California Court Says Customs Broker's Noncompete Agreement Not Enforceable

A California state appeals court on Feb. 4 found a customs brokerage can’t enforce a noncompete agreement against its former employee. Hecny Brokerage’s agreement with its longtime employee Madeline Sopko was too broad too meet California’s strict limits on noncompete clauses, and Sopko’s national permit and work with clients nationwide made it too difficult to narrow the noncompete’s geographical scope to fit California’s strict requirements, the court said.

Sopko had worked at Hecny’s San Francisco office since 1977 and paid $11,000 for an 11 percent ownership stake in the office under a joint venture arrangement offered by Hecny to its local managers to encourage them to generate business and eventually provide them with retirement income. Sopko held a local broker permit for the Port of San Francisco, but she also held a national permit, and only conducted about 50 percent of her business with California-based importers. She would in 2003 rise to be station manager of Hecny’s Bay Area office, overseeing both its transportation and brokerage divisions.

“In 2007, however, Sopko's work environment deteriorated significantly,” the court said. That year, Hecny tasked a new executive with managing and restructuring its U.S. offices. Sopko, and others at Hecny, clashed with the new management and she was demoted from station manager to brokerage manager, and retired from the company soon after in August 2009.

Months later she would go to work for OEC Logistics’ new Bay Area office, joined by a handful of other former Hecny employees. But shortly after, as part of her exit from Hecny, Sopko signed a noncompete agreement that barred her from engaging in any customs brokerage or freight forwarding work anywhere for two years. She said she signed the agreement because she was told it was required to get her buyout payment, and because “she was fairly certain the clause was not enforceable,” the court said. Hecny’s business went on to decline by as much as 75 percent after Sopko left. Some of those clients went to OEC Logistics. Hecny sued in 2010.

Noncompete agreements are generally void under California law. The exceptions are noncompetes made in connection with the sale of a business, or the dissolution of a partnership. Each of those exceptions, however, requires that the noncompete cover “similar business” within “a specified geographic area” where the original business was conducted.

The appeals court agreed with the lower court’s decision that the noncompete signed by Sopko had “fundamental problems.” While Sopko was a partner as a result of her 11 percent ownership stake, the agreement did not have any geographical restrictions, banning her completely from employment in customs brokerage or freight forwarding jobs anywhere. And it also didn’t cover “similar business,” because it applied to both brokerage and forwarding when Sopko, by the time she signed the agreement, was only on the brokerage side.

Hecny said the court should rewrite the noncompete clause to be legal because, under California law, contracts should generally be interpreted in a way that make them lawful. But even if the court wanted to rewrite the noncompete, Sopko’s nationwide client base made restricting the geographic scope of the agreement difficult. And more to the point, “had the parties intended to reach a lawful noncompete clause with an appropriate geographical limit, they could have negotiated the difficult issue of defining where Sopko and Hecny Brokerage carried on business,” the court said. “But they did not do so.” The court declined “to draft what the parties did not negotiate.”