"Breaking Contracts has Consequences" - Third Circuit Backs Employer with Restrictive Covenant Agreements

February 11, 2019  |  By: Dina M. Mastellone, Esq.

What happens when your employee signs multiple restrictive covenant agreements with different terms, and then violates them?

A recent decision from the Third Circuit in Heartland Payment Sys., LLC v. Volrath addresses a grant of preliminary injunction against an employee who signed multiple agreements with restrictive covenants, and violated them immediately upon beginning employment with a direct competitor.

Facts in Volrath. 

Michael Volrath worked at Heartland for ten years soliciting merchants to use Heartland’s credit- and debit-card payment equipment and services.  As part of its business model, Heartland employees could also earn commissions both during their employment and after they left the company.  During his career with Heartland, Volrath signed a manager agreement which included two post-employment conditions.  The manager agreement contained a confidentiality clause, a non-solicitation clause specifically prohibiting Volrath from possessing or sharing Heartland’s confidential information, a five-year ban on soliciting Heatland’s merchants and a two-year ban on poaching Hartland employees.

After signing the manager agreement, Volrath also signed at least twenty-two commission agreements.  Each commission agreement also contained a non-solicitation clause that was narrower than the non-solicitation clause in the manager agreement.  Specifically, the commission agreements only addressed merchants signed by Volrath, whereas the manager agreement had provisions addressing all of Heatland’s merchants, merchants signed by Volrath, and Heartland’s employees.  The commission agreements were silent on confidential information.  Moreover, all of the agreements contained a merger clause stating, in effect, that they superseded any prior agreements regarding the same subject matter.

Immediately after resigning from Heartland to work for a direct competitor with the same job responsibilities, Volrath breached the manager agreement by sending confidential information to the competitor’s employees.  Additionally, Volrath solicited Heartland’s merchants and he allegedly tried to “poach” a Heartland employee.

Third Circuit’s decision. 

Volrath appealed the District Court’s decision to issue a preliminary injunction banning him from soliciting Heartland’s customers and business partners or misusing confidential information he obtained from his time working at the company. While Volrath conceded that the manager agreement’s confidentiality clause was enforceable, he argued that the commission agreement’s more narrow non-solicitation clause governed, and that he did not violate it because the commission agreement did not address “all Heartland’s merchants” or “Heartland’s employees.”

The Third Circuit disagreed, concluding that “[b]ecause there is no overlapping subject-matter of soliciting all Heartland’s merchants and employees, the manager agreement continues to govern those two subjects.”  Additionally, the Court held that Heartland showed that it was likely to suffer irreparable harm.  Specifically, the Court found that Volrath’s repeated violations of the confidentiality and non-solicitation clauses resulted in “a strong presumption that he will breach again,” and that continued breaches could cause “irreparable, incalculable harm to Heartland, including loss of goodwill and damage to its reputation.”

Bottom Line

When an employee signs multiple agreements including restrictive covenants, courts will look to merger clauses contained therein to determine each agreement’s validity.  In Volrath, because the commission agreement’s merger clause superseded prior contracts only with respect to the same subject matter, the Court was able to enforce the broader previously signed manager agreement that also contained provisions regarding confidential information, and covered all of Heartland’s merchants, and Heartland’s employees.

Nonetheless, employers should be mindful that entering restrictive covenant agreements containing merger clauses may nullify prior restrictive covenant agreements.  Had the commission agreement’s merger clause not contained language that it only superseded prior contracts regarding the same subject matter, it is unclear how the Court would have ruled in this case.

Tags: Dina MastelloneJohn C. PetrellaJames W. SukharevLabor LawEmployment Law & LitigationHuman ResourcesThird CircuitRestrictive Covenants