Federal Court Applies State Law in Finding Covenant Not to Compete Unenforceable – Fields v. QSP, Inc.

After a woman filed suit against a fundraising company for alleged payroll violations, the company brought counterclaims against her, including a claim for alleged breach of a covenant not to compete. Fields v. QSP, Inc. (Fields 2), No. CV 12-1238 CAS (PJWx), opinion (C.D. Cal., Jun. 4, 2012). The plaintiff filed the lawsuit as a putative class action on behalf of employees subjected to employment practices that allegedly violated the federal Fair Labor Standards Act (FLSA) and various California statutes. After hearing several competing motions for summary judgment and judgment on the pleadings, the court dismissed some of the plaintiff’s employment law claims and retained others. It also ruled that the covenant not to compete in the plaintiff’s employment contract was unenforceable under California law.

The defendant, QSP, Inc., serves a nationwide clientele of youth organizations and schools. It employed the plaintiff from 1999 to 2010, primarily as a “Sales and Service Specialist.” Her job involved researching and contacting potential clients, assisting “field sales managers” (FSMs), and maintaining a database (the “QSP Database”) of current and prospective school customers. A covenant not to compete in her employment contract stated that she may not contact fundraising organizations that she “solicited or serviced during [her] employment by QSP” for a period of twelve months. Fields 2 at 12. QSP alleged that the plaintiff did not delete the QSP Database from her computer when her employment ended, and used the database to provide services to QSP’s competitors.

The lawsuit, first filed in August 2010 under an earlier cause number, alleged that QSP maintained illegal policies regarding employees’ vacation time and commissions. It also asserted that the covenant not to compete was illegal under state law. A federal district judge granted the defendant’s motion for summary judgment on the plaintiff’s FLSA claim in December 2011. Because that eliminated the only federal law claim, the court dismissed the lawsuit without prejudice. Fields v. QSP, Inc. (Fields 1), No. CV 10-5772 CAS (PJWx), judgment (C.D. Cal., Jan. 4, 2012). The plaintiff filed a new suit in state court, and QSP removed it to the same federal court based on diversity jurisdiction. The court then ruled on additional motions for partial summary judgment, including the plaintiff’s motion regarding the enforceability of the non-compete agreement.

States that allow non-compete agreements generally require them to have a reasonable duration and geographic scope, such as a five-mile radius from the employer for a six- or twelve-month period. California does not allow non-compete agreements under most circumstances, including those that prevent someone from pursuing their profession or trade. Fields 2 at 14-15; citing Cal. Bus. & Prof. Code § 16600; Edwards v. Arthur Andersen LLP, 44 Cal.4th 937, 945-46 (2008). The court drew a distinction between the non-compete clauses of the agreement and the confidentiality provisions. It rejected the plaintiff’s claim that the contract was “permeated with illegality,” id. at 15, and only granted summary judgment as to the non-compete provisions.

At Lubin Austermuehle, our business trial attorneys represent business owners and professionals in non-compete and other claims throughout the Chicagoland area including Cook, DuPage, Lake, Kane, McHenry and Will Counties and in the Mid-West region including Indiana, Wisconsin and Iowa. Call us at 630-333-0333 for a free consultation or contact us online by filling out our online contact form at the side of this blog or here.

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