As the global economy falters, a fortunate few companies have seen tremendous growth as a result of the COVID-19 crisis. Among the companies benefitting from the shelter-in-place orders currently in effect is Peloton Interactive, Inc. ("Peloton"), which manufactures and distributes home exercise equipment capable of streaming live and pre-recorded classes. Since Peloton's IPO in late 2019, its shares have jumped over 50%, largely based on its outstanding second quarter results. As people have been shut-out of their gyms, they are frequently turning to alternatives, including Peloton, to stay active (and sane). In full disclosure, that includes the authors of this article and many of our colleagues.
One quality that has made Peloton so successful is the attachment that its customers form to the instructors. In the most true sense, the instructors are the "face" of Peloton. Users identify themselves with "who they ride," including professional athletes and celebrities. Several instructors have been featured in main stream media pieces, including the Wall Street Journal, New York Times, USA Today, Shape Magazine, and others, and most instructors boast Instagram followings in the hundreds of thousands.
Not surprisingly then, in its public filings, Peloton identified its ability to retain and attract fitness instructors as a potential risk factor affecting its performance and ability to grow its business. Given the importance of the individual instructors to Peloton's success, this begs the question: how is Peloton protecting its business and customer goodwill? While details of Peloton's contracts with fitness instructors are unclear, Peloton did disclose that its "standard employment contract with our fitness instructors has a fixed, multi-year term." Presumably, such contracts also include restrictive covenants prohibiting instructors from joining a competing fitness platform where they might leverage their celebrity and the company's goodwill to entice Peloton's customers to move. Customer goodwill in a situation like this-where customers are initially attracted to the product itself, but then grow attached to instructors after using the platform-is precisely the type of business interest that can be protected through the use of restrictive covenant agreements.
In this blog, we have previously discussed the importance of using restrictive covenant agreements to protect customer goodwill and relationships. While many customer-facing employees do not have quite the celebrity and social media followings of Peloton's instructors, they are just as critical to a company's success. And, similarly, such employees pose a risk of moving business to a competitor in the event that they are recruited away. We do not counsel using a one-size-fits-all approach to using restrictive covenant employment agreements, but where employees are entrusted with developing and retaining customer relationships, agreements including non-competition and/or non-solicitation covenants should be considered.
Originally published May 19, 2020
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