A Case of Fairness
In a recent Louisiana case, the plaintiff, a national corporation that sells, installs and monitors residential security systems, entered into a contract whereby the defendant agreed to sell alarm monitoring accounts to the plaintiff, along with the right to receive monthly payments for monitoring services under the recurring monthly revenue (RMR) accounts. Under the terms of the agreement the plaintiff would buy the accounts if they met certain criterion. The contract made it clear that “one of the fundamental expectations of the plaintiff . . . is that the RMR accounts will be renewed by each customer after expiration of their current terms and . . . their RMR accounts customarily are so renewed.” The contract also included a provision entitled noninterference, non-competition and a confidentiality provision.
Subsequently, the plaintiff filed a complaint alleging that the defendant violated the non-solicitation provision. The defendant either “solicited those customers to cancel the contract between the customers and plaintiff” or “signed the name of the customers to a cancellation notice.”
The defendants filed a motion for summary judgment arguing that the non-solicitation provision was unenforceable under the Louisiana revised statute that generally prohibits non-compete agreements (La. Rev. Stat. § 23:921). The court granted defendant’s summary judgment motion and ordered that the claims against the defendant be dismissed.
On the plaintiff’s appeal, the Sixth Circuit Court concluded that the statute does not apply if the plaintiff and defendant were companies on “equal footing.” The court pointed out that unless the District Court concluded that the corporations were not on an equal footing, it should find that the Louisiana Revised Statute Annotated 23:921 had no application and the contract provision should be enforced.
There were three factors to consider. First, whether the contract benefited both parties; second, whether the non-competition clause between the parties was fair; and third, whether the contract was prepared, reviewed and approved by the objecting party’s attorney. The court indicated that there was evidence that it was reasonable to find that both parties benefited from the contract. A reasonable jury could find that the defendant, by agreeing to the non-solicitation provisions was able to sell its accounts to the plaintiff at a higher price. In determining whether the non-solicitation provision was fair, the court pointed out that there was evidence that the provision bound only the defendant who was precluded from soliciting the plaintiff’s accounts, while plaintiff was free to solicit the defendant’s accounts. The plaintiff admitted that many of the contract’s terms, particularly the non-solicitation provision, were non-negotiable. Further, the provision only precluded the defendant from soliciting a capped number of customers, i.e., the approximate 800 customers that the defendant sold to the plaintiff. So the fact that defendant was smaller than plaintiff did not establish the contract as unfair.
There was evidence that plaintiff and defendant fairly negotiated the price that plaintiff would pay to the defendant for the accounts. A reasonable jury could conclude from the evidence that without the non-solicitation provision it would be almost impossible for plaintiff to earn a profit paying this price because defendant could easily re-solicit the account customer at the end of the current contract term. A reasonable jury therefore could find that, despite plaintiff’s inflexibility on the terms of the contract, the parties had equal bargaining power.
The court concluded that a reasonable juror could conclude that the non-solicitation provision was fair, and the defendant’s motion for summary judgment was denied.
Q: Our company is now using the Internet for many of our subscriber installations to transmit signals. Are we properly protected with our normal installation and monitoring agreement? Will we be covered under our existing errors and omissions policy?
A: Without referring to your specific contract we cannot answer the question. However, many contracts currently contain language that protects the company for any type of transmission that may be utilized. You should consult directly with your attorney to make sure that your contract does in fact contain this language.
With reference to insurance coverage, it is our understanding that many carriers do not include cyber liability coverage under their normal general liability or errors and omissions coverage. I would strongly urge you to contact your insurance agent and make sure that you are covered. If, in fact, your present policy distinguishes cyber liability from the service you are presently providing, then I would suggest you obtain the additional cyber insurance coverage.
To ask Les Gold a question, e-mail firstname.lastname@example.org.