Federated Mut. Ins. Co. v. Bennett - 36 Ark. App. 99, 818 S.W.2d 596 (1991)

Rule:

In order for a covenant not to compete to be enforceable, three requirements must be met: (1) the covenantee must have a valid interest to protect; (2) the geographical restriction must not be overly broad; and (3) a reasonable time limit must be imposed.

Facts:

Appellee Billy Eugene Bennett, Jr. went to work as a marketing representative or agent for appellants Federated Mutual Insurance Company and Federated Life Insurance Company with an assigned territory. Appellee was appellants' only marketing representative assigned to the specific territory and could not sell insurance for any other company. The parties signed an employment contract which included a covenant not to compete. After terminating his employment with appellants, appellee began selling insurance for the Fulmer Insurance Agency. Thereafter, appellants filed suit against appellee, seeking specific performance of the covenant not to compete. In his answer, appellee asserted that the covenant not to compete was unreasonable and against public policy and, therefore, unenforceable. The chancellor granted judgment in favor of appellee. Appellants challenged the judgment.

Issue:

Under the circumstances, was the agreement not to compete enforceable?

Answer:

No.

Conclusion:

The Court noted that in order for a covenant not to compete to be enforceable, three requirements must be met: first, the covenantee must have a valid interest to protect; second, the geographical restriction must not be overly broad; and third a reasonable time limit must be imposed. In the case at bar, the Court determined that the covenant not to compete did not meet the three requirements in order for the covenant to be enforceable. It was found that after appellee began employment with the Fulmer Agency, he provided some insurance policies to several of his former customers but only sold them types of insurance that they could not obtain from appellants; appellee did not sell any policy that replaced one of appellants' policies. Appellants also did not lose any profits as a result of appellee's employment with the Fulmer Agency. According to the Court, the covenant not to compete would not be enforced merely to prohibit ordinary competition. The Court held that appellee was not exercising unfair competition in selling a product that appellants did not sell and found that the covenant not to compete was overly broad and void. Accordingly, the Court affirmed the chancellor’s decision to enter judgment in favor of appellee.