By Kammie Cuneo

The ancient notion of a “covenant in restraint of trade” has given way to the modern non-compete agreement. Over recent decades, as the use of non-compete agreements has proliferated, states including Idaho have developed statutory frameworks to govern the enforceability of these agreements. This article provides a historical summary of the common law and the Idaho statute. The article then explores interpretations based on the limited case law available and offers observations on potential practice pointers.

Ancient and Not-So-Ancient History and Common Law

The earliest statements of the common law in England held that covenants in restraint of trade were void; this was regarded as “old and settled law” even by the time of Henry V.[i] This ancient rule was qualified by a succession of decisions in the English courts over the next few centuries, with a distinction emerging in Broad v. Jollysse and Mitchel v. Reynolds between “general” and “limited” restraints of trade. [ii]

The latter case provided the clearest expression of the common law rule adopted in England and later in this country: “A bond or promise to restrain oneself from trading in a particular place, if made upon a reasonable consideration, is good. [Unless] if it be on no reasonable consideration, or to restrain a man from trading at all” (emphasis by author) [iii].

This quote from Mitchel has been a model for the development of the law in the U.S. and specifically in Idaho—the Idaho Supreme Court calling it “a guide for courts ever since.”[iv] For most of our state’s history, Idaho courts were left to their own devices on this issue and chose to adopt and expand the aforementioned principles of common law, approvingly citing to the rule in Mitchel,[v] and applying a similar standard whereby such agreements were enforceable but disfavored.[vi]

The court provided that covenants not to compete would be “strictly construed against the employer”[vii] and required they be “supported by adequate consideration, and consistent with public policy” and reasonable.[viii] The chief requirement of the reasonableness standard was that the clause be “no more restrictive than necessary to protect the employer’s legitimate business interests.”[ix]

In addition, the covenant must be reasonable as applied to “the employer, the employee, and the public.”[x] More specifically, the covenant must be “not greater than necessary to protect the employer…not unduly harsh and oppressive to the employee; and [] not injurious to the public.”[xi] If covenants were found to be overbroad, the Supreme Court “approved of the modification of otherwise unreasonable covenants”[xii] to render them enforceable. If, however, 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,”[xiii] modification is no longer acceptable.

The New Millennium and the Features of Non-Compete Legislation

Consistent with national trends and perhaps feeling that specific guidance was in order, the Idaho Legislature in 2008 passed our state’s first statute governing restrictive covenants, specifying that a non-compete agreement was enforceable with respect to a “key employee or key independent contractor” if reasonable “as to its duration, geographical area, type of employment or line of business, and does not impose a greater restraint than is reasonably necessary to protect the employer’s legitimate business interests.”[xiv]

Broadly taking cues from the common law while seeking to impose some more definite standards, the Legislature created a number of guidelines for presumptive reasonability. Under the statute, rebuttable presumptions were established that agreements limited to (1) employees or independent contractors who were among the highest paid five percent of a company’s employees or contractors, (2) a post-employment duration of 18 months,[xv] (3) the geographic areas in which “the key employee…provided services or had a significant presence or influence,” and (4) the “type of employment or line of business conducted by the key employee” are reasonable.[xvi]

For the presumption concerning key employees or independent contractors, the statute requires that the employee prove “that it has no ability to adversely affect the employer’s legitimate business interests”[xvii] in order to rebut the presumption. This feature sharply breaks from the old rule in imposing a presumptive restraint on the employee instead of placing the burden of proof on the employer.

The statute also includes certain important definitions. While highly-paid employees and contractors are presumptively “key,” the term also embraces those who, by reason of some investment or exposure by the employer (pecuniary or otherwise), “have gained a high level of inside knowledge, influence, credibility, notoriety, fame, reputation or public persona as a representative or spokesperson of the employer.”[xviii] The term “legitimate business interests” is also defined broadly to include both concrete technologies, plans, processes, contacts, and trade secrets and intangible “goodwill.”[xix]

Another notable aspect is that the statute provides for, arguably mandates, that the court “limit or modify” the agreement as necessary to reflect the intent of the parties and “render it reasonable” where the agreement has been found to be unreasonable.[xx] While the common law rule also provided for the modification of covenants, as noted above, the statutory language is closer to a mandate: “shall limit or modify.”[xxi]

The Idaho non-compete statute remains in force unchanged today, although it was briefly amended in 2016 to add a paragraph establishing a “rebuttable presumption of irreparable harm” upon breach of a non-compete agreement. The statute imposed on defendants the punishing standard of “show[ing] that the key employee… has no ability to adversely affect the employer’s legitimate business interests.”[xxii] Following widespread criticism,[xxiii] the amendment was repealed in 2018. The current statute is identical in all substantive respects to the 2008 version.

Statutory Interpretation and Practice Pointers

Unfortunately for practitioners, judicial guidance regarding the construction of either version of this statute has been relatively limited. A few notable cases are nonetheless worth examining. In making this examination, the author optimistically concludes, despite having only two data points, that the courts follow reasonableness criteria as set forth by the statute but remain strongly informed by the traditional bias against restraints of trade.

Perhaps the most directly relevant case is Brand Makers Promotional Products, LLC v Archibald, an unreported decision of the Idaho Court of Appeals under the current statute.[xxiv] Brand Makers asserted, among others, claims of fraud, conversion, unjust enrichment, and breach of contract against defendant Nathan Archibald, a former employee and co-founder of the company. The claim of breach was predicated on an allegation that Archibald had breached a non-solicitation and confidentiality agreement by directly competing with Brand Makers and by soliciting away Brand Makers’ customers. The agreement between the two mandated that Archibald avoid involvement with any competitor of the company or be engaged in any business activity which would compete with the business of Brand Makers. Archibald further explicitly agreed not to solicit away any employees, contractors, or customers.[xxv]

The court found that the agreement was unreasonable, and thus unenforceable, specifically stating that it imposed a greater restraint on Archibald than was reasonably necessary to protect Brand Makers’ interests. The court noted the following shortcomings in the agreement as the basis for its conclusion: the agreement was “silent as to the geographic limitations, type of employment, or line of business” that Archibald was prohibited from conducting.[xxvi]

Most interestingly, in contrast to the apparent mandate of the statute to modify or limit any unreasonable provisions of such agreements, the Archibald court declined to modify the agreement, and in the process seemed to narrow the scope of the statute’s blue-pencilling provisions. The court reasoned that the statute “does not require the court to insert terms into a non-compete agreement in order to render it reasonable when such terms are absent on the face of the provision”[xxvii]—a justification which highly resembles the old rule articulated in Pinnacle Performance, Inc. v. Hessing.[xxviii]

Although the decision is not precedential, it seems to indicate a tendency on the part of Idaho courts to discard restrictive covenants which are perceived as grossly insufficient notwithstanding the “limit or modify” requirement of I.C. § 44-2703. This may be viewed as a continuation of the older common law trend that disfavored non-compete agreements.

To better understand the scope and nuances of the judicial decision-making, it is instructive to compare Archibald with another case—Timberline Drilling v. American Drilling.[xxix] Timberline was decided based on the principles of common law.[xxx] Stephen Elloway, the U.S. operations manager of Timberline Drilling, signed a non-compete agreement in 2007 that prohibited him from soliciting or selling products or drilling services (1) to any of Timberline’s customers or “potential customers”, (2) for a period of five years, (3) within 100 miles of any location in which Timberline operated a drill rig at the time of termination.[xxxi]

Elloway resigned in 2008 and formed the American Drilling Corporation, which signed contracts with three mines, all customers of Timberline’s at the time of Elloway’s resignation. All of American Drilling’s employees were former employees of Timberline. A suit ensued. Both sides moved for partial summary judgment on the non-compete agreement in the District of Idaho.

The Court found that Timberline had a “protectable business interest in its customer relationships which Elloway helped to develop while working for Timberline” and that the geographic scope of the agreement was reasonable. It found the duration and inclusion of “potential customers” to be unreasonable.[xxxii] To rectify the shortcomings of this agreement, the court judicially modified the agreement, striking the words “potential customers” and shortening its duration to 18 months. The reduction of the duration to 18 months was influenced by a provision of the 2008 statute, I.C. § 44–2704(2), which the court called “instructive as to what was reasonable”[xxxiii] (although the statute was not technically applied to this agreement).

Collectively analyzing the decision in Archibald (declining to modify the agreement despite the statutory provision appearing to mandate such modification) with the decision to judicially modify the agreement in Timberline (before the mandate had become law) may reflect a tendency of courts to make fact-specific determinations. These determinations appear to be on the totality of a case when deciding whether to modify unreasonable restrictive covenants.

In Timberline, where the facts were arrayed against the defendant and the agreement was reasonable in many terms, the court chose to modify even without statutory pressure; in Archibald, where the agreement appeared manifestly deficient, the court chose not to modify even with this pressure. Although, the skeptic could also conclude that no patterns have emerged in Idaho as of yet and the difference in the decisions is explained by the choice of venue.

A final distinction on this topic is worth noting. Dating back to the ur-case Mitchel, courts have consistently differentiated restrictive covenants “ancillary to the sale of a business”[xxxiv] from those signed in the context of an employer-employee relationship.[xxxv] Although a rule establishing this difference is neither explicit in the Idaho statute nor in recent case law based on the statute, the rule was repeatedly reaffirmed under common law.

The Supreme Court in Bybee v. Isaac noted the rule thus:[xxxvi] “‘restrictive covenants in contracts limiting an employee’s natural right to pursue an occupation and thus support himself and his family will be strictly scrutinized’, but courts are less strict in construing the reasonableness of such covenants ancillary to the sale of a business.”[xxxvii] Given the Archibald courts’ reliance on the common law framework, it is not unreasonable to expect that the courts may do same regarding this distinction between the types of restrictive covenants.

Considering the broader picture of these historical developments, the mindful practitioner may note that restraint in drafting may be the key to an enforceable restraint of trade agreement in the employment context. While statutory provisions in Idaho provide for such agreements, the courts may still approach such covenants with caution. Accordingly, an enforceable covenant is likely a carefully drafted one which limits restraint to only that necessary for the protection of the legitimate business interests and which limits restrictions consistent with the presumptive reasonableness criteria stated in the statute.

Acknowledgment: I would like to thank Arman Cuneo, my former intern, for his contributions to this article.

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[i] Alger v. Thatcher, 36 Mass. 51, 52 (Mass. 1837).

[ii] Broad v. Jollysse, Cro. Jac. 596, 79 Eng. Rep. King’s Bench Div. VIII 509 (1621); Mitchel v. Reynolds, 24 Eng. Rep. 347, 348; 1 P. Wms. 181, 182 (1711) (noting that general restraints were those that prevented a man from practicing his trade throughout England).

[iii] Shannon Aaron, Using the History of Noncompetition Agreements to Guide the Future of the Inevitable Disclosure Doctrine, 17 Lewis & Clark L. Rev. 1191, 1222 (2013) (quoting from Mitchel 24 Eng. at 347, 1 P. Wms. at 181).

[iv] Shakey’s Inc. v. Martin, 91 Idaho 758, 762, 430 P.2d 504, 508 (1967).

[v] See id.

[vi] Freiburger v. JUB Engineers, Inc., 141 Idaho 415, 419, 111 P.3d 100, 104 (2005).        

[vii] Id.

[viii] Id.

[ix] Id. at 105.

[x] Insurance Ctr., Inc. v. Taylor, 94 Idaho 896, 899, 499 P.2d 1252, 1255 (1972).

[xi] Freiburger, 141 Idaho at 419, 111 P.3d at 105.

[xii] Id. at 422, 107-108; see also Insurance Ctr., Inc. v. Taylor, 94 Idaho 896, 899, 499 P.2d 1252, 1255 (1972).

[xiii] Pinnacle Performance, Inc. v. Hessing, 135 Idaho 364, 369, 17 P.3d 308, 313 (Ct. App. 2001).

[xiv] I.C. § 44-2701 (2008) (which is the same as the 2018 version).

[xv] This was also established as a maximum duration in § 44-2704(1).

[xvi] I.C. § 44-2704 (2008) (which is substantively the same as the 2018 version).

[xvii] I.C. § 44-2704(5).

[xviii] I.C. § 44-2702(1) (2008) (which is substantively the same as the 2018 version.

[xix] I.C. § 44-2702(2).

[xx] I.C. § 44-2703 (2008) (which is the same as the 2018 version).

[xxi] Id.

[xxii] H.B. 487, 63^rd Leg., 2^nd Sess. (Idaho 2016) (Business and Commerce—Breach of Contract—Contractors).

[xxiii] Betsy Z. Russell, Idaho Businesses Line Up Against Non-Compete Law; ‘Lie of The Year’; and Veyo’s Replacement; My Full Sun. Column . . ., THE SPOKESMAN-REVIEW, Dec. 17, 2017, http://www.spokesman.com/blogs/boise/2017/dec/17/idaho-businesses-line-against-non-compete-law-lie-year-and-veyos-replacement-my-full-sun-column/; see also Conor Dougherty, Noncompete Pacts, Under Siege, Find Haven in Idaho, N.Y. TIMES, Jul. 14, 2017, https://www.nytimes.com/2017/07/14/business/economy/boise-idaho-noncompete-law.html.

[xxiv] Brand Makers Promotional Products, LLC v Archibald, No. 44926, 2018 WL 5076135, at * 1 (Idaho App. Oct. 18, 2018).

[xxv] Id., at *1-*2.

[xxvi] Id., at *10.

[xxvii] Id., at *11.

[xxviii] See n. 15 supra.

[xxix] No. CV 09-18-N-EJL-MHW, 2010 WL 11531293, at *5 (D. Idaho Mar. 17, 2010).

[xxx] Id., at n. 2.

[xxxi] Id., at *3.

[xxxii] Id., at *4.

[xxxiii] Id., at *5.

[xxxiv] Shakey’s, 430 P.2d at 508.

[xxxv] Harlan M. Blake, Employee Agreements Not to Compete, 73 Harv. L. Rev. 625, 629 (1960).

[xxxvi] Bybee v. Isaac, 145 Idaho 251, 178 P.3d 616 (Idaho 2008).

[xxxvii] Id. at 256, 178 P.3d at 621 (quoting Stipp v. Wallace Plating, Inc., 96 Idaho 5, 6, 523 P.2d 822, 823 (1974)).