition and require that it show that Rosno actually did business and had personal contact with ‘virtually all’ of PBS' clients”, and PBS lost on that proof. Third, and this is the research trap: the one recognised exception to the customer-contact rule is GONE. Mertz v. Pharmacists Mutual Insurance held that to the extent Dana F. Cole & Co. “can be interpreted as an exception to the rule set forth in Polly v. Ray D. Hilderman”, it “is disapproved and overruled”, and the only Nebraska opinion since that cites Dana F. Cole, Rosno in 2004, still describes it as a live exception and never mentions Mertz. Fourth: geography is the wrong lever. Mertz struck a covenant that WAS tied to the employee's own territory, because it still reached non-customers; Chambers-Dobson, Inc. v. Squier upheld covenants with NO geographic limit at all, because they were tied to defined customer pools: “The covenants' limited applicability to customers and area leaves open to Squier a rather vast market in the insurance business.” Adding a radius is how Nebraska covenants die; naming the customers is how they live. Fifth, a franchise trap in both directions: § 87-404(2) applies “to any noncompete agreement entered into before, on, or after April 8, 2016” and reaches a Nebraska-headquartered franchisor “[n]otwithstanding section 87-403”, so it escapes the Franchise Practices Act's own thresholds, and no Nebraska appellate court has ever cited it. Waadah would come out the other way today on identical facts, and nobody has tested that.
40 authorities
The words that state the rule
In determining whether a covenant not to compete is valid, a court considers whether the restriction is (1) reasonable in the sense that it is not injurious to the public, (2) not greater than is reasonably necessary to protect the employer in some legitimate interest, and (3) not unduly harsh and oppressive on the employee.
The words that state the rule
It only prevented him from business contacts with those customers with whom he had personal business dealings during the last 2 years of his employment with Aon. The agreement was properly focused on the legitimate purpose of protecting Aon's goodwill with its customers. We conclude that the nonsolicitation agreement was reasonable in the sense that it is not injurious to the public, not greater than reasonably necessary to protect Aon's legitimate interest in retaining the goodwill of its customers with whom Pearson dealt personally, and not unduly harsh and oppressive on Pearson.
The words that state the rule
The provision of the agreement which states that a court may reform the covenant is of no effect. Private parties may not confer upon the court powers which it does not possess.
The words that state the rule
Because we find that the covenant is not subject to modification, we must either enforce it as written or not enforce it at all.
The words that state the rule
A minority of the courts which have addressed the question have held that courts may not revise an agreement so as to make it enforceable. These courts have reasoned that reformation is tantamount to the construction of a private agreement and that the construction of private agreements is not within the power of the courts. See, Rollins Protective Svcs. Co. v. Palermo, 249 Ga. 138 , 287 S.E.2d 546 (1982); Rector-Phillips-Morse v. Vroman, 253 Ark. 750 , 489 S.W.2d 1 (1973). We find the minority view the most reasonable view and the view which is most in harmony with existing precedent.
The words that state the rule
Though this position against the severability of noncompete covenants is the minority one, it is backed by important public policy considerations.
The words that state the rule
This court has long held that it is not the function of the courts to reform a covenant not to compete in order to make it enforceable.
The words that state the rule
We decline Jani-King’s invitation to reconsider our rejection of the blue pencil rule.
- case693 N.W.2d 548H & R Block Tax Services, Inc. v. Circle A Enterprises, Inc.Neb.decided 2005read it at the source ↗
The words that state the rule
Our jurisprudence thus reflects a consistent refusal to strike or alter the language of an integrated covenant not to compete in order to make it enforceable.
- case693 N.W.2d 548H & R Block Tax Services, Inc. v. Circle A Enterprises, Inc.Neb.decided 2005read it at the source ↗
The words that state the rule
Nebraska courts are generally more willing to uphold promises to refrain from competition made in the context of the sale of goodwill as a business asset than those made in connection with contracts of employment.
- case693 N.W.2d 548H & R Block Tax Services, Inc. v. Circle A Enterprises, Inc.Neb.decided 2005read it at the source ↗
The words that state the rule
Because we conclude that this franchise agreement is akin to a sale of a business, the “customer specific” rule articulated in those cases is not applicable. Instead, in the case of a covenant not to compete ancillary to the sale of a business, a restraint is enforceable if it is reasonable in both time and scope.
The words that state the rule
Upon a de novo review of the record, we find, as a matter of law, that unreasonable covenants are not enforceable and are not subject to reformation.
The words that state the rule
It is not the function of courts to reform unreasonable covenants not to compete solely for the purpose of making them legally enforceable. The district court erred in reforming the covenant in this case.
The words that state the rule
Without deciding whether any other restriction in the covenant was reasonable or unreasonable, we find that because the covenant attempts to restrict Vlasin from soliciting or working with anyone, rather than just Johnson’s clients with whom Vlasin did business and had personal contact, it is greater than is reasonably necessary to protect Johnson’s legitimate interest in customer goodwill. Thus, the covenant is unreasonable and unenforceable.
The words that state the rule
From these cases, then, a rule regarding the validity of a covenant not to compete which is aimed at preventing a former employee from unfairly appropriating the customer goodwill which properly belongs to the employer can be gleaned. Such a covenant may be valid only if it restricts the former employee from working for or soliciting the former employer’s clients or accounts with whom the former employee actually did business and has personal contact.
The words that state the rule
Because the covenant not to compete in this case attempts to restrict Polly from soliciting or working for Hilderman’s clients with whom Polly did not work and did not even know, it is greater than is reasonably necessary to protect Hilderman’s legitimate interest in customer goodwill, and is thus unreasonable and unenforceable.
The words that state the rule
Not only did the covenant fail to limit its terms to those clients with whom Mertz actually did business or had personal contact, it fails to limit itself in any way to Pharmacists’ existing client base in Nebraska.
- case680 N.W.2d 176Professional Business Services Co. v. RosnoNeb.decided 2004read it at the source ↗
The words that state the rule
We limit PBS to the allegations made in its petition and require that it show that Rosno actually did business and had personal contact with “virtually all” of PBS’ clients.
- case680 N.W.2d 176Professional Business Services Co. v. RosnoNeb.decided 2004read it at the source ↗
The words that state the rule
We conclude that the covenant not to compete in the employment agreement is greater than is reasonably necessary to protect PBS and is unenforceable.
The words that state the rule
We have determined above that the noncompete agreement in this case is unreasonable, and we do not reform it to make it enforceable.
The words that state the rule
a covenant not to compete is available to prevent unfair competition by a former employee but is not available to shield an employer against ordinary competition
The words that state the rule
The covenants’ limited applicability to customers and area leaves open to Squier a rather vast market in the insurance business.
The words that state the rule
The absence of specified geographic applicability of the *764 noncompetition covenants presents no problem under the circumstances inasmuch as Squier can conduct an insurance agency in Lincoln or any other location, provided that he does not draw customers from the pools prohibited by the covenants.
The words that state the rule
the covenant not to compete prohibited Vodra’s soliciting American’s customers contacted in the combined circumstances, conditions, or situations specified in that covenant. Such restriction on Vodra, as a former employee of American, provides minimal restraint on competition and is reasonable.
The words that state the rule
An unreasonable covenant not to compete is of no effect, and its scope cannot be judicially reformed in order to make it enforceable.
The words that state the rule
On the basis of our de novo review, we conclude that the scope and duration of the restraint on competition imposed by the covenant not to compete ancillary to the sale of Beller’s business was greater than reasonably necessary to protect the legitimate business interests of Presto-X. Therefore, the covenant is contrary to public policy and void.
- statuteNeb. Rev. Stat. § 87-404enactment date not established
The words that state the rule
If restrictions in a noncompete agreement are found by an arbitrator or a court to be unreasonable in restraining competition, the arbitrator or court shall reform the terms of the noncompete agreement to the extent necessary to cause the restrictions contained therein to be reasonable and enforceable.
- statuteNeb. Rev. Stat. § 87-404enactment date not established
The words that state the rule
Notwithstanding section 87-403 , this subsection also applies to any noncompete agreement entered into by a franchisor headquartered in the State of Nebraska, unless otherwise agreed to by the franchisor and franchisee. This subsection applies to any noncompete agreement entered into before, on, or after April 8, 2016.
- statuteNeb. Rev. Stat. § 87-402enactment date not established
The words that state the rule
Noncompete agreement means any agreement between a franchisor and a franchisee, a guarantor, or any person with a direct or indirect beneficial interest in the franchise that restricts the business activities in which such persons may engage during or after the term of the franchise. Noncompete agreement includes any stand-alone agreement or any covenant not to compete provision within a franchise agreement or ancillary agreement.
- statuteNeb. Rev. Stat. § 48-4105enactment date not established
The words that state the rule
A health care staffing agency shall not: (a) Include in any contract with a worker or a health care entity a noncompete clause restricting in any manner the employment opportunities of a worker
- statuteNeb. Rev. Stat. § 75-330enactment date not established
The words that state the rule
A transportation network company shall not require a participating driver to sign an agreement not to compete with the company in order to be matched with passengers through the company's online-enabled application or platform.
The words that state the rule
Jani-King’s 1-year restraint prohibited the franchisee from operating a “Competing Business” “in any other territory in which a Jani-King fran- chise operates.” Since Jani-King operates on a multi-state and international basis, on continents as far away as Australia, the restriction from competing in “any . . . territory in which a Jani-King franchise operates” is similar to having no territo- rial restriction at all. We find that this is unreasonable in geo- graphic scope. And because this 1-year restraint is not sever- able from the 2-year restraint also presented by this covenant, the entire noncompete agreement is unenforceable.
The words that state the rule
It also prohibited a franchisee from operating for a period of 1 year a competing business in any other territory in which a Jani-King franchise operates.
The words that state the rule
Newman agrees and covenants that he will not, for a period of five (5) years after the date of this Covenant, and anywhere in the United States, the continent of North America, or anywhere else on earth, or such lesser period of time or geographical area restriction as a court of law might later determine to be the limits of enforceability of this covenant, (a) directly or indirectly solicit electrochemical metalizing business regarding railroad axles and/or mounted wheel sets....
The words that state the rule
To the extent that Dana F. Cole & Co. can be interpreted as an exception to the rule set forth in Polly v. Ray D. Hilderman & Co., supra, it is disapproved and overruled.
- case680 N.W.2d 176Professional Business Services Co. v. RosnoNeb.decided 2004read it at the source ↗
The words that state the rule
In Polly , this court reviewed Dana F. Cole & Co. v. Byerly, 211 Neb. 903 , 320 N.W.2d 916 (1982), and observed that Dana F. Cole & Co., by virtue of its facts, presented an exception to the general rule.
- statuteNeb. Rev. Stat. § 48-4105enactment date not established
The words that state the rule
(2) Any clause of a contract that violates this section is void.
- case680 N.W.2d 176Professional Business Services Co. v. RosnoNeb.decided 2004read it at the source ↗
The words that state the rule
he shall not directly or indirectly solicit, contact or perform services for any of Employer’s clients for his own benefit or as an officer, director, shareholder, partner, advisor, consultant or employee of any third party.
- statuteNeb. Rev. Stat. § 87-403enactment date not established
The words that state the rule
Sections 87-401 to 87-410 apply only to a franchise (1) the performance of which contemplates or requires the franchisee to establish or maintain a place of business within the State of Nebraska, (2) when gross sales of products or services between the franchisor and franchisee covered by such franchise shall have exceeded thirty-five thousand dollars for the twelve months next preceding the institution of suit pursuant to sections 87-401 to 87-410 , and (3) when more than twenty percent of the franchisee's gross sales are intended to be or are derived from such franchise.
The words that state the rule
for a period of three (3) years within the geographical territory serviced by the Representative at the time of termination of this agreement or in any territory serviced by him/her within three (3) *707 years prior to his/her termination.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.