A recurring issue in insurance agency litigation is disputes over whether an insurance producer who leaves the agency can write business for their former clients that seek them out if they have signed a restrictive covenant against accepting such business.
On May 9, 2019, the Business Litigation Session of the Suffolk Superior Court issued an opinion in ruling on a preliminary injunction against a former producer that made clear how far an agency can expect a Massachusetts to enforce a restrictive covenant in an employment contract.
The case, David C. Bruett v. John J. Walsh Insurance Agency, Inc. and John J. Walsh, involved a declaratory judgment suit filed by Mr. Bruett seeking a declaration as to his right to write business in his new agency any customers he dealt with at the Walsh Agency whom he did not solicit but who asked him to write their insurance.
In this declaratory judgment against the John J. Walsh Insurance Agency, Inc. (“Walsh Agency” or “agency”) and its owner John J. Walsh, Jr., (Mr. Walsh), David C. Bruett (“Mr. Bruett”) sought a declaration that certain restrictive covenants contained in his employment agreement were not enforceable against him.
Agency gives an untried producer a chance to succeed
The Walsh Agency began operations in Salem in 1989 when it purchased the Auger Insurance Agency in Salem from the Travelers Insurance Company. The agency writes a large number of commercial and personal lines accounts.
The plaintiff in the lawsuit, Mr. Bruett, had known the owner of the Walsh Agency, John J. Walsh since he was a teenager. In 2004, when he was 28 years old, Mr. Walsh offered him employment as an insurance agent with the Walsh Agency. Mr. Bruett had no prior insurance sales experience, but Mr. Walsh expected him to learn.
When Mr. Bruett stared at the agency, he signed an agreement entitled “Producer Agreement” that contained the following restrictive covenant:
Bruett covenants and agrees that, during the term of this Agreement with the Agency, he will not, directly or indirectly, compete with the Agency in any manner [for three years after the termination of his employment], except to the extent Bruett shall purchase from the Agency the Agency’s ownership interest in the Bruett Production, he will not, directly or indirectly, on his own behalf or on behalf of anyone else, solicit, attempt to obtain, accept, write, service or transact insurance business of any nature for any customer or account on the books of the Agency at the time his employment by the Agency shall terminate or within 12 months prior to the date of such termination; . . .
Mr. Bruett successfully worked for the Walsh Agency during the next fourteen years and developed a book of insurance accounts he placed with the agency under his producer agreement.
In 2018 Mr. Bruett asked for an opportunity to become a “partner” in the agency. When Mr. Walsh declined to allow him to become a partner in the Agency, Mr. Bruett asked to purchase his book of business from the Agency, as mentioned in the producer agreement, to start his own agency. Mr. Walsh rejected this proposal, also.
On October 11, 2018, Mr. Bruett had formed a company, David C. Bruett Insurance Services, LLC, in Delaware. Mr. Bruett registered his Delaware company in Massachusetts on November 16, 2018.
Mr. Bruett resigned from the Walsh Agency in December 2018 and had his attorney notify the Walsh Agency that he was starting his own agency. The attorney’s notice also contained a formal offer from Mr. Bruett to buy his book of accounts from the Walsh Agency. Mr. Walsh rejected Mr. Bruett’s proposal.
Long-term employment relationship ends in litigation
Mr. Bruett located his new agency about one mile from the Walsh Agency’s main office in Salem.
In February 2019 Mr. Bruett notified his former agency that some of his clients at the Walsh Agency had contacted him and had requested that he continue to service them at his new agency. He advised the Walsh Agency that he had not solicited these insureds and had no intentions of sending any notices or solicitations to any insured that he previously had placed as a producer for the Agency.
However, Mr. Bruett further advised the Walsh Agency that he planned to place insurance for the former clients at the Agency that had sought him out and that he intended to do the same for any other previous clients who sought him out at his new agency in the future. The Walsh Agency responded by advising Mr. Bruett that he was in breach of the provisions of producer agreement by accepting insurance business from clients of the Walsh Agency.
A month later on March 22, 2019, Mr. Bruett filed a lawsuit against the Walsh Agency and Mr. Walsh seeking a declaratory judgment that the restrictive covenants contained in his 2004 producer agreement did not prohibit his writing business for former clients who sought him out on their own. Based on the issues involved, Mr. Bruett’s lawsuit was accepted into the Business Litigation Session in Suffolk Superior Court sitting in Boston.
In his first amended complaint, Mr. Bruett sought a declaratory judgment and unpaid wages for commissions allegedly earned.
The Walsh Agency responded by filing a counterclaim seeking the enforcement of the restrictive covenants in the producer agreement against Mr. Bruett, personally and his new agency enforcing the restrictions in his producer agreement and seeking damages for breach of contract.
Court grants some relief to both parties
After filing its counterclaim on April 18, 208, the Walsh Agency moved for a preliminary injunction based on the producer agreement, its verified pleadings and affidavits. Judge Kaplan heard the Agency’s preliminary injunction application and Mr. Bruett’s opposition on May 7, 2018, and issued his decision on May 9, 2019.
The judge’s decision allowed a modified preliminary injunction allowing in part the Walsh request and denying in part the request.
The preliminary injunction against Mr. Bruett enjoined him from contacting a customer that was previously part of his book of business or any other customer of the Walsh Agency at the time he terminated his employment:
- “to the extent that Mr. Bruett had contact with such customer or was familiar with that customer as a result of his employment at the Walsh Agency.”
The initial term of the preliminary injunction was the term of three years in the producer agreement, however, noted the case should resolve long before that time and that “If the case remains unresolved, Bruett may move for relief from the three-year period…”
The judge’s order provided two exceptions that materially deviated from the terms of the Agency’s producer agreement with Mr. Bruett. These exceptions from the preliminary injunction were:
- Bruett “is not enjoined from writing insurance or servicing any such customer who initiates contact with Bruett without having first been contacted by Bruett” and, also that;
- Bruett “cannot be enjoined from soliciting business from any Walsh Agency customer, as the Walsh Agency is a large and established business and Bruett may solicit business from a person or company that is a Walsh Agency client without knowing that relationship.
An agency can protect its own goodwill but cannot appropriate a producer’s goodwill
The terms of the producer agreement stated that Mr. Bruett would no “accept, write, service or transact insurance business of any nature for any customer or account on the books of the Agency at the time his employment by the Agency shall terminate..” If applied as written, this provision would have barred Mr. Bruett from writing insurance for his prior clients at the Agency who sought him out or writing insurance for any active clients of the Agency that were not his clients.[pullquote]A reasonable noncompetition clause is to protect the employer’s goodwill and not to appropriate the goodwill of the employee.”[/pullquote]
The court noted that the type of claim that the Walsh Agency was making to enforce restrictive covenants against a departing insurance agent who developed business while employed by an insurance agency is not a new question in Massachusetts.
The court noted such an employee’s covenants not to compete generally is enforceable “only to the extent that is necessary to protect the legitimate business interests of its employer.” These legitimate business interests might include trade secrets; other confidential information, or the goodwill the employer has acquired through dealings its customers.
In this case, the court ruled that there were no trade secrets at issue and the only confidential information that was important was the agency’s expiration list that identifies the names, addresses, telephone numbers, current insurance policies and their expiration dates of insureds.
The remaining protected interest was the agency’s goodwill based on “the prior history of reliability, integrity, knowledgeability, insurance experience, and prompt service that would cause present insurance clients to renew their existing insurance policies with the agency.”
The court noted, however, that the goodwill the agency legitimately may preserve is its own goodwill and not the goodwill earned by the employee that fairly belongs to the employee. Thus, the law in Massachusetts is that “the objective of a reasonable noncompetition clause is to protect the employer’s goodwill and not to appropriate the goodwill of the employee.”
The court went on to find that the general rule is that restrictive covenants barring an insurance agent from dealing with his former clients after he leaves the agency is reasonable and enforceable but only to the extent that it strikes a fair balance between protecting the agency’s confidential information and the goodwill that is earned as a company versus taking the goodwill belonging to the agent individually.
The court endorsed the rule from prior cases that “the fair balance would not bar the agent from accepting insurance business from his former clients if without his solicitation of their business they wish him to continue to service their insurance need. If such clients are ones who on their own have decided that it’s the agent’s goodwill they enjoyed and not that of the agency… they should be free to act upon that decision.”
Judge Kaplan endorsed this reasoning, finding that it applied to Mr. Bruett’s claims and the agencies claims because these have remarkably similar facts and similar noncompetition clauses to those previously at issue.
He ended by noting that when a former client of Mr. Bruett calls the Walsh Agency and asks for Mr. Bruett, the client is only told that he is no longer with the Walsh Agency, and not that he is an agent now working at his own agency.
Under these circumstances, if a client that had previously placed his insurance through the Agency follows Mr. Bruett to his new agency without solicitation because of the personal relationship with Mr. Bruett was strong enough to cause that client to go through the trouble of finding Bruett at his agency, the court found the goodwill is likely more the result of Mr. Bruett’s individual service to that client rather than any benefits that may have been derived from the services of the Walsh Agency.
Based upon that scenario, the court found that the Walsh Agency was unlikely to succeed on the merits of its claim to enforce that part of the restrictive covenant that prohibited Bruett from writing insurance business for a former client and denied that part of the Agency’s request for a preliminary injunction.