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Trading Secrets

A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

There Are Many Ways to Milk a Cow and Not All Are Protected Trade Secrets

Posted in Non-Compete Enforceability, Practice & Procedure, Trade Secrets

A consultant of a company entered into a consulting agreement with a competitor. The scope of his consultancy of the first company involved dairy-permeate processing systems and the second involved lactose-processing systems. The Court of Appeals of Minnesota found that these businesses were sufficiently distinct such that disclosure of information regarding one business would not violate the non-compete agreement prohibiting the disclosure of information regarding the other.  The Court also drew a distinction between confidential information and trade secrets. See RELCO, LLC v. A. Kent Keller, No. A13–1633, 2014 WL 2921895 (Minn. Ct. App. June 30, 2014). 

Background

Keller and RELCO entered into a consulting agreement in 2000 whereby Keller, an expert in designing and manufacturing systems and equipment for factories, would assist RELCO in establishing itself in the markets of both lactose-processing systems and dairy permeate-processing systems. The consulting agreement was accompanied by a non-compete and a non-disclosure agreement, prohibiting the disclosure of confidential information. Even though RELCO’s business involved both dairy-permeate and lactose-processing systems, both the non-compete and non-disclosure agreements defined RELCO’s business as limited to the business of dairy-permeate systems. The consulting agreement also came with an asset purchase agreement under which Keller would sell RELCO Whey Systems. The parties agreed that the dairy-permeate and lactose-processing systems were “two separate and distinct systems for processing milk by-products.”

In late 2009, two employees left RELCO and went to work for Custom Fabricating and Repair, Inc. (“CFR”), which shortly thereafter created a wholly-owned subsidiary Cheese Systems, Inc. (“CSI”), a direct competitor to RELCO. In December 2010, Keller entered into a consulting agreement with CSI specifically on lactose-processing systems.

The Action

RELCO commenced suit, claiming, inter alia, misappropriation of trade secrets and confidential information and breach of contract.

In its misappropriation claim, RELCO first argued that Keller improperly shared information related to mass-balance sheets. The Court rejected the “conclusory” statements of RELCO and its expert and granted summary judgment in Keller’s favor because RELCO submitted no evidence that the mass-balance sheets constituted protected trade secret information. In fact, RELCO had initially purchased the mass-data sheets from Keller. RELCO then argued that Keller misappropriated trade secrets by disclosing Whey System’s files. However, the Court found no evidence that Keller had disclosed the files that he retained.

In its breach of contract claim, RELCO argued that the non-compete agreement at issue was ambiguous such that the Court should look to the parties’ intent. The Court rejected that argument and enforced the contract on its terms. Unfortunately for RELCO, the non-compete was limited to the business of dairy-permeate systems whereas Keller’s consultancy with CSI related to lactose-processing systems. The Court declined to adopt a broader interpretation of “competitive” or “business” that would include lactose-processing systems.

RELCO also prohibited the disclosure of confidential information in its non-disclosure agreement with Keller.  Although the Court recognized the principle that trade secrets and confidential information are not synonymous, it did not find any wrongful use of confidential information here. In RELCO’s agreement with Keller, “confidential information” was also limited to that information which was related to RELCO’s “business” of dairy-permeate systems. Thus, because Keller was not retained by CSI to work on dairy-permeate systems, he had not improperly disclosed confidential information by disclosing information about lactose-processing systems.

The Court, thus, affirmed the trial court’s grant of summary judgment in favor of Keller on both RELCO’s misappropriation of trade secrets and confidential information claim and its breach of contract claim.

Takeaways

Employers seeking to protect their competitive advantage should take care to craft broad non-compete agreements that are sufficiently tailored to their business. The express provisions in a non-disclosure and non-compete agreement matter. If the definition of information or business is limited, a court will not necessarily expand its meaning to include all types of information and competitive behavior, not included within the agreement.

Eighth Circuit Affirms $31.1 Million Dollar Jury Verdict in Favor of Hallmark Cards over Private Equity Firm

Posted in Practice & Procedure, Trade Secrets

In Hallmark Cards Inc. v. Monitor Clipper Partners LLC et al., 2014 WL 3409953 (8th Cir. July 15, 2014), the U.S. Court of Appeals for the Eighth Circuit affirmed a $31.3 million dollar jury verdict, which included $10 million in punitive damages, in favor of Hallmark Cards, Inc. (“Hallmark”) against a private equity firm known as Monitor Clipper Partners LLC, which was found to have misappropriated confidential information from Hallmark, including data from Power Point presentations. Hallmark’s Power Point presentations were also found to constitute trade secrets under the Missouri Uniform Trade Secrets Act (Mo. Rev. Stat. 417.450 et seq.).

Summary of the Case

Hallmark hired a Boston-based consulting company known as Monitor Company Group, L.P. (“Monitor”) to compile research on the greeting cards market. Monitor then created several PowerPoint presentations to summarize its findings, and both Hallmark and Monitor signed confidentiality agreements to make the market research material confidential. Monitor then transmitted this confidential market research it had performed for Hallmark to another private equity firm known as Monitor Clipper Partners, LLC (“Clipper”). Clipper was a private equity firm founded by two of Monitor’s original partners and was also located in the same office building. Furthermore, Clipper’s primary investment strategy was to use Monitor’s expertise in consulting various clients to understand specific fields or markets. Clipper then all of a sudden became interested in entering the greeting cards market, and used the confidential market research information prepared by Monitor to buy one of Hallmark’s competitors known as Recycled Paper Greetings, Inc (RPG). Clipper also used data from at least five PowerPoint presentations prepared by Monitor to inform and finance its bid for RPG, which it won. After Clipper bought RPG, Hallmark began to suspect that Monitor had disclosed the confidential research on the greeting cards market to Clipper. After an arbitration which led to a settlement between Hallmark and Monitor of $16.6 million, Hallmark then filed suit against both Monitor (for breach of contract) and Clipper (for the theft of trade secrets in violation of the Missouri Uniform Trade Secrets Act) in the U.S. District Court for the Western District of Missouri. The jury in the trial court case awarded Hallmark both $21.3 million in compensatory damages and $10 million in punitive damages against Clipper. After the trial, Clipper moved for judgment as a matter of law and to amend the verdict. The district court denied both motions and Clipper appealed to the Eighth Circuit.

The Court’s Rationale

The decision is essentially divided into the alleged trade secrets claim and the double recovery/punitive damages claim.

Alleged Trade Secrets

For the trade secrets claim, Clipper argued that Hallmark’s PowerPoint presentations were not trade secrets under the Missouri Uniform Trade Secrets Act because (1) Hallmark had publicly disclosed one of the conclusions contained in the PowerPoint presentations, thereby destroying any claim that power point presentations were trade secrets, and (2) four years had elapsed between the time that the PowerPoint presentations were created and the time of alleged trade secret misappropriation: thus, such information was already stale and of no economic value when Clipper allegedly misappropriated it. The court concluded that the jury had sufficient evidence to find that Hallmark’s PowerPoint presentations were trade secrets under the Missouri Uniform Trade Secrets Act. In response to (1), the court held that although Hallmark may have revealed one of the conclusions in the presentations, it did not reveal the underlying data supporting that conclusion or any methodology used to reach such a conclusion. In response to (2), the court held that information on the greeting card market was very limited even at the time of Clipper’s alleged misappropriation (2005) and that this scarcity of data made even a four year old PowerPoint presentation valuable.

Double Recovery

Clipper also argued that the jury verdict in the district court case amounted to a double recovery for Hallmark because Hallmark had already settled a similar claim against Monitor for $16.6 million and after going to trial, was also awarded another $31.3 million in damages against Clipper. The court rejected this argument and held that the arbitration award and the trial award were two separate awards for two separate, independent injuries. Therefore, no reduction of the jury award was necessary, and punitive damages against Clipper were permissible under Missouri law as long as the defendant acted with reckless disregard for Hallmark’s rights and the Due Process clause. Accordingly, the court affirmed the district court’s denial of Clipper’s motion for judgment as a matter of law and, alternatively, to amend the judgment. The court also affirmed the $31.3 million jury trial verdict.

Takeaways

As can be seen by this case, there can be large awards around the order of $31.3 million made in particularly egregious trade secret misappropriation cases, even for the theft of PowerPoint presentations.  This serves as a reminder to potential trade secret thieves who may believe that such trade secret misappropriation may be all part of an aggressive but fair business strategy. Especially considering a market as competitive as the greeting card business, such damages may be viewed as appropriate in compensating parties harmed by trade secret misappropriation.

Preliminary Injunction Entered After Texas Federal Court Concludes That Ex-Employee “Inevitably” Will Disclose His Former Employer’s Trade Secrets

Posted in Data Theft, Practice & Procedure, Trade Secrets

An employee entered into non-compete and confidentiality agreements with his employer.  Following his resignation from that company, he went to work for a competitor.  His job functions and territory with both employers were similar.  In a suit for violation of the non-compete and confidentiality agreements, a Texas federal court held recently that — absent an injunction — disclosure to his new employer of his former employer’s confidential information was inevitable.  The court concluded that all of the prerequisites were met for a preliminary injunction.  Brink’s Inc. v. Patrick, Case No. 3:14-cv-775-B (N.D. Tex., 6/26/14).

Summary of the Case

Greco was employed by Brink’s, a provider of secure money transport services.  Shortly before resigning from Brink’s to go to work a competitor, he allegedly transferred confidential files from his Brink’s office computer to his personal thumb drive and then deleted the files from the computer.  Brink’s sued him in a Texas state court, and he removed to the federal court.  Brink’s claimed that disclosure of its trade secrets was inevitable unless Greco was enjoined from competing with Brink’s for the entire two-year term of the non-compete.  The court granted the motion in part, limiting the scope of the covenant and enjoining Greco only while the litigation is pending.

Inevitable Disclosure

Injunctions based on the inevitable disclosure doctrine typically involve specialized and particularized information developed in the course of the former employer’s R&D and used in that company’s highly technical or complex workplace.  Often, the new employer is a start-up, or a company planning a significant expansion, which would benefit — by not having to expend significant sums and effort on development — from the former employer’s closely guarded, valuable trade secrets.   In that situation, some judges will prohibit the newly hired employee from using or even inadvertently disclosing the secrets.  

Other judges, however, express reluctance to invoke the inevitable disclosure doctrine, except in “the rarest of cases.”  For one thing, the more experienced the employee, and the more general the information disclosure of which is foreclosed, the harder it is for the parties and a court to differentiate between (a) knowledge gleaned simply from that experience, which the employee should be free to use, and (b) confidential information proprietary to the former employer.  For another, an inevitable disclosure injunction might prevent the employee from providing meaningful services to a new employer in the industry in which the employee knows best.  Those jurists maintain further that the inevitable disclosure doctrine adds little of substance to a non-compete if the employee agreed to one, but if there is none courts should not impose on the ex-employee a functionally equivalent substitute.

The injunction in the Brink’s Case

Duration.  The court declined to issue a two-year “preliminary injunction” as requested by Brink’s because such an order would, in effect, grant 100% of the relief requested but at a time when the dispute’s merits have not yet been adjudicated. 

Geography.  Greco objected to the request by Brink’s to restrain him from working for a competitor located in Chicago.  Although he had been employed in the Chicago office of Brink’s, he maintained that the company’s operations there were outside his responsibility for his final two years with that company.  However, the non-competition covenant stated in relevant part that the territory covered includes the entire area served by the office where the employee was located at termination.  So, Greco was ordered not to compete with Brink’s in the territory serviced by its Chicago office, but he was not precluded from competing outside that region or providing non-competitive services within that area.

Inevitable disclosure.  Brink’s alleged that Greco was intimately familiar with its confidential “customer names, contacts, volume of business and routes for customers, service specifications, service delivery strategies, and staffing and pricing models.”  Agreeing with Brink’s that the non-compete was necessary to protect the company’s good will, the court concluded that Greco inevitably would cause irreparable harm by performing competitive services for Garda in the relevant territory.  Most courts issuing an inevitable disclosure injunction would emphasize efforts the former employer made to protect the confidentiality of the trade secrets, a subject the Brink’s court did not mention.

Takeaways

Greco was bound by both confidentiality and non-compete covenants.  Any employer that wants to maximize protection of trade secrets should insist that high-level employees execute both.  Whether the same result would have been reached in the absence of a non-compete, in other words, based solely on the inevitable disclosure doctrine, is unclear.  The court’s decision clearly was influenced by the near identity of Greco’s job responsibilities with both employers and by his apparent misuse, as he was exiting, of the computer Brink’s had provided to him.  Attorneys representing employers seeking to enforce a confidentiality covenant should stress facts showing why misuse of trade secrets is particularly likely and that the trust placed in the ex-employee by the former employer was abused. 

Seyfarth to Host Webinar on International Trade Secrets and Non-Compete Law

Posted in International, Non-Compete Enforceability, Practice & Procedure, Trade Secrets

When the Walt Disney Company built the “It’s a Small World” ® ride for the New York World’s Fair in 1964, they probably had no idea of the challenges that globalization could pose 50 years later. From cases involving the sale of stolen trade secrets to foreign companies to departing employees setting up competing business in different jurisdictions, many of our recent posts illustrate an unmistakable fact: in an increasingly globalized world, protection of trade secrets, confidential information, and other intellectual property presents global challenges as never before.

On Thursday, July 31, 2014 at 9:00 a.m. Central, Seyfarth attorneys from across the globe will present an on-demand webinar focused on non-compete and trade secret considerations from an international perspective. During the 90-minute webinar, Seyfarth attorneys Wan Li (Shanghai), Ming Henderson (London), Justine Turnbull (Sydney) and Daniel Hart (Atlanta) will provide valuable insight on non-compete and trade secret issues in Europe, Australia, and China compared to the United States.

Topics will include the following

  • Overview of key rules for non-compete and non-disclosure agreements in Europe
  • Key principles of non-compete and non-disclosure agreements in the United Kingdom, France and Australia, including recent case developments
  • Latest developments in non-compete and trade secret law in China
  • The European Commission’s proposed directive on trade secrets protection throughout the European Union
  • Practical considerations under U.S. law for multinational employers to effectively protect their trade secrets and confidential information

Please register to receive access to the broadcast by clicking here.

 

Rebecca Woods on Recent Kentucky Supreme Court Decision Holding that Non-Compete Failed for Lack of Consideration

Posted in Non-Compete Enforceability, Practice & Procedure

In a recent ruling by the Supreme Court of Kentucky, Creech v. Brown (June 19, 2014), the court affirmed that in Kentucky, noncompetition agreements must be supported by adequate consideration in order to be enforceable. The circumstance addressed by the court involved an employee who was presented with a noncompetition and confidentiality agreement after working for the employer for 16 years. The employee was offered no payment, no change in employment terms, and was not threatened with termination if he failed to execute the agreement. The court held that under this set of facts there was a lack of consideration and the court deemed the agreement unenforceable. The ruling makes clear that while consideration is necessary, it may be deemed from after-the-fact changes in employment circumstances.

Trading Secrets Readers: Cast Your Vote in the ABA’s 100 Best Legal Blogs Competition!

Posted in Non-Compete Enforceability, Practice & Procedure, Trade Secrets

Voting is open for the American Bar Association’s Annual 100 Best Legal Blogs competition. You helped us get named to the list in 2013, and we hope you will cast your vote today to help keep Seyfarth’s Trading Secrets blog on the ABA’s list for 2014.

Trading Secrets is a resource for employers and legal professionals that provides timely legal and news updates to C-suite executives, corporate in-house counsel, technology and security officers, and HR professionals concerned about protecting their valuable trade secrets, intellectual capital, workforce, customer relationships, and other confidential information.

The blog also offers a mobile device version, video blogs, podcasts and webinar library of our popular and informative webinars on trade secret, non-compete, and computer fraud issues, and resources, including an archive library from 2008 to the present.

Help us gain some extra recognition by casting your vote in the ABA’s Annual 100 Best Legal Blogs competition!

You only have a few days left to vote: The deadline is August 8, 2014.

Please click the link here to vote. Simply provide a short explanation of why you like the blog.

Seyfarth Offers 2014-2015 Edition of 50 State Desktop Reference: What Employers Need to Know About Non-Compete and Trade Secrets Law

Posted in Non-Compete Enforceability, Trade Secrets

What Employers Need To Know About Non-Compete and Trade Secrets Law

There is no denying that there exists a variety of statutes and case law across the country when it comes to employee non-competition and non-solicitation agreements, as well as the protection of proprietary information. All too often, what is enforceable in one state may be questionable in another and entirely prohibited in the next.

Seyfarth’s Trade Secrets, Computer Fraud & Non-Competes Practice Group has created a one-stop Desktop Reference surveying many of the questions related to the use of employee covenants and intellectual capital protection in all fifty states. For the company executive, in-house counsel or HR professional, we hope that this booklet will provide a starting point to answer your questions about protecting your company’s most valuable and confidential assets.

How to get your Desktop Reference: 

This publication may be requested from your Seyfarth contact or Trading Secrets editor Robert Milligan (rmilligan@seyfarth.com) in hard copy or is available as an eBook, which is compatible with PCs, Macs and most major mobile devices*. The eBook format is fully searchable and offers the ability to bookmark useful sections for easy future reference and make notes within the eBook. To request the 2014-2015 Edition of 50 State Desktop Reference as an eBook, please click the button below:

 

$16 Million Awarded By Arbitrator Against 50 Cent in Trade Secret Spat

Posted in Practice & Procedure, Trade Secrets

By Christina F. Jackson

In a case out of Florida involving the rapper known as “50 Cent” an arbitrator found the rapper liable for trade secret misappropriation, among other claims, in the creation of his own line of headphones. The arbitrator awarded, the plaintiff in the case, Sleek Audio, LLC, a little over $11.5 million in damages. Attorney’s fees were also awarded to Sleek and two other individual plaintiffs in the amount of nearly $4.5 million.

Summary of Case

Curtis J. Jackson, III, (aka “50 Cent”) had originally invested in a company known as Sleek Audio, LLC, to design a line of headphones.  Jackson also became a member of Sleek’s board.  Sleek began creating a design for over-the-ear headphones known as “Sleek by 50.” However, eventually Sleek and Jackson parted ways in 2011.  Thereafter, Jackson collaborated with another company, of which he was a majority owner, SMS Audio, to create the headphones known as “Street by 50” and “Synch by 50.”  Jackson hired individuals to work on the SMS Audio headphones that had already had access to the design of Sleek’s headphones.

Sleek then sued Jackson for misappropriation of trade secrets in relation to the headphone design of SMS Audio.  Jackson brought claims against Sleek or fraud in the inducement to enter into a securities purchase agreement and operating agreement.  The claims went to arbitration.

Comparing The Headphones

Ultimately the arbitrator found Jackson liable for misappropriation of trade secret claims, as well as other claims.  As for the misappropriation claim, the arbitrator relied upon Sleek’s expert testimony in comparing Sleek’s headphones to SMS’ headphones.  The expert opined that the three sets of headphones “shared a multitude of mechanical design details” unlike those of other headphones.  Moreover, since Sleek had not yet marketed its headphones to the public, the mechanical design was not “generally known” or “readily ascertainable” by others.  The arbitrator thus found that these similarities as well as Sleek’s internal company procedures for attempting to safeguard this information evidenced trade secret misappropriation.

Additionally, the arbitrator found that an employee of one of Jackson’s company’s had misappropriated trade secrets consisting of potential customer data on Sleek’s webpage that had been password protected.

Inevitable Disclosure

Furthermore, the arbitrator, in relying upon Sleek’s expert opinion, found that SMS’ headphone design could not have been started in such a short period of time and be of such quality without having used Sleek’s trade secrets.  This finding was based upon Jackson hiring the individuals who, prior to working for SMS, had access to the design of Sleek’s headphones.

Liability of Jackson

The arbitrator found Jackson was liable for the misappropriation of Sleek’s trade secrets because of Jackson’s role as a corporate officer of SMS. Under applicable case law, a corporate officer that “was aware of or ratified” use of “improperly obtained trade secrets” along with knowing (or should have known) they were “acquired by improper means” can be held personally liable.  Here, the arbitrator found that the misappropriation of trade secrets by SMS employees combined with Jackson’s awareness of the misappropriation was a sufficient basis for Jackson’s liability.

Takeaways

This case highlights the need for entrepreneurs or businesses to be careful about who they hire and for what purpose.  If a new hire or potential new hire has worked on a similar product for a competitor, caution should be applied in development of similar products.  Perhaps the outcome in this case would have been different had Jackson hired individuals to design SMS’ headphones who had not previously had access to Sleek’s design information.  Additionally, an officer of a company may be liable for an employee’s misappropriation of trade secrets.  This case serves as a reminder of the burdens an officer bears.  Finally, in regard to litigation, as has been demonstrated time and again, a key expert can play a major and decisive role in the outcome of a case.

Texas Federal Court Imposes Ongoing Royalty Rather Than Permanent Injunction Against Alleged Trade Secret Misappropriator

Posted in Practice & Procedure, Trade Secrets

A Texas federal trial court, finding the absence of any legal precedence to award an ongoing royalty in a trade secret misappropriation case, looked to the patent laws to impose an ongoing royalty. As a result, rather than permanently enjoining the misappropriator from continuing, the trial court imposed a royalty, thereby allowing the victim some compensation but allowing the other party to continue its activities. Sabatino Bianco MD v. Globus Medical Inc., 2014 WL 2980740 (ED Tx. 02 July 2014)(docket no.: 2:12-cv-00147)

Summary of the Case

Dr. Bianco designed certain spinal implants. The jury ruled that Globus misappropriated Dr. Bianco’s trade secrets and awarded damages. Dr. Bianco wanted disgorgement of Globus’ profits, but the jury instead awarded Dr. Bianco a 5% royalty as back-payment for the taken secrets. Dr. Bianco asked for, but was denied, a permanent injunction. Instead, the district court asked the parties to come up with some figure for the ongoing royalty percentage, which the judge determined to be 5% also. The judge said that the payment period would extend for 15 years.

Dr. Bianco asked for more than 5% (he asked for 6%) and Globus said it wasn’t going to pay anything in the future because the secrets were no longer secret and that the prior 5% back-payment was full compensation. Dr. Bianco said that the previous 5% was a floor and any new rate should necessarily be higher. Globus said that once the misappropriation was publicized and embodied in the actual spinal devices, nothing was a secret. Certainly there was no call for paying royalties over 15 years. Dr. Bianco asked for a higher rate to send warnings to other misappropriators that such behavior is not tolerated. The trial judge rejected both sides’ proposals.

The Court’s Rationales

First the court noted that in Texas, there is no state-based trade secret law covering the ongoing royalty situation. So the court unsurprisingly adopted patent law as the trial judge was in fact Judge William Bryson of the US Federal Circuit Court of Appeals, sitting in designation in Texas.

The court then noted that in Texas, injunctions can continue longer than the period after which a secret becomes public. The court also noted that any increase in the rate cannot be for punitive or willful theft purposes because Texas law does not allow for punitive forward looking remedies and that any punitives were included in the back-payment royalty rate.

Furthermore, the court reasoned that in Texas, trade secret theft is a one-time event, hence the proper calculation would be on what the parties would hypothetically negotiate on the one-time event. In patent law, though, each infringement is a continuing tort.

Finally, the court rejected Dr. Bianco’s deterrent effect argument. The court noted that any deterrent effect is satisfied by the possibility that the court will not award any base damages or ongoing royalties but instead will order a full disgorgement.

Takeaways

This case teaches several aspects: (1) One should not assume that every trade secret theft can be remedied by automatic permanent injunction relief. Rather a court may allow the defendant to continue activities so long as it pays some royalty; (2) In your particular state, as here, there might be no case law precedent that sets the contours of the remedy, and hence, a court may borrow from another legal subject matter; (3) While we do not recommend any such action, this is an instance in which the misappropriation is allowed to continue, with a royalty payment. One could presume that there is still a significant financial benefit to the misappropriator in that it still makes money from its initial misappropriation; and  (4) In the initial disclosure, though in confidence, of Dr. Bianco’s information to Globus, would the result have been different if the disclosure documents included Globus Medical’s agreement that it would be subject to permanent injunctive relief and disgorgement? Perhaps the disclosure documents could have included those statements.

Eleventh Circuit Affirms Alabama Federal Court Ruling that Non-Compete Signed Prior to Employment is Void

Posted in Non-Compete Enforceability, Practice & Procedure, Restrictive Covenants

A few months ago, we reported on a federal court decision in the Southern District of Alabama declining to enforce a non-compete and non-solicitation agreement against a former employee who executed the agreement before he began his employment. Last week, a panel of the Eleventh Circuit affirmed the District Court’s decision in an unpublished opinion.

As we reported following the District Court’s decision, in Dawson v. Ameritox, Ltd., 2014 WL 31809 (S.D. Ala. Jan. 6, 2014), Ameritox, a healthcare company, sought to enforce non-compete and non-solicitation covenants against its former Assistant Director of Medical Science and Health Outcomes Research, Dr. Eric Dawson, who had left Ameritox for a similar position with a competitor. Although Ameritox sought a preliminary injunction against Dawson, the District Court denied the motion and ruled that the covenants in question were void and unenforceable because Dawson had executed the agreement before his employment with Ameritox began. Under Alabama Code § 8-1-1, a contract by which anyone “is restrained from exercising a lawful profession, trade, or business of any kind” is void, except that “one who is employed as an agent, servant or employee may agree with his employer to refrain from carrying on or engaging in a similar business and from soliciting old customers of such employer within a specified county, city, or part thereof, so long as the . . . employer carries on a like business therein.” Relying on the Alabama Supreme Court’s prior decision in Pitney Bowes, Inc. v. Berney Office Solutions, 823 So. 2d 659 (Ala. 2001), the District Court noted that employee non-compete agreements are valid only if signed by an employee and that prospective employment is not sufficient to meet the exception in Section 8-1-1. Thus, because Dr. Dawson was not an employee of Ameritox at the time he signed the agreements, the District Court reasoned that the agreements were void and unenforceable.

In its unpublished opinion affirming the District Court’s decision, the Eleventh Circuit agreed with the District Court, noting that Ameritox’s attempts to distinguish Pitney Bowes were unpersuasive. The Eleventh Circuit reasoned that, because the agreement was void under Alabama Code § 8-1-1, Ameritox failed to show a substantial likelihood of success on the merits. Thus, the District Court did not abuse its discretion in denying Ameritox a preliminary injunction.

The Eleventh Circuit’s panel decision reaffirms the importance of practical pointers we noted in our prior post. While it is prudent — and, in some states, required — to provide prospective employees with copies of required non-compete agreements before the employee’s first day of work, employers in Alabama should ensure that employees execute (or re-execute) such agreements on or after their first day of employment, ideally in the presence of a representative of human resources. In addition, because continued at-will employment is sufficient consideration for new restrictive covenants in Alabama, employers with operations in Alabama should consider periodically reviewing their existing restrictive covenants and requiring employees to execute new agreements from time to time as appropriate.