Trading Secrets : Trade Secrets Lawyers & Attorneys : Seyfarth Shaw Law Firm : Computer Fraud, Confidentiality Agreements, Corporate Espionage

ING Life Ins. and Annuity Co. v. Gitterman, Slip Copy, 2010 WL 3283526 (DNJ August 18, 2010)

Plaintiffs ING Life Insurance and Annuity Company (“ILIAC”) and ING Financial Advisors (“IFA”) (collectively, “Plaintiffs” or “ING”), sought to enjoin defendants, all of whom were former employees of ING, from soliciting clients to withdraw certain accounts from ING, pending the resolution of a FINRA Dispute Resolution Proceeding. The Court initially granted a preliminary TRO enjoining defendants from: (1) “soliciting, inducing or attempting to induce any customers of Plaintiffs (or their affiliated companies) to sell or transfer assets from any ING Life Insurance and Annuity Company (“ILIAC”) account, product or security” and (2) “taking any action designed to effectuate the sale or transfer of assets from any ILIAC account, product or security, including, but not limited to submitting or assisting others in submitting account withdrawal forms to ILIAC.”  The District Court further ordered Plaintiffs to post a surety bond to pay the costs and damages sustained by any party found to have been wrongly enjoined or restrained.

After a full hearing, the District Court found as follows.

Prior to April 2010, each Defendant was employed by ING either as an investment advisor, a career agent, a registered representative, or was employed in more than one of these capacities. That During the period of defendants' affiliation with ING, defendants serviced ILIAC's account in New Jersey's Alternative Benefit Program (“ABP”), a defined contribution retirement program available to eligible employees of New Jersey's public institutions on higher education.  Until Defendants' affiliation with ING terminated in May 2010, defendants were responsible for servicing the accounts of more than 2,000 ILIAC customers with assets invested in the ABP. In February 2010, with ING's knowledge, several of the defendants set up their own Registered Investment Advisory firm (“GAWM”) and affiliated with an independent broker-dealer as registered representatives. As a result, many of the clients now in issue established investment advisory and/or brokerage accounts with Defendants off of the ING platform.

In May 2010, the affiliation between the defendants  and ING was terminated, with an arrangement that would allow ING to maintain relationships with the defendants' clients with respect to these clients' investment in ING's New Jersey ABP. With respect to every other aspect of the clients' portfolios, ING agreed to, and assisted in, facilitating their transfer from ING to the new group's new broker dealer and to GAWM.

Although defendants did not initially sign a restrictive covenant when they first became affiliated with ING, they did sign contracts with ILIAC and/or IFA that contained a non-solicitation clause. The contracts contained a provision providing that defendants “shall not for a period of [one or] two years thereafter, directly or indirectly by or through any partner, associate, agent, employer, employee or firm action on the Agent's behalf: (i) advise, induce or attempt to induce any contract-holder of the Company [ILIAC] to cancel, replace or allow to lapse any annuity contract or security issued by the Company or its affiliates ...” All of the defendants signed covenants substantially similar to this provision.

Upon these facts, the District Court denied the motion, finding that Plaintiffs could not sufficiently demonstrate that there is a likelihood of success on the merits of their claims, specifically holding that “[m]erely being in contact with former clients does not constitute solicitation,”citing Mona Elec. Group, Inc. v. Truland Service Corp., 56 Fed.Appx. 108, 110 (4th Cir.2003); Prudential Securities, Inc. v. Plunkett, 8 F.Supp.2d 514, 520 (E.D.Va.1998); Bayly, Martin & Fay, Inc. v. Pickard, 780 P.2d 1168, 1175 (Okl.1989); and Aetna Bldg. Maintenance Co. v. West, 39 Cal.2d 198, 246 P.2d 11 (1952).  The Court further found that there was no question that defendants needed to be in contact with Plaintiffs' clients, as they provide financial advice to these clients on many non-ABP investments unrelated to ING's business interests.

Most notably, the Court rejected Plaintiff’s assertion that defendants were, in fact, soliciting clients related to ING’s business interests, finding that “[the] … only evidence of solicitation Plaintiffs have provided is a single affidavit from an ING employee indicating that, through her communications with clients, it appears that Defendants' have recommended that Plaintiffs' clients switch to a different, competing ABP product. Plaintiffs' declaration summarily refers to client communications, without indicating the number of such communications or providing documentation of such communications.” The District Court also rejected as only “circumstantial” that several client accounts withdrew from ING in a short time frame from defendants’ departure. The Court expressly found that such departures do no “necessarily indicate[] that [the clients] were solicited or encouraged to leave.” To punctuate the finding, the Court provided the hypothetical example that “…these clients may have determined, upon learning of the termination of the [defendant-ING] relationship, that they no longer wanted to remain with ING. A non-soliciting statement from the defendants or ING, then, could have triggered clients to defect, and they are entitled to do so.”

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Plaintiff IDG USA, LLC (“IDG”), a Georgia company with its principal place of business in North Carolina, commenced an action against a former employee, Kevin J. Schupp (“Schupp”), a New York resident, alleging breaches of a Non-Compete Agreement, breach of a Confidentiality Agreement, unfair competition, and theft of trade secrets.

In a 12 page decision, IDG USA, LLC v. Schupp, Slip Copy, 2010 WL 3260046 (W.D.N.Y. Aug.18, 2010), the District Court granted IDG's Motion for a temporary restraining order and preliminary injunction, enjoining Schupp from: (1) working for any competitor of IDG within 50 miles of IDG's Amherst, New York office, (2) soliciting orders from IDG’s identified “major” customers with whom Schupp had had contact , and (3) disclosing or using confidential information and/or trade secrets of IDG. The court also denied Schupp’s Rule 12(c) cross-motion to dismiss the Complaint, expressly finding that IDG’s allegations that Schupp used his knowledge of IDG's major, revenue-generating customers and its pricing policies for the benefit of his new employer, and disclosed information regarding IDG’s Amherst Office's control over pricing issues to one of those customers were sufficient to render the causes of action plausible for purposes of a Rule 12(c) analysis.

The Complaint alleged that IDG is a national distributor and supplier of industrial materials, has a Northeast Division, with a principal office in York, Pennsylvania, an a regional office in Amherst, New York, which  is responsible for the company's customer base in upstate New York and western Pennsylvania.  It was further alleged that in 1998, IDG acquired Schupp’s previous employer, AFL, and retained most of AFL's employees including Schupp, whom immediately began working out of IDG's Amherst, New York office as a Sales Associate.  IDG claimed that Schupp serviced many of IDG's major revenue generating clients, most, if not all of whom were assigned to Schupp by IDG, which had preexisting relationships with the clients.

The operative agreements before the District Court were a Non-Compete Agreement (the “NCA”) and a Confidentiality Agreement, entered into between IDG and Schupp.  The Court found that Schupp received “additional compensation in the amount of Three Thousand Dollars ($3,000) in consideration for his execution, delivery, and performance of th[e] [NCA] .”   Notably, the Court found that the NCA restrained Schupp, for the period of one year from the date of the termination of his employment with IDG, from accepting employment with any competitor of IDG, for work similar to that he performed at IDG, within a fifty (50) mile radius of any office to which he was assigned during the twelve months prior to the termination.

The Complaint went on to allege that on January 14, 2010, Schupp voluntarily terminated his employment without advance notice, and that within days after his resignation he commenced employment as a sales representative with Abrasive-Tool Corp. (“Abrasive”), a company that sells many of the same products as IDG and offers customers similar services.  It was shown that Schupp worked out of Abrasive's Buffalo office, which is within ten miles of IDG's Buffalo office.  The Court found that Schupp had solicited orders on behalf of Abrasive from long-standing, major revenue producing clients he was assigned to service and entertain during his employment with IDG, and further disclosed to an IDG customer confidential information regarding its Amherst Office's control over pricing issues.

Of primary interest, the District Court found that IDG had demonstrated the threat of irreparable harm by Schupp’s conduct by reason of: (a) Schupp’s contacting three “Major Customers” of the  company” (identified by the Court as customers whose purchases from IDG exceeded $25,000 in the previous twelve months) and quoting prices for Abrasive's goods and services to one of these Major Customers; (b) three Major Customers requesting pricing information and quotes from IDG, something they had not required in the previous ten years; (c) another Major Customer informing IDG that it would no longer do business with IDG; and (d) the fact that the month following Schupp's resignation from IDG, IDG experienced a reduction in its sales to ten of the thirteen Major Customers which had been serviced by Schupp.

Specifically, the Court held:

Here, IDG has sufficiently demonstrated that Schupp violated paragraph 7(a) of the NCA when he commenced work at Abrasive, as a sales associate in its Buffalo office, immediately after resigning from IDG. Likewise, IDG has sufficiently demonstrated that Schupp immediately began soliciting orders on Abrasive's behalf from IDG's Major Customers in violation of the NCA's paragraph 7(b). Schupp does not dispute IDG's attestations in this regard. In addition, the NCA expressly provides that “if Schupp is permitted, after cessation of his employment with [IDG], to trade upon th[e] training and th[e] confidential information which he had received by virtue of his position of trust and confidence with [IDG] ... irreparable damages will result to [IDG],” and that “any breach of the [NCA's] covenants ... would not be readily or appropriately compensable in damages”  Courts have found that such language in an employment agreement “ ‘might arguably be viewed as an admission by [the former employee] that plaintiff will suffer irreparable harm were he to breach the contract's non-compete agreement.’ ” On the evidence presented at this juncture, including the NCA's provisions, Schupp's conclusory assertion that any damage to IDG can be rectified by a monetary award is rejected.

Finally, the Court rejected Schupp’s argument that IDG had “materially breached” the NCA by reducing his annual salary from that stated in the NCA, prior to his resignation. IDG argued that because the salary reduction was not a “material breach,” Schupp was not excused from performance of his obligations and, in any event, Schupp waived any breach when he continued to work for IDG after his salary was modified.  The District Court found IDG's contentions that it did not materially breach the agreement and that Schupp acquiesced to a modification of the NCA consistent with New York decisional authority involving employment agreements similar to the NCA, citing: In re Footstar, Inc., 04-22350, 2007 Bankr.LEXIS 2302, at *12-13 (S.D.N.Y. July 6, 2007); Hanlon v. MacFadden Publications, 302 N.Y. 502, 505, 99 N.E.2d 546 (1951)); Bottini v. Lewis & Judge Co., 211 A.D.2d 1006, 1007-1008, 621 N.Y.S.2d 753 (3d Dep't 1995); Dwyer v. Burlington Broadcasters Inc., 295 A.D.2d 745, 745-746, 744 N.Y.S.2d 55 (3d Dep't 2002); Gebhardt v. Time Warner Entm't-Advance/Newhouse, 284 A.D.2d 978, 978-9, 726 N.Y.S.2d 534 (4th Dep't 2001); Bottini, 211 A.D.2d at 1007-1008, 621 N.Y.S.2d 753; and Mosely v. Island Computer Prods., 2006 U.S. Dist. LEXIS 6437, 2006 WL 318815, at *2-4  (E.D.N.Y. Feb.9, 2006).

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Earlier this month, Starbucks Corp. filed a complaint in the U.S. District Court for the Western District of Washington to seek enforcement of a noncompetition agreement it entered into with former Division Senior Vice President Paul Twohig.

According to Starbucks, Twohig purportedly had accepted a position with Dunkin’ Donuts as its Brand Operations Officer, which would have been in violation of the non-competition agreement he entered into with Starbucks.

On Friday, October 23, 2009, Starbucks announced that it had resolved its dispute with Twohig. The settlement agreement included promises by Twohig that he would complete initial training at Dunkin’ Donuts, but would not otherwise work there until January 15, 2010, approximately ten months after Twohig left Starbucks’ employ.

In addition, Starbucks is to receive $500,000 as part of the settlement. Starbucks has not reported who will be responsible for this payment.

The case was Starbucks Corp. v. Paul Twohig, case number 09-01404, U.S. District Court for the Western District of Washington.

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Jerry Powers, the founder of Miami's successful magazine, Ocean Drive, has sued the purchaser of the business and now-publisher of the magazine, Niche Media Holdings, LLC ("Niche Media")  seeking a declaratory judgment that the non-compete restrictions contained in the parties' asset purchase agreement ("APA") and the employment agreement he entered into following the sale do not (a) prevent Powers from helping inner-city youth publish their own magazine (Inspire, Enrich & Empower or IE2) as part of a non-profit effort and (b) prevent Powers from working in the luxury magazine world after November 1, 2009.   In the 126-page complaint, including exhibits, Powers alleges that there are inconsistencies in the provisions of the APA and his employment agreement, but that under the APA, his restrictive covenants cease as of November 1, 2009.  Niche Media, according to the complaint, contends that the restrictive covenants last until February 17, 2011 -- a rather significant difference in time.  In support of his theory, Powers points to the provision in the employment agreement that says that terms of the APA are controlling if there is any conflict between the APA and the employment agreement.

In the complaint, Powers claims that he filed suit based on the "intermeddling" of Niche Media in his efforts to publish IE2.  Indeed, Powers claims that Niche Media threatened to sue to stop the publication of IE2. 

The parties' dispute has attracted some media attention with the Miami Herald   and Law360 reporting on it.  The interest may derive in part from the charity involved in publishing IE2, Overtown Youth Center, is supported by Alonzo Mourning Charities.  Alonzo Mourning is a retired NBA star who played for the Miami Heat.  

Yet, without so much as an opposing brief being filed by Niche Media, the day after filing, the Court denied Powers's request for emergency relief.  The Court rejected the emergency nature of the brief, saying

the Complaint and Motion fail to set out in detail good cause of the necessity of expedited procedures, as required in an emergency motion.  Finally, the Court notes that the Complaint does not clearly allege a case or controversy that is ripe for adjudication, specifically as to the request for declaratory and injunctive relief regarding the expiration of the non-competition and non-solicitation provisions. 

This early of a set-back in a case of this sort may not bode well for Powers.  And, solely in my opinion (of course), Powers may need to be considering amending his complaint to avoid a motion to dismiss based on the Court's statements in her order. 

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By Kurt Kappes and Jim McNairy

            On August 20, 2009, the California Court of Appeal for the Fourth Appellate District issued an order certifying publication of its decision in The Retirement Group v. Galante, No. D054207, 2009 WL 2332008 (Cal. App. 4th July 30, 2009). In Galante, the Court analyzed the tension between California’s strong public policy favoring competition, as embodied in Business and Professions Code section 16600, and the longstanding body of law recognizing an employer’s right to guard against misappropriation of its trade secrets. 

Under the facts presented, the Court concluded that an employer who seeks to prohibit a former employee from soliciting former customers to transfer their business away from the former employer to the employee's new business, cannot specifically enforce a covenant not to compete without showing a tort. The employer must show more than that the former employee had access to customer lists that qualified as trade secrets while employed, and solicited customers once he left. Instead, the former employer must show that the former employee actually used the trade secret list to identify or facilitate the solicitation of existing customers.

In Galante, The Retirement Group (TRG), described as a business “association”, provided broker/dealer, investment advice, and securities sales services to customers on a fee for service basis. TRG provided these services through, among other things, the use of independent contractors, many of whom were registered investment advisors and registered representatives licensed to sell securities. Some of TRG’s customers used the registered representative to buy and sell securities through a third party broker/dealer known as Security Services Network, Inc. (SSN). TRG’s registered representative independent contractors also entered into independent contractor relationships with SSN. 

TRG undertook extensive marketing efforts, including seminars. About 95% of TRG’s customers were obtained through this marketing. TRG’s list of customers and potential customers was maintained in a secure database designed to prevent copying of information in the database.

As a condition to allowing access to the secure database, TRG required execution of a Marketing and License Agreement (MLA). In pertinent part, the MLA defined TRG's confidential information, and provided that (both during the term of the relationship and thereafter) the signing party would keep the information confidential and would not “disclose or use” the information, except as the MLA permitted.   

After one of TRG’s principals left to form a competing business (Monarch) with several of the independent contractors who had worked for TRG, the independent contractors and Monarch allegedly began contacting TRG’s customers and asking them to switch their business to Monarch and Monarch’s new broker/dealer, SII Investments, Inc.

TRG filed suit, alleging among other things, misappropriation of TRG’s trade secret information contained on its database. TRG sought and obtained a preliminary injunction.

The preliminary injunction prohibited certain conduct, including:

“[d]irectly or indirectly soliciting any current TRG [customers] to transfer any securities account or relationship from TRG to [Advisors] or any broker-dealer or registered investment advisor other than TRG[.]”(“Non-solicitation Provision”); and

“[u]sing in any manner TRG information found solely and exclusively on TRG databases. [However,] [s]imilar information found on servers, databases and other resources owned and operated by other entities or businesses is excluded from the injunction[.]” (“Database Provision.”)

The Court of Appeal addressed the propriety of the Non-Solicitation Provision. In doing so, the Court analyzed (1) Bus. & Prof. Code section 16600 and the cases interpreting and applying it, and (2) trade secret case law providing that former employees may not misappropriate the former employer’s trade secrets to compete unfairly with the former employer.

In its analysis of Section 16600, the Court focused on the 2008 California Supreme Court decision in Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (2008). In Edwards, the Supreme Court held that covenants not to compete are void in California under Bus. & Prof. Code section 16600 unless permitted by a statutory exception.   Section 16600 provides that “[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

After noting that Edwards “appears pivotal to resolution of this appeal,” the Galante Court highlighted that “[a]though Edwards reaffirmed the broad California rule that invalidates noncompetition agreements falling outside of the statutorily-prescribed exceptions, Edwards expressly stated it was not ‘[a]ddress[ing] the applicability of the so-called trade secret exception to section 16600.’” The Retirement Group, 2009 WL 2332008 at *5 (quoting Edwards, 44 Cal.4th at 946 n. 4). 

In analyzing the trade secrets line of cases, the Galante Court started by noting “[a]n equally lengthy line of cases has consistently held former employees may not misappropriate the former employer's trade secrets to unfairly compete with the former employer.” The Court continued, “in accordance with these principles, the courts have repeatedly held a former employee may be barred from soliciting existing customers to redirect their business away from the former employer and to the employee's new business if the employee is utilizing trade secret information to solicit those customers.” Id. at *6, emphasis in original. The Court then concluded “[T]hus, it is not the solicitation of the former employer's customers, but is instead the misuse of trade secret information, that may be enjoined.” Id. (emphasis in original).

Having analyzed section 16600 and the trade secrets line of cases, the Court concluded that :

“We distill from the foregoing cases that section 16600 bars a court from specifically enforcing (by way of injunctive relief) a contractual clause purporting to ban a former employee from soliciting former customers to transfer their business away from the former employer to the employee's new business, but a court may enjoin tortious conduct (as violative of either the Uniform Trade Secrets Act and/or the Unfair Competition Law) by banning the former employee from using trade secret information to identify existing customers, to facilitate the solicitation of such customers, or to otherwise unfairly compete with the former employer. Viewed in this light, therefore, the conduct is enjoinable not because it falls within a judicially-created “exception” to section 16600’s ban on contractual nonsolicitation clauses, but is instead enjoinable because it is wrongful independent of any contractual undertaking." Id. (bolding added).

Applying this reasoning to the facts before it, the Court concluded that the Non-Solicitation Provision of the preliminary injunction facially violated Edwards and could not be viewed as limited in scope to only enjoining the misappropriation of TRG's trade secrets.  

The Court also rejected the argument that the Non-solicitation Provision could be upheld as an injunction designed to have the limited effect of protecting against the misappropriation of TRG's trade secrets because the Database Provision of the injunction granted the full range of trade secret protections to which TRG was entitled. The Court further held that “[a]bsent the provisions of [the Non-solicitation Provision] [defendants] could compete with TRG for the business of TRG's existing customers by employing all available resources and information except for those materials found ‘solely and exclusively on TRG's databases,’” which constituted protectable trade secrets. Id. at * 7.

TRG’s argument regarding the so-called “trade secret exception” to section 16600 was also rejected by the Court. TRG argued that the conduct enjoined by the Non-solicitation Provision is outside the boundaries of Edwards because Edwards expressly excepted from its ruling noncompetition clauses falling within the trade secret exception to section 16600. Id. Significantly, the Galante Court noted that “[E]dwards did not approve the enforcement of noncompetition clauses whenever the employer showed the employee had access to information purporting to be trade secrets. Instead, Edwards merely stated it was not required to “address the applicability of the so-called trade secret exception to section 16600 [citation] because it was not germane to the claims raised by the employee.” Id.

            Additional reasons for the Court holding that the Non-solicitation Provision was invalid included:

·        TRG did not dispute that the names and contact information for existing customers were readily available to defendants from independent third party sources, thus negating that the names and contact information of existing customers constituted protectable trade secret information;

·        Because the Database Provision already protected against defendants’ use of TRG's trade secrets, the Non-solicitation Provision could not have any additional effect, except to bar solicitations not involving the use of trade secret information; and

·        The Non-solicitation Provision was not enforceable as a mere “narrow restraint” on defendants because the “narrow-restraint” exception developed by 9th Circuit Court of Appeal was rejected in Edwards.

The Court ordered the trial court to vacate the preliminary injunction and enter a new injunction deleting the Non-Solicitation Provision.

The distinction that the Court drew between enforcing a contractual clause and enjoining tortious conduct, introduces new uncertainty whether a covenant not to compete in California explicitly tied to the protection of trade secrets is viable. Although future cases may address this issue, neither Galante nor Edwards expressly held that one cannot by contract prohibit conduct that is otherwise unlawful under one or more statutes.  

The lessons from this case are:

1. Businesses should continue to use caution before utilizing any covenants not to compete in California and should carefully assess whether the restriction on competition can be tied to one of the statutory exceptions to section 16600 or to the protection of trade secrets. However, if tied to the protection of trade secrets, a covenant which seeks to restrict a former employee or contractor from competing against the former employer should be tied to the former employee’s/contractor’s actual misuse of trade secrets. Simply referencing prior access to trade secrets during the term of employment/contract alone is unlikely to address the misuse of that information.

2. This case highlights what the California Supreme Court made clear in its Edwards v. Arthur Andersen opinion: unless falling within one of few exceptions to CBPC § 16600, post-term covenants not to compete are invalid in California regardless of whether such covenants are narrowly drawn.

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I recently ran across this newsletter article regarding taxation of non-compete clauses in the sale of closely held businesses and thought it worth passing along for those who find themselves negotiating non-compete agreements in the context of the sale of a closely held business.

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In the back and forth battle between companies and former employees regarding the confidential nature of customer information, the United States District Court for the District of Nebraska has just issued a decision of note in Softchoice Corp. v. MacKenzie, 08-cv-00249. By the decision, the Court dismissed the action as against the defendant, finding that despite plaintiff’s treatment of the information as secret, had plaintiff truly wished to protect the information it should have had defendant enter into a properly tailored covenant not to compete instead of only having him sign a nondisclosure agreement.

The action was brought by Softchoice against MacKenzie, a former employee, alleging the usual panoply of claims: breach of confidentiality, misappropriation of trade secrets and confidential business information, unfair competition and tortious interference with business relations. The confidential information was alleged to be customer contact information and pricing. MacKenzie had not signed a non-compete covenant, but had signed a nondisclosure agreement.

In dismissing the action, Judge Joseph F. Batailon found that:

“The plaintiff cannot succeed on its claims for breach of contract, misappropriation of trade secrets or unfair competition without a showing that the information he allegedly misappropriated was a trade secret … MacKenzie has [] shown that he obtained the only information that could arguably be categorized as ‘secret,’ that is, pricing information, from the potential customers themselves, who freely shared the information with him in hopes of obtaining a lower price. MacKenzie has also shown that his suppliers shared this sort of information …”

This segued into the Court’s interpretation of the extent nondisclosure agreements will protect customer information:

“Softchoice, or its predecessor, could have limited MacKenzie’s contact with his former customers, and consequently protected its pricing information, through a narrowly drawn, valid and enforceable covenant not to compete, but id did not do so. Softchoice cannot achieve by way of a nondisclosure agreement what it could not have obtained via a non-solicitation agreement …”

It will be interesting to watch if any other courts pick up on Judge Batailon’s interpretation of nondisclosure agreements.

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 By Robert Milligan and summer associate Andrew Larratt-Smith

In a decision that encourages cost efficient corporate mergers in Nevada, the Nevada Supreme Court in HD Supply Facilities Maintenance v. Bymoan, 2009 WL 1635924 (June 11, 2009) recently ruled in an en banc decision that restrictive employment agreements acquired through corporate mergers do not require a showing that the agreements’ assignment provisions were negotiated at arm’s length or are supported by separate consideration. 

The court clarified its previous decision in Traffic Control Servs. v. United Rentals, 120 Nev. 168, 172 (2004), which held that employee noncompetition agreements are nonassignable when acquired through an asset purchase transaction, absent an explicit assignment clause negotiated at arm’s length supported by separate consideration. The Traffic Control decision was based on the notion of “honoring an obligor’s choice to contract with only the original obligee, thereby ensuring that the obligor is not compelled to perform more than his or her original obligation.” Further, the decision supports the general proposition that personal services contract are not assignable absent consent. In its Traffic Control  ruling, the Nevada Supreme Court used broad language, leading some to believe that the nonassignability of employee noncompetition agreements extended to agreements acquired as the result of mergers as well as to those acquired through asset purchase transactions. 

But in HD Supply the Nevada Court distinguished employment restrictive covenants found in mergers from asset purchase transactions. The court emphasized the contractual nature of an asset purchase transaction, whereas a merger is a creation of statute. The court stated that in a merger “two corporations unite in a single corporate existence” whereas “the acquiring corporation in an asset purchase transaction becomes… a wholly new employer.” Consequently, the court reasoned that Traffic Control’s general rule of non-assignability did not apply to covenants of noncompetition, nonsolicitation, or confidentiality as a result of a merger. 

The court found that when a relevant merger statute exists, the issue of a covenant’s assignability is not controversial, stating “[a]s the majority of courts have concluded when considering this issue, in a merger, the right to enforce the restrictive covenants of a merged corporation normally vests in the surviving entity.” Further, in support of its decision, the court noted that although Nevada courts have not addressed this exact issue before, the court had previously acknowledged a hard and fast distinction between the implications of a merger, which is a statutory creature, and an asset purchase, which is not.

Despite ruling that restrictive employment agreements acquired through mergers do not need to comply with the strict rule of assignability found in Traffic Control, under Nevada Revised Statute 613.200(4) and applicable case law, such covenants must still be reasonable in scope and duration. The HD Supply decision is significant because it removes a significant obstacle for businesses who obtain employment restrictive covenant agreements as a result of merger and thereby reduces additional costs arising out mergers in Nevada. 

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The Texas Supreme Court has once again ruled in favor of enforcing non-competition agreements. On April 17, 2009, the Court held that “if the nature of the employment for which the employee is hired will reasonably require the employer to provide confidential information to the employee for the employee to accomplish the contemplated job duties, then the employer impliedly promises to provide confidential information and the covenant is enforceable so long as the other components of the Covenant Not to Compete Act are satisfied.” Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, No. 07-0490, 2009 WL 1028051, *1 (April 17, 2009). The other components of the Act involve whether the agreement’s terms are reasonable.   

In Light v. Centel Cellular Co. of Tex., the Court interpreted the Act to require employers to promise to provide and actually to provide confidential information or trade secrets to employees “at the time the agreement is made.” 883 S.W.2d 642, 644-45 (Tex. 1994). This almost never happened and thus non-competes were difficult to enforce. 

In 2006, the Court modified Light and held that the employer’s promise to provide confidential information or trade secrets is enforceable as long as the employer provides the information at some point during employment. Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 651 (Tex. 2006). Thus, non-competes became easier to enforce. 

The Court has now gone further and held that the employer’s promise to provide confidential information or trade secrets within the non-compete need not be express; it may be implied. Fielding at *1. Thus, as long as a covenant not to compete is “ancillary to or part of an otherwise enforceable agreement,” (i.e., an employee’s non-disclosure agreement) and the nature of the contemplated employment will reasonably require the employer to furnish the employee with confidential information, then the employer impliedly promises to provide the information and the contract is enforceable. In such a situation, the only remaining issue is the reasonableness of the terms, i.e., whether the restrictions are reasonable in length of time, geography, and scope of activity restrained by the agreement. This ruling makes it more difficult for an employee to challenge the formation of a covenant not to compete under the Act. 

It is also important to note that the Court held “confidential information” may include client-specific information that a client provides to the employer such as the “clients’ names, billing information, and pertinent tax and financial information.” Id. at *6. 

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"Reprinted with permission from the March 23, 2009 issue of the New York Law Journal. © 2009 Incisive Media US Properties, LLC. Further duplication without permission is prohibited. All rights reserved."

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In Global Link Logistics, Inc. v. Briles, No. A08A1871, (Ga. App. Feb. 18, 2009), the Georgia Court of Appeals recently reiterated Georgia court’s requirements for non-compete and non-disclosure covenants. The case involved the departure of Jim Briles from Global Link Logistics to a competitor. Briles moved for a declaratory judgment stating that the restrictive covenants in his employment agreement – a non-compete provision and a non-disclosure of confidential information provision – were unenforceable. Global Link answered and moved to compel arbitration. The trial court found that the restrictive covenants were unenforceable.

The Court of Appeals upheld the trial court’s finding. It held that the non-disclosure provision was unenforceable because it purported to cover Briles’s “observations” and was therefore overly broad. The provision also lacked a time limit, as required by Georgia law. As far as we know, Georgia is unique among all 50 states in the latter requirement. 

The Court of Appeals held that the non-compete provision was unenforceable for two reasons. First, it purported to prevent Briles from working as an “owner, operator, manager, employee, officer, director, consultant, advisor, representative or otherwise.” As such, the prohibition was an impermissible “in any capacity” restriction. Second, it purported to bar solicitation of all of Global Link’s customers, regardless of whether Briles had material contact with them. 

Faced with hostile law, Global Link made two additional arguments. It asserted that Briles’s agreement should be viewed under Georgia’s more lenient degree of scrutiny afforded to restrictive covenants executed in connection with the sale of a business. The Court of Appeals rejected this argument, concluding that Briles did not own an interest in Global Link’s predecessor when he executed the agreement in question. Thus, the fact that he acquired an equity stake in Global Link when it purchased the predecessor was immaterial. 

Global Link also argued that the trial court’s order ignored Georgia’s policy of deferring to actions previously filed in other jurisdictions, as well as the parties’ own forum selection clause, and that it undermined state and federal policy favoring arbitration. The Court of Appeals dismissed each of these arguments. It found that Briles had obtained relief from the trial court after Global Link had dismissed an action filed against Briles in Delaware and before either party commenced arbitration. Moreover, the Court of Appeals cited to the language of the arbitration provision in Briles’s employment agreement, which specifically stated that the parties could obtain injunctive relief in court prior to arbitration.

Global Link illustrates the difficulties in enforcing a restrictive covenant in Georgia. The Court of Appeals was able to pick from any one of a number of rules to knock out the restrictive covenants. The decision also highlights the fact that the relaxed scrutiny for restrictive covenants in the sale of a business context applies only if the covenant was signed as part of the actual sale.

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Yesterday afternoon, the Georgia House of Representatives passed HB 173, a bill that would set forth a comprehensive statutory framework for interpreting restrictive covenant agreements. The current version of the bill is linked here. The final vote was a resounding 137 in favor and 22 against. HB 173 will now progress to the Georgia Senate for consideration. The bill passed the House on cross-over day, the last day in which a bill can pass one house of the Georgia Assembly in order to be considered by the other.

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HB 173, which we have written about before, heads to a vote before the Georgia House of Representatives today.  The legislation  dramatically changes the way Georgia court's will review restrictive covenants (non-competes, non-solicitation agreements) and fixes the time limit imposed on confidentiality restrictions (eliminating the two-year restriction).  To find out how to reach your State Representative to express your views, click here.  

If the bill does not pass today, it is my understanding that it will not be given any further consideration this session.

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In Hal Wagner Studios, Inc. v. Elliott, No. 3:09-CV-31-MJR, 2009 WL 424432 (S.D. Ill. Feb. 19, 2009), Judge Michael Reagan of the Southern District of Illinois entered a preliminary injunction against Kris Elliott (Wagner’s former general manager for its Edwardsville, Illinois office) and a number of former Wagner employees, including Elliott’s wife, Pam. The facts of the case are as follows:

Wagner is in the business of supplying photography services to local schools. In 1994, Wagner purchased the assets of Mr. Elliott’s business, Delmar Studios, for $245,000. As part of the sale, Mr. Elliott executed a non-compete provision, forbidding him from doing the following for 18 months after the end of his employment with Wagner: (1) soliciting or selling school photography accounts from Elliott’s territory, which was defined in the agreement; (2) disclosing a list of said accounts; or (3) otherwise competing for the accounts. Pam Elliott did not sign a non-compete agreement.

On December 31, 2008, Elliott and six co-workers (including his wife) mailed resignation letters to Wagner’s headquarters in St. Louis, Missouri. Defendants’ resignations left Wagner’s Edwardsville office bereft of personnel save for two short term employees. The Elliotts and at least one other Defendant then commenced employment with Herff Jones, Inc., a competitor of Wagner. On January 2, 2009, the Elliotts sent out a solicitation letter on behalf of Herff Jones to approximately 50 schools serviced by Wagner’s Edwardsville office. In that letter, the Elliotts referred to themselves collectively 16 times. Kris Elliott then had his wife, Pam, solicit those schools because she was not covered by a non-compete agreement. Pam Elliott obtained contracts from 21 of the schools.

Upon inspection of the Edwardsville office after Defendants’ resignations, Wagner determined that a number of business documents had been taken, printed, and/or deleted from the company’s office and computers. Specifically, Wagner could not locate its contracts with the vast majority of schools serviced by the Edwardsville office. Wagner further determined that the Elliotts had removed “The Bible,” a rolodex containing the contact information for Wagner customers serviced by the office. 

Wagner filed an action against Defendants on January 9, 2009. The Court entered a temporary restraining order against Defendants on January 13, 2009. In that order, Judge Reagan ordered the Elliotts to return all Wagner property in their possession. Judge Reagan declined to enjoin Defendants on the basis of Kris Elliott’s non-compete provision because of a dispute regarding alleged modifications to the provision. Following a preliminary injunction hearing that took place from February 2-4, the Court entered an order granting a preliminary injunction on February 6 and codified that ruling in its decision published on February 19. 

In the decision, the Court reiterated its finding that Defendants would have to return all Wagner property in their possession. Judge Reagan specifically noted that Defendants’ actions in taking Wagner property made it very difficult for Wagner to service its clients.

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This afternoon, the Judiciary Committee of the Georgia House of Representatives unanimously passed HB 173 and HR 178, which would set forth a statutory and constitutional framework for interpreting restrictive covenant agreements related, in particular, to employment. 

The House Civil Judiciary Subcommittee debated HB 173, leading to a number of changes. Specifically, the Subcommittee added language setting forth a test (analogous to the exempt/non-exempt test under the Fair Labor Standards Act) to determine whether an employee can be subject to a non-compete provision.  Additionally, the Subcommittee added in language permitting courts to take the economic hardship of an employee into account when deciding whether to enforce a restrictive covenant.  Finally, the Subcommittee added in language to ensure that courts cannot expand the scope of a restrictive covenant; they can only strike language or reduce the scope of the restrictions based on a rule of reasonableness.  The bill passed out of the Subcommittee on March 2, 2009 with a “do pass” recommendation.

The full Judiciary Committee considered the legislation this afternoon.  After brief explanatory remarks from the bill’s chief sponsor, Rep. Kevin Levitas, Committee Chairman Wendell Willard expressed happiness with the changes to the bill over the past year.  The Committee then passed the bill unanimously. 

HB 173 and its companion, HR 178 (a recommended constitutional amendment related to the legislation), will now be before the House Rules Committee.  If the Rules Committee passes the bill and the resolution, then they will be eligible for consideration by the House of Representatives itself before teh session ends.

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By Robert Milligan & Jim McNairy

After obtaining a sweeping nationwide injunction from an arbitrator that enjoined licensee Comedy Club, Inc. (“CCI”) from opening any new comedy clubs until 2019 pursuant to a trademark license agreement, licensor/competitor Improv West Associates (“Improv”) could not have been in the mood for laughs when the U.S. Court of Appeals for the Ninth Circuit modified the arbitrator’s injunction by significantly narrowing its scope and breadth. The decision is an important one for franchisors because the court indicated that in-term covenants not to compete in franchise like agreements will be void if they foreclose competition in a substantial share of a business, trade, or market.

The Ninth Circuit held in Comedy Club, Inc. v. Improv West Associates that an arbitrator’s injunction based on in-term covenant not to compete in a trademark license agreement, which precluded CCI and its affiliates (including tangential relatives of CCI principals) from competing in the comedy club business (apart from existing licensed “Improv” clubs that CCI continued to operate under the license agreement) until 2019, was not enforceable. Specifically, the court modified the nationwide scope and inclusion of tangential relatives of CCI principles in the arbitrator’s injunction.

The court found that the arbitrator’s injunction violated California Business & Professions Code Section 16600 (“CBPC § 16600”). With respect to the injunction barring affiliates from competing, the court stated:

Moreover, precluding non-party relatives or ex-spouses from opening or operating improv-comedy-related businesses or restaurants violates CBPC § 16600. . . . By restricting non-party relatives and ex-spouses from engaging in a lawful business, the injunctions, with respect to those persons, exceed the arbitrator’s authority.

 Regarding the scope of the nationwide injunction, the court stated that under existing California case law that it was evident that under CBPC § 16600 an in-term covenant not to compete in a franchise-like agreement will be void if it forecloses competition in a substantial share of a business, trade, or market. The court also stated that California courts are less willing to approve in-term covenants not to compete outside a franchise context because there is not a need to protect and maintain the franchisor’s trademark, trade name and goodwill.

The court indicated that under existing California case law that the franchisor-franchisee context was different from an employment or partnership context. The court stated that CCI’s relationship with Improv was in essence a franchise agreement as CCI contracted with Improv to use Improv’s trademarks and open comedy clubs modeled on Improv’s clubs. Assessing the requirements of California law, the court weighed CCI’s right to operate its business against Improv’s interest “to protect and maintain its trademark, trade name and goodwill.”  The court concluded that “this balance tilts in favor of Improv with regard to counties where CCI is operating an Improv club, but under the restraint of CBPC § 16600 California law does not permit an arbitrator to foreclose CCI’s competition in opening comedy clubs throughout the United States.” Accordingly, the court upheld a more limited injunction that restricted competition by CCI and those persons in active concert or participation with CCI but only in counties where CCI continued to operate comedy clubs using the licensed “Improv” name. Because the parties did not address its application, the court did not address whether the in-term covenant could be upheld under the trade secrets exception to CBPC § 16600.

Lessons from this case include:

1. In-term covenants not to compete may be enforceable in the franchise context “to protect trademarks, trade names, and goodwill of a licensor” if they are narrowly tailored and do not foreclose a party from engaging in its business or trade in a substantial section of the market—the geographic scope should be the territory where the company is or companies are doing business during the agreement. If franchisors can show that the in-term covenant is necessary to protect trade secrets, then they may be able to support a broader covenant. Franchisors should review their agreements to ensure that they comport with the court’s decision. 

2. Businesses should use caution before utilizing any covenants not to compete in California and should assess whether the restriction on competition can be tied to one of the statutory exceptions to California Business and Professions Code section 16600, to the protection of trade secrets, or the court’s in-term “franchise” exception to section 16600. These exceptions to California’s general prohibition against non-compete agreements were recognized by the court.

3. Franchisors should not include overly broad definitions of affiliates in their franchise agreements in California. Courts will not enforce overly broad covenants that restrict non-party relatives and ex-spouses from engaging in a lawful business because such covenants violate Business and Professions Code Section 16600.

4. The court’s decision highlights what the California Supreme Court made clear in its Edwards v. Arthur Andersen opinion: unless falling within one of few exceptions to Business and Professions Code Section 16600, post-term covenants not to compete are invalid in California regardless of whether such covenants are narrowly drawn.

5. The court’s decision places an increased focus on trade secrets. The court’s decision may be seen by some franchisees/employees as allowing greater mobility, even where proprietary information is taken. Auditing your organization’s trade secret protections is a valuable first step toward protecting against this risk, ensuring that your organization’s intellectual capital is adequately protected, and attempting to enforce a non-compete/non-solicit provision under the trade secrets exception to Business and Professions Code Section 16600.

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The Georgia House of Representatives is hard at work on the restrictive covenant bill (HB 173 - note that the linked version is not the most current as we understand it).  The House Civil Judiciary Subcommittee (led by Rep. Mike Jacobs) has been reviewing the proposed legislation.  Although a vote was anticipated earlier this week, the bill was held over so the subcommittee could look at adding language to ensure that the statute did not have the unintended consequence of reaching employees who were not involved in sales and whose duties would not normally involve interacting with customers or access to trade secrets and confidential information. 

On Tuesday of this week, HR 178, the companion resolution recommending an amendment to the Georgia constitution "so as to allow the enforcement of contracts that restrict competition during or after the term of employment or of a commercial relationship so long as such contracts are reasonable in time, area, and line of business; to provide that courts may modify such contracts to achieve the intent of the contracting parties; to provide for the submission of this amendment for ratification or rejection; and for other purposes," was cleared through the subcommittee with a "do pass" recommendation. 

We are not sure when we will see a new draft of the proposed legislation, but we will post a link when it is available.

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Representative Kevin Levitas's HB 173 is headed for another hearing on Monday at the Georgia Capitol.  It may be up for a vote before the full Judiciary Committee as soon as Tuesday, February 17, 2009.  

Subcommittee chairman Representative Mike Jacobs led the latest hearing on Tuesday, February 10, 2009.  The subcommittee heard support for the bill from Reed Elsevier, Inc. and Gould Hagler, the Executive Director of the Independent Insurance Agents of Georgia, Inc. (who also suggested a few potential modifications) among others.  

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The recent travails of newly hired Tennessee head football coach Lane Kiffin provide some interesting parallels to issues faced by a host of employers. As the penultimate paragraph of this piece from SportsIllustrated.com’s Andy Staples sets forth, Tennessee raided the coaching staffs of conference rivals Alabama and South Carolina to hire David Reaves and Lance Thompson, respectively. According to Staples, Reaves immediately began recruiting high school players whom he had previously recruited on behalf of South Carolina. 

Reaves, like most assistant coaches for major college football programs, is tasked with developing relationships with promising high school players and then convincing the players to come play for his employer. Without a restrictive covenant in place, Reaves apparently was free to move from South Carolina to Tennessee and commence recruiting his prior contacts to play football for the Volunteers instead of the Gamecocks. Moreover, knowing South Carolina’s tailored pitches to the players and the players’ responses to the pitches, Reaves would have been in a prime position to undercut the sales message that South Carolina was making to the players.

Although not apparent at first blush, Reaves’ recruiting role makes his assistant coaching position similar to the sales representative positions that are common throughout the country. In this analogy, high school recruits function as the “customers” of major college football programs. Like football coaches, sales representatives are tasked with establishing and cultivating relationships that are critical to the continued success of their employers. Like football coaches, sales representatives know their employers’ customer-base, as well as the methods used to identify the customers, the preferences of those customers, and the way that the employer has pitched and serviced those customers. Because of those relationships and that knowledge, football coaches and sales representatives can represent competitive threats to their former employers when they move to competitors. 

In the commercial context, a non-compete or non-solicitation of customers provision is the most common way for an employer to protect itself against a sales representative resigning and then making a play for the employer’s customers. Although these clauses are rare in the employment agreements of college football coaches, they are not unheard of. Recently, there has been discussion of a non-compete provision in Arkansas head coach Bobby Petrino’s employment agreement with the school that would forbid Petrino from accepting a coaching position with any of Arkansas’s divisional rivals. As the stakes increase in college football, one would expect such restrictive covenants to become more common. The same is true in any industry where relationships and non-public information are critical.

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Our own Robert Milligan and Damon Anastasia published an oustanding article in the California Lawyer on the status of the law in California on non-competition agreements in light of Edwards v. Arthur Anderson.  The article is publicly available here.

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The First Circuit recently rejected a taxpayer’s claim for a refund based on recharacterization of a payment for a noncompetition agreement. Muskat v. United States, 2009 WL 211067 (1st Cir. 2009).

Irwin Muskat was the CEO and largest shareholder of his company, Jac Pac Foods. He entered into an agreement with Corporate Brand Foods America to sell the company with him to remain as CEO. Muskat’s overall compensation package (a part of the asset purchase agreement between Jac Pac and Corporate Brand) included a covenant not to compete, in return for which he was provided separate compensation from his salary at the now-sold company, including an initial $1 million payout under the non-competition agreement.

Although Muskat initially recorded that payout as ordinary income for his 1998 taxes, in 2002 he filed an amended return for 1998, recharacterizing the $1 million payment as a capital gain (which would have entitled him to a refund of over $200,000). The IRS denied Muskat’s request so he brought an enforcement action against the IRS. The district court, too, denied his request, finding that Muskat lacked “strong proof” that the non-competition payment was intended as payment for personal “good will” rather than as a covenant not to compete.

The First Circuit noted two principles in reviewing Muskat’s appeal of this decision; first, that generally speaking, payments in return for covenants not to compete are taxable as ordinary income and payments for goodwill are taxable as capital gains; and, second, that ordinary income is usually taxed at a higher rate than capital gains. It also explained the “strong proof” rule to which Muskat’s claim was subject. This rule of heightened burden for one appealing a decision of the IRS applies “when the parties to a transaction have executed a written instrument allocating sums of money for particular items, and one party thereafter seeks to alter the written allocation for tax purposes on the basis that the sums were, in reality, intended as compensation for some other item.”

Here, Muskat argued, among other things, that his non competition agreement was in reality a payment for his personal goodwill as president of the company, which was what Corporate Brand purchased in connection with the non competition agreement. The First Circuit rejected that argument, noting that his non competition agreement was a “garden-variety agreement not to compete” and it affirmed the district court’s decision. It reiterated that compensation for non-competition agreements remain ordinary income. It is only if an agreement is actually a purchase of goodwill that the compensation may be classified as capital gains.

This case, however, raises a point of consideration for drafters and parties to non competition agreements and asset purchase agreements where one of the primary assets is goodwill. Although Muskat had to overcome a significant burden (of strong proof) to reverse the IRS qualification, the First Circuit did note that the compensation under the agreement expressly was for Muskat’s promise not to compete against the purchaser (Corporate Brand) and “to protect Jac Pac’s goodwill.” Thus, the questions then raised are whether Muskat could or should have executed separate agreements to take the tax benefits of the goodwill presumably purchased as a part of the sale of the business and whether, ab initio, it was the heightened legal burden placed on Muskat that kept him from successfully qualifying his compensation as a capital gain. The company or individual dealing in non-competition agreements in the sale of a business or goodwill should consult a tax professional for advice about these issues.
 

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Just before the end of 2008, Georgia's House Study Committee on Restrictive Covenants in the Commercia Arena, chaired by Representative Kevin Levitas, issued its final report, asking for support to "[m]oderniz[e] Georgia law" and to "attract new business to our great state and retain those companies that are already located here." 

Following two hearings involving testimony and letters from a number of witnesses (in full disclosure, I participated in providing testimony), the Committee concluded that "[t]he time has come for a change in Georgia law, both to bring our state in line with the overwhelming majority of other states as well as to establish a rule of reasonableness in the analysis of restrictive covenants." 

Additionally, the Committee recommended that Georgia courts be allowed to "blue pencil" restrictive covenants in connection with employment agreements (blue-pencling in connection with agreements relating to sale of a business already is allowed).  A couple of practitioners who testified before the Committee expressed concern that blue-penciling would make it more difficult to predict outcomes; that is that there is no certainty until the litigation concludes.  Proponents of blue-penciling countered that argument by noting that blue-penciling may lead to more negotiated settlements of disputes. 

It appears that the legislation may be headed for a hearing this session.   The question that remains is whether a constitutional amendment will be required.  Previous attempts by the General Assembly to bring clarity to Georgia's law were struck down by Georgia's Supreme Court as violating Art. III, Sec. VI, Par.  V(c) of the Constitution of Georgia of 1983, which reads: "The General Assembly shall not have the power to authorize any contract or agreement which may have the effect of or which is intended to have the effect of defeating or lessening competition, or encouraging a monopoly, which are hereby declared to be unlawful and void."  So, in addition to making it through the General Assembly, we may also see support for a constitutional amendment to avoid uncertainty in the Georgia's courts.

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In D.L. Anderson’s Lakeside Leisure Co. v. Anderson, the Wisconsin Supreme Court recently upheld an award of damages for violation of a non-compete provision in a sale of business agreement. The facts of situation are as follows:

D.L. Anderson built D.L. Anderson Co., a business offering a range of marine services and products, such as shore landscaping and manufacturing and selling and servicing piers and lifts. He sold the business for $891,000 to Scott and Steven Statz in 2000. Of the purchase price, $400,000 was allocated as consideration for Anderson executing a non-compete provision that forbade him from engaging in the business of providing marine products and services within a 120-mile radius of the business. The non-compete provision also prevented Anderson from allowing his name to be used in the industry; $200,000 of the purchase price was allocated to the business’s goodwill and for use of the trade name.

Starting in 2002, Anderson performed a number of acts that the Statzes alleged violated the non-compete agreement. Specifically, Anderson: (1) worked on the development of a boat for installing and removing boatlifts; (2) acted as a factory representative of a company that manufactured and distributed boat lifts; (3) established a new business (one mile from his prior location) named “The Sailboat House at Anderson Marine” that sold, stored, and repaired boats and sold marine accessories; and (4) publicized his ability to perform shoreline restoration work.

The Statzes sued Anderson in September 2004. In April 2006, a jury awarded compensatory and punitive damages to the Statzes for breach of the non-compete provision and trademark infringement. After the entry of the verdict, the Statzes moved for injunctive relief and asked that the non-compete provision be extended by 591 days, pursuant to a tolling provision in the sale agreement. The Statzes also requested recovery of their attorney’s fees pursuant to the agreement. The trial court granted these requests. 

The Wisconsin Court of Appeals upheld the findings of breach of the agreement and trademark infringement, as well as the damages awarded for breach of the agreement. The Court of Appeals reversed the damages award for trademark infringement and remanded the attorney’s fees issue to the trial court for further consideration.

The Wisconsin Supreme Court upheld the award of compensatory damages for the violation of the non-compete provision. In so doing, the Supreme Court found that the Statzes presented evidence showing a decrease in gross receipts for pier installation, as well as testimony attributing the decline to Anderson’s competitive activities in areas where the Statzes had previously made sales. This evidence was sufficient to uphold the award of compensatory damages. 

The Supreme Court also upheld the extension of the non-compete period. In so doing, the Supreme Court recited the Court of Appeals’s finding that the extension of the period was proper because of the jury’s findings that Anderson violated the non-compete provision and the Statzes suffered damages as a result.

The Supreme Court upheld the jury’s verdict that Anderson infringed upon the trademark that he sold to the Statzes. The Supreme Court reversed the Court of Appeals’s finding that the Statzes provided insufficient evidence to support the damages awarded by the jury for infringement. In so doing, the Supreme Court found that the Statzes were not required to offer evidence of actual confusion and negative impressions on the part of customers; the $200,000 allocated to the goodwill was sufficient to support the award, as was the testimony of the Statzes as to the value of the goodwill. The Supreme Court also cited to testimony presented by the Statzes that established customer confusion and frustration resulting from billing issues caused by Anderson operating his similarly named business. The Supreme Court concluded that the jury did not have to apportion damages with mathematical precision because of the nature of the tort. 

Because the Court of Appeals’s decision to remand the attorney’s fees question was based on its reversal of the award of compensatory damages for trademark infringement, the Supreme Court reinstated the award of attorney’s fees. The Supreme Court remanded the matter to the trial court for consideration of an award of attorney’s fees to the Statzes for fees incurred during the appellate process.

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This morning (September 24, 2008), Rep. Kevin Levitas and Sen. Judson Hill from the Georgia Legislature convened the first meeting of a legislative study committee reviewing the law of Georgia with respect to restrictive covenants in employment and business relationships. The House Committee is chaired by Representative Kevin Levitas, and includes the following members: Representative Tim Bearden; Representative Butch Parrish; Representative Richard Smith; Representative Brian Thomas; and Representative Al Williams. As Representative Levitas previously remarked,

“It is time that the legislature studied this issue in depth and provided clear guidance to the courts regarding the sustainability of these private agreements between private contracting parties and how to make them fair to all parties. . . .

 “It is imperative that we carefully examine all aspects of this important issue so that both employer and employee can know their rights and duties after employment has ended.

“Both parties need to know with certainty what they can and cannot do, and that is why legislation in this area is so important. In addition to providing certainty to the parties, clarifying the law will have a significant impact on Georgia’s economy and the ability of the state to attract businesses to this state and to keep them here.”

Levitas noted th[at] he expects that the committee will hear from a diversity of witnesses with differing viewpoints on the subject. Levitas said that he intends for the committee “to bring together all necessary points of view and to gather all of the facts so that we can, once and for all, clearly define and bring certainty to this important area of the law.”

Erika Birg, a partner with Seyfarth Shaw’s Trade Secrets, Non-Competes, and Computer Fraud team, led off the morning’s testimony, highlighting the background of restrictive covenant law in Georgia. A lively question-and-answer session followed between the committee members and Ms. Birg. The committee’s questions, although varied in substance, primarily involved how a court or a legislature would determine whether a covenant is “reasonable,” as well as how the legislature might craft legislation (and a constitutional amendment if needed) that would address the concerns of both Georgia employers and their valued employees. 

J. Henry Walker IV, a partner with the litigation group of Kilpatrick Stockton and former in-house litigation counsel for BellSouth, spoke, representing the Georgia Chamber of Commerce. Mr. Walker noted the Chamber’s support for the committee’s work directed towards re-vamping Georgia’s law to provide certainty for both employers and employees. Mr. Walker also discussed BellSouth v. Forsee, 265 Ga. App. 589 (2004), a case in which BellSouth lost the ability to enforce a non-compete for a high-level executive because of Georgia court’s prohibition on enforcing a non-compete that is not certain at the time of execution of the agreement. He highlighted that certainty in the law benefited all concerned – employers and employees alike. 

The committee then heard from R. Samuel Snider, Vice President and Lead Acquisition Counsel for LexisNexis, a subsidiary of Reed Elsevier, regarding the effect of Georgia’s admittedly confusing law on the company’s decision to relocate to Georgia following its acquisition of ChoicePoint. Mr. Snider focused on the needs of technology companies to protect both intangible intellectual property but also protect the companies’ investments in highly compensated and sought-after personnel. He noted that in such instances, restrictive covenants may be part of a negotiated employment arrangement.

The study committee is set to meet again this fall, before the Legislature reconvenes in January. As the date and time are set, we will post the information here.

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On August 6, 2008, New York Governor David A. Paterson signed Bill S02393, dubbed the “Broadcast Employees Freedom to Work Act” into law. The act, amends the New York Labor Law so as to prohibit non-compete agreements in the broadcasting industry.  The enactment is effective immediately, and is codified as section 202-k of the Labor Law

Specifically, the newly minted Section 202-k provides that a “broadcasting industry employer shall not require as a condition of employment, whether in an employment contract or otherwise,” that a broadcast employee or prospective broadcast employee, after the conclusion of employment, refrain from obtaining subsequent employment “(a) in any specified geographic area, (b) for a specific period of time, or (c) with any particular employer or in any particular industry.” The act further declares as unenforceable any contractual provisions that would waive these prohibitions.

Within Section 202-k definition of “broadcasting industry employer” are companies operating television, radio, cable stations, networks, and/or internet or satellite-based services “similar to a broadcast station or network,” any broadcast entities “affiliated” with such entities, and “any other entity that provides broadcasting services such as news, weather, traffic, sports, or entertainment reports or programming.”  Likewise, a “broadcast employee” is defined as any on- or off-air employee of a broadcasting industry employer, “excluding management employees.”

The act provides that broadcast employees, as defined, can seek civil damages, including attorney’s fees and costs, as against a broadcasting industry employer violating Section 202-k.

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 By Robert Milligan, Kurt Kappes and James McNairy

The California Supreme Court released its highly anticipated decision in Edwards v. Arthur Andersen LLP  today and held that employee non-competition agreements are invalid, even if narrowly drawn, unless the agreement falls within a statutory exception. 

In doing so, the Court rejected the Ninth Circuit’s narrow restraint exception, which excepted the prohibition contained in Business and Professions section 16600 on non-competition agreements where one was barred from pursuing only a small part or limited part of the business, trade or profession.

In its decision, the Court limited its review to two issues:

1)      To what extent does Business and Professions Code section 16600 prohibit employee non-competition agreements;

2)      Is a contract provision requiring an employee to release “any and all” claims unlawful because it encompasses nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802.

The Court concluded that Business and Professions Section 16600 prohibits employee non-competition agreements unless the agreement falls within the applicable statutory exceptions of sections 16601, 16602, or 16602.5. The Court also held that a contract provision whereby an employee releases “any and all” claims does not encompass nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802.

On the first issue, the Court found that California state courts have consistently affirmed that section 16600 evinces a settled legislative policy in favor of open competition and employee mobility. Section 16660 states: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” (emphasis added) The chapter excepts non-competition agreements in the sale or dissolution of corporations (§ 16601), partnerships (§ 16602), and limited liability corporations (§ 16602.5). 

The Court noted that it had previously invalidated an otherwise narrowly tailored agreement as an improper restraint under section 16600 because it required a former employee to forfeit his pension rights on commencing work for a competitor (citing Muggill v. Reuben H. Donnelley Corp. (1965) 62 Cal.2d 239, 242-243). The Court, quoting Muggill, stated section 16600 invalidates provisions in employment contracts and retirement pension plans that prohibit “an employee from working for a competitor after completion of his employment or imposing a penalty if he does so unless they are necessary to protect the employer’s trade secrets.”

The two clauses at issue in Edwards’ agreement with Andersen provided:

1)      If you leave the Firm, for eighteen months after release or resignation, you agree not to perform professional services of the type you provided for any client on which you worked during the eighteen months prior to release or resignation. This does not prohibit you from accepting employment with a client. 

2)      For twelve months after you leave the Firm, you agree not to solicit (to perform professional services of the type you provided) any client of the office(s) [Los Angeles] to which you were assigned during the eighteen months preceding release or resignation. 

Andersen argued that the Court should interpret the term “restrain” under section 16600 to mean simply to “prohibit,” so that only contracts that totally prohibit an employee from engaging in his or her profession, trade, or business are illegal. 

The Court rejected that argument and found that Andersen’s non-competition agreement was invalid because the two specific clauses at issue in the agreement restricted Edwards from performing work for Andersen’s Los Angeles clients and therefore restricted his ability to practice his accounting profession. 

Earlier in the decision, the Court expressly stated it did not address the applicability of the “so-called trade secret exception to section 16660.” Before the Supreme Court granted the petition for review in Edwards, the lower appellate court’s decision remanded the case to the trial court to determine if the trade secret exception applied, i.e. the non-competition agreement was necessary to protect trade secrets. The Court’s disposition indicates that the issue is closed though and that there will be no such remand to the trial court:

We hold that the noncompetition agreement here is invalid under section 16600, and we reject the narrow-restraint exception urged by Andersen. Noncompetition agreements are invalid under section 16600 in California even if narrowly drawn, unless they within the applicable statutory exceptions of sections 16601, 16602, or 16602.5

Andersen asked the Court to adopt the limited or “narrow-restraint” exception to section 16600. The Court noted that confusion over the Ninth Circuit’s application of section 16600 arose in a paragraph in the Ninth Circuit’s decision in Campbell v. Trustees of Leland Stanford Jr. Univ. (9^th Cir. 1987) 817 F.2d 499, in which the Ninth Circuit stated that some California state courts have excepted application of section 16600 “where one is barred from pursuing only a small or limited part of the business, trade or profession” (citing Boughton v. Socony Mobil Oil Co. (1964) 231 Cal.App.2d 188 and King v. Gerold (1952) 109 Cal.App.2d 316). The Court found that the reasoning in these state court cases does not provide persuasive support for adopting the narrow restraint exception because Boughton involved the use of land, not a restriction upon a plaintiff’s practice of a profession, and King relied upon a trade secret exception to the statutory rule. 

The Court acknowledged that recent Ninth Circuit cases have followed Campbell to create a narrow-restraint exception to section 16600 in federal court. The Court stated that California state courts have not embraced the Ninth Circuit’s narrow restraint exception and stated “no reported California state court decision has endorsed the Ninth Circuit’s reasoning, and we are of the view that California courts have been clear in their expression that section 16660 represents a strong public policy of the state which should not be diluted by judicial fiat” (citing Scott v. Snelling and Snelling, Inc. (N.D. Cal. 1990) 732 F. Supp. 1034, 1042).

In sum, while the Court’s decision clearly states California does not recognize a “narrow restraint” exception to the general rule that employee non-competition agreements are invalid, the Court did not specifically address when non-solicitation of customer and employee clauses are permissible to protect trade secrets. 

The San Francisco Chronicle also has posted an article about this case.

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           According to the California Supreme Court's website, the Court’s highly anticipated decision in Edwards v. Arthur Andersen, LLP will be available tomorrow, August 7, 2008 at 10:00 a.m. on the Court’s website.

            Trade secret and employment attorneys have been closely following the Edwards case after the Supreme Court granted review of the case on November 29, 2006. 

            In the lower court, the Court of Appeal for the Second Appellate District expressly rejected somewhat settled Ninth Circuit case law that provides an exception to the general rule in California that covenants not to compete are unlawful in the employment context pursuant to Business and Professions Code section 16600. The narrow restraint exception essentially provides that a noncompetition agreement is not unlawful where it leaves a substantial portion of the market open to the employee. The lower court expressly found that the narrow restraint exception was a “misapplication of California law when applied to an employee’s noncompetition agreement.” The court further stated “[i]n our view, section 16600 prohibits noncompetition agreements between employers and employees even where the restriction is narrowly drawn and leaves a substantial portion of the market available for the employee.”

            The lower court also found that the broadly worded release that Edwards allegedly was required to sign was unlawful because it purportedly waived Edwards’ Labor Code section 2802 rights. Labor Code section 2802, subdivision (a), provides: "An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties . . ." The lower court held that “[b]ecause Labor Code section 2802's indemnity provisions implement public policy, requiring Edwards to waive indemnity rights as a condition of continued employment violated public policy and constituted an independently wrongful act for purposes of . . .[Edwards’] intentional interference with prospective economic advantage claim.”

            The issues that the Supreme Court are expected to address in tomorrow’s decision are:

 (1) Is a non-competition agreement between an employer and an employee that prohibits the employee from performing services for former clients invalid under Business and Professions Code section 16600, unless it falls within the statutory or judicially-created trade secrets exceptions to the statute?

(2) Does a contract provision releasing "any and all" claims the employee might have against the employer encompass non-waivable statutory protections, such as the employee indemnity protection of Labor Code section 2802?

            We will provide a follow-up blog entry once the decision comes out.  

By Robert Milligan, James McNairy and Summer Associate Julia Brodsky

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By Robert Milligan and Summer Associate Justin de Herrera

In City of Oakland v. Hassey, 163 Cal.App.4th 1477, (June 17, 2008), a California appellate court recently rejected a police officer’s claim that a provision in his employment contract requiring him to reimburse the City of Oakland for his training expenses constituted an illegal covenant not to compete in violation of Business & Professions Code Section 16600. The former Oakland police officer agreed in his employment contract to pay back the cost of his police academy training if, once hired, he left the department in less than five years time. The officer’s training expenses were approximately $8,000.

On appeal, after the trial court granted summary judgment in favor of the City on its reimbursement claim, the officer contended that the provision violated Business and Professions Code Section 16600. Section 16600 provides “[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” 

The court disagreed and found that “[n]othing prevented [Hassey] from working for another police department, or anywhere else, for that matter.” 

The appellate court relied heavily on a Seventh Circuit federal case, Heder v. City of Two Rivers, Wisconsin, 295 F.3d 777 (2002), in reaching its decision. The Heder case involved a firefighter claiming that a provision in his employment contract – similar to the one at issue in Hassey – constituted an illegal covenant not to compete. The Heder court equated the provision to other valid employment incentives that employers offer to their employees. The Heder court reasoned that the residents of the city where the firefighters worked received the benefit of a more skilled fire department, and that the city might be less likely to provide that benefit if it feared that employees would leave the fire department, taking their new skills elsewhere. 

The court’s ruling in Hassey, however, leaves many questions unanswered. For instance, does the decision only apply to repayment provisions in government employment contracts or only those of public safety officials for that matter? After all, the court’s reference to Heder seems to suggest that when the agreement benefits city residents, additional latitude is granted to the government. On the other hand, if the ruling does apply to private employment contracts, how much money may an employer seek in reimbursement from an outgoing employee for training expenses, if at all, before a court finds that a Section 16600 restraint exists? To some, a $8,000 bill could represent a serious impediment to changing jobs.

More importantly, however, how does the court’s ruling in Hassey square with California Labor Code section 2802? That section requires an employer to “indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties . . . ” Oakland required that all of its officers obtain licensed academy training before becoming police officers. 

Interestingly, the court, in an addendum to its original decision, refused to address this issue because Hassey did not rely on Labor Code Section 2802 in his answer and because Hassey did not allege a Labor Code Section 2802 cause of action in his cross-complaint . The court also refused to address Hassey’s argument that the agreement violated Labor Code 2804 [contracts waiving benefits of this article or any part thereof are invalid] for similar reasons. Currently, Edwards v. Arthur Andersen, LLP, a case that will decide whether an employee can waive the protections of Labor Code Section 2802, is currently on appeal with the California Supreme Court. Oral argument was held on June 4, 2008 and an opinion in the case is due at any time.

Due to the many unanswered questions that the Hassey decision prompts, its application to private employment contracts remains dubious. The Supreme Court’s pending decision in Edwards v. Arthur Andersen, LLP may provide some additional guidance.

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Zimmer, Inc. v. Albring, 2008 WL 2604969 (E.D. Mich.June 27, 2008)

Judge Steeh in the Eastern District of Michigan carefully crafted a narrowly tailored injunction order to prevent a former employee (Albring) from violating her non-compete and non-solicit agreements, but allowed her to remain employed by her new employer, and to be paid by that employer, pending the expiration of the restrictive covenants.   Albring had entered into an arrangement to become employed full-time by a competitor of her former employer, Zimmer (both in the surgical implant business) pending expiration of her restrictive covenants. Her deal paid her “$3,000 per week to do nothing as the company is waiting for her non-compete agreement with Zimmer to run out and then she will begin selling . . . products for them.” Judge Steeh found that Albring’s profitable arrangement did not violate the non-compete, because she was not actively selling competing products. 

Zimmer also argued that Albring should be enjoined on the grounds that it put the company’s confidential information at risk. The court rejected that argument based on its conclusion that none of the information that the company sought to protect were properly raised. The court said that “Zimmer has not shown or even alleged any trade secrets involving surgical implants or the identity of [defendant’s] customers. . . .” 2008 WL 2604969 at *6. The court went on to reject any claim that customer information was confidential, noting that the defendant claimed that the targeted surgeons were friends of hers before she became employed by Zimmer and “[i]n any event, their identity is easily accessible and can be located merely by checking the telephone book.” 

Nonetheless, the Court did enjoin the defendant from a second job that put her in direct contact with the same surgeons and had the effect of promoting or selling surgical implants that competed with Zimmer's.

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Cynergies Consulting, Inc. v. Wheeler, 2008 WL 2623960 (Ohio App. 8 Dist. July 3, 2008)

An Ohio Court of Appeals recently ruled that although “‘an injunction must account for period of noncompliance in order to make judicial enforcement effective’,” 2008 WL 2623960 at *4 (citation omitted), failure to file the complaint before the expiration of the non-compete clause will prevent the complaining party from seeking to take advantage of the tolling provision when looking for injunctive relief. The court emphasized that if the non-compete period had not expired as of the time that the plaintiff filed the complaint, then injunctive relief and tolling for purposes of extending the period of the injunction would be potentially available remedies. 

The court also denied the plaintiff’s request for an accounting for the revenues received by the defendant (former employee) in connection with the alleged breach of the non-compete agreement. The court ruled that the “discovery process provides adequate means to obtain the same information sought through an accounting. . . .” Id. at *5.

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The California Courts of Appeal recently concluded that a former employee could not have breached a duty of loyalty to his employer where he entered into competition with the employer only after leaving the company. Primetech Corp. v. Cohen, 2008 WL 1899976 (Cal. App. 4 Dist. April 30, 2008).

The plaintiff, Primetech Corporation, a supplier of aircraft parts to the military and civilian industry, hired defendant Jonathan Cohen to help produce a database of aircraft parts. A year after Cohen started, the United States Air Force suspended Primetech and “debarred” many of its principals from any government contracting because of allegations that the company had knowingly delivered counterfeit parts to the Department of Defense. Around this time, Cohen, and another employee of Primetech, formed Air Sonic, an aircraft parts business, where they continued to use Primetech’s database. Cohen ultimately separated from Primetech in July 2005, taking several computers with him, as well as a database program containing Primetech’s financial information.

Primetech sued Cohen and his new aircraft parts company, Air Spectrum, which had replaced the earlier Air Sonic. After a bench trial, the trial court entered judgment for Cohen on most of the causes of action, rejecting Primetech’s claims for breach of loyalty, misappropriation of trade secrets, and unfair competition, among others. Primetech argued on appeal that the trial court had erred in denying its motion for a directed verdict (nonsuit) on its cause of action for breach of loyalty. Primetech alleged that Cohen had breached his duty of loyalty when he began operating his own aircraft parts company while still employed at Primetech. The trial court, however, concluded that Cohen was never an officer of the company and furthermore, he had started Air Sonic with the consent of Primetech’s vice president and had not actually decided to compete with Primetech until after he had separated from the company, which he was entitled to do since there was no non-compete clause in his employment contract. Reviewing the facts, the Courts of Appeal observed that while substantial evidence supported a determination that Cohen was an officer of Primetech when he set up a competing business using Primetech’s database, Primetech had failed to demonstrate that Cohen had directly harmed the company with his competing venture, so any error was not prejudicial and thus reversal was not warranted. As a result, the Courts of Appeal held that the trial court’s factual findings precluded Primetech from succeeding under a breach of loyalty theory.

This case should prompt companies to consider carefully the circumstances under which they separate from former executives. Although non-competition agreements can protect an employer, a company should not rely on breach of loyalty claims to protect against contemporaneous competition where there is any inference of an amicable split. Employers should also realize that to pursue a breach of loyalty claim successfully , they must demonstrate that the employee “formed the design to compete” while still employed with the company. Similarly, without adequate trade secrets counseling and preparation, even a company’s most valuable asset (in this case the airplane parts database) can be used by former employees in competing businesses if the proper protections are not in place.

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By Scott Krol, New York

A six-panelist jury awarded $6.9 million in punitive damages and $126,511 in compensatory damages to CBS Radio f/k/a Infinity Radio in a dispute stemming from an action to enforce a non-compete clause against radio host Jennifer Ross, whose real name is Elena Whitby. According to published reports, CBS has spent approximately $4 million in attorney fees pursuing Ross since 2000. Ross’s attorney plans to appeal the verdict. http://www.sun-sentinel.com/news/local/palmbeach/sfl-flpross0509pnmay09,0,3372540.story

The dispute started in 2000, when after failed negotiations, Ross left “Sunny 104.3” WEAT, for rival WRMF 97.9 FM. Ross had worked for WEAT since 1995 under an agreement, as amended in 1999, which contained a non-compete clause prohibiting Ross from appearing on radio or television and for working for any competitor within 125 miles of WEAT, for 12 months after leaving WEAT. (See Elena Whitby v. Infinity Radio Inc., 951 So. 2d 890) In January 2000, Infinity send a letter to Ross stating its intent to exercise its option to renew the agreement for 5 years. The two sides were unable to negotiate a new agreement, and Ross started broadcasting for rival WRMF in September 25, 2000 at the expiration of the 1995 Agreement. Infinity sued Ross and Licensees, seeking injunctive relief, contract damages, tortious interference and punitive damages. In 2005, Infinity was awarded $17.2 million. That judgment was set aside on appeal. http://www.4dca.org/Jan2007/01-24-07/4D05-3888.op.pdf.

In 2008, the jury again found for Infinity and awarded $6.9 million in punitive damages and $126,511 in compensatory damages. According to the Sun-Sentinel, David Gorman, Ross’s attorney, plans to appeal the verdict saying that it would be a financial hardship for Ross who is being paid $200,000 a year at WRMF, to pay the $126,511 verdict plus interest plus attorney fees. Gorman contends that Ross was underpaid at WEAT, “she was paid $135,000 a year… If she’s that great, that’s all you’re going to pay her?” (See Missy Diaz, South Florida Sun-Sentinel , May 8, 2008, http://www.sun-sentinel.com/news/local/palmbeach/sfl-flpross0509pnmay09,0,3372540.story) In light of nearly 8 years of litigation, $4 million in attorney fees and only $60,000 difference in salary, perhaps the sides should have been more diligent in their contract talks in 2000.

Currently Jennifer Ross is the morning co-host of “The Jennifer and Danny Show” on WRMF. CBS’s WEAT FM has “The Sunny Morning Show” with a similar format. For the record WEAT FM is ranked number 1 in the West Palm Beach Radio market, while WRMF is third.

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The Eleventh Circuit recently affirmed the enforcement of a non-competition agreement against a former employee where the plaintiff-company appealed from judgment entered in its favor because it was dissatisfied with the result. See MQ Associates, Inc. v. North Bay Imaging, LLC, 2008 WL 713688 (11th Cir. March 18, 2008).

Plaintiff MQ Associates (“MedQuest”) operates outpatient medical imaging clinics, providing services such as Magnetic Resonance Imaging (MRI), X-rays, and CT Scans. MedQuest employed defendant Bruce Woolum, first as a technician moving up eventually to area manager. In return for his employment and stock options, Woolum agreed to a non-competition agreement, which prevented his solicitation of MedQuest employees and competition with MedQuest within a 25-mile radius of the relevant imaging clinic for 24 months. The non-competition agreement also included an “extension” provision, which provided that “If [Woolum] violates the provisions [stated above], [Woolum] shall continue to be bound by the restrictions set forth [above] and the Non-Compete Period shall continue until the expiration of a cumulative period of twenty four months after the cessation of the violation.” In other words, if Woolum violated the agreement just before it expired, it could result in a total prohibition on competition of nearly four years.

Despite this agreement, Woolum left MedQuest and prepared to open a competing imaging center two miles away. In so doing, he solicited a MedQuest employee to join him at his new venture: North Bay Imaging. In response, MedQuest filed an action requesting, among other things, an injunction against North Bay and Woolum preventing competition and solicitation. The district court granted the injunction as to the non-solicitation provision, including extending its length because, it concluded, the extension clause operated independently based on the particular prohibition challenged. But as North Bay had not opened for business yet, the court reasoned, it was not actually in competition, thus, the non-competition provision could not be enforced against North Bay.

MedQuest appealed, claiming that these conclusions were incorrect because (i) the extension clause applied to both prohibitions and (ii) even if it did not apply to both prohibitions, entering into a venture for the purposes of competing was sufficient to find “indirect competition.”

The appeals court disagreed on both counts and refused to find that the district court had abused its discretion in tailoring the injunctive relief. Most notable from this decision is the difficult place into which MedQuest was placed when its former employee began preparing to compete. It could prohibit him from soliciting its employees, to be sure, but the Court held that “formation and start-up” are insufficient to support finding competition.

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In a 2-1 decision, the Illinois Appellate Court, Third District, affirmed summary judgment awarded to an ex-employee in an action brought by the ex-employer to enforce an employment agreement restrictive covenant. Brown & Brown, Inc. v. Mudron, No. 3-06-0908 (Ill. App., 3d Dist., Mar. 11, 2008). The agreement provided that it was to be construed in accordance with Florida law where the ex-employer is incorporated. Even though Section 542.335(g) of the Florida statutes provides expressly that “a court: (1) Shall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought,” the court ruled that Illinois law was applicable (based on Section 187 of the Restatement (Second) of Conflict of Laws), that the Florida statute “is contrary to Illinois’s fundamental public policy,” and that Illinois law requires consideration of the hardship a restrictive covenant imposes on the ex-employee.

The court also held that the covenant was unenforceable because it was supported by inadequate consideration. The ex-employee resigned approximately seven months after signing the employment agreement. Noting that “Illinois courts depart from the traditional rule that the law does not inquire into the adequacy of consideration, only its existence,” the court held that “[s]uch a short period of time of continued employment is not sufficient consideration under Illinois law to support the restrictive covenant.”

The dissenting justice was aghast at the ruling regarding inadequacy of consideration. In the case cited by the majority as support for that ruling, the court had emphasized the peculiar facts present there: the covenant was signed by the employee in exchange for a promised promotion which was given and then almost immediately retracted, whereupon the employee quit. There is a “[b]ig difference,” the dissenting justice observed, between an employee like the one in the cited case who resigns “because the consideration failed,” and the Mudron majority’s holding “that the consideration failed because [the ex-employee] quit.” He added that the majority’s decision “renders all restrictive employment covenants illusory in this state. They would all be voidable at the whim of the employee.” Further, Mudron was a breach of contract lawsuit, whereas the cited case was an action for an injunction in which the court had “observed that even a peppercorn of consideration is sufficient to support a finding of adequate consideration when one seeks damages at law while more should be required when one seeks equitable relief.”

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In Navair v. IFR Americas, the Tenth Circuit reversed the district court’s grant of summary judgment to defendants, holding that an extension of time to a distribution agreement should be for a reasonable time even if no specific term is agreed upon by the parties.

Plaintiff Navair, Inc. was the exclusive Canadian distributor for IFR, a military communications equipment manufacturer. Under a long-running series of distribution agreements, when Navair would find a buyer for IFR equipment, IFR would agree to sell the equipment to Navair at a discount, and Navair could then resell the equipment for a profit. In other words, Navair would enter into a purchase and sale agreement with a customer on reliance of a below-fair market value price from IFR and sell the equipment at fair market value to its own customer. But after almost 30 years of this relationship, IFR told Navair that it would not renew their relationship, based in part on allegations that Navair was in violation of its noncompetition clause. Rather than immediately terminating their distribution agreement, however, the parties entered into two open-ended extensions.

Navair and the Canadian Government entered into a purchase and sale contract for IFR equipment a few months after termination of the Navair—IFR agreement. It was unclear if this contract occurred within the extension period, but the district court concluded that it did not. The Tenth Circuit disagreed. Because the parties had agreed to an extension, it reasoned, even though they had not set a specific time for the extension to end, the extension would be in effect for “a reasonable time.”

This case bears noting for two reasons. First, violations of a non-compete, particularly in a business-to-business context, can have other ramifications than simply an injunction or potential damages. Second, companies should be sure that the terms of their agreements are clear and that all essential terms of the contract (including expiration) is clearly conveyed to the opposing party. From the tenor of the Court’s language in remanding the case, it sounds like IFR will learn an expensive lesson.

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In almost every trade secret/restrictive covenant dispute, a company whose trade secret information has been stolen must confront the possibility that its customers will be dragged into the dispute. One company decided to take the bull by the horns pre-litigation and sent a letter to all of its customers notifying them of a misappropriation by one of its former employees and “suggesting” that, to avoid potential involvement in any ensuing litigation “as a material witness, or otherwise,” the customers should not do business with the former employee.

Unsurprisingly, the former employee sued his former employer for defamation. The former employer brought a motion to strike the defamation complaint under California’s anti-SLAPP statute, which authorizes a court to dispose of lawsuits that are brought to chill “the valid exercise of constitutional rights,” such as the right of free speech. The trial court’s decision to grant the former employer’s anti-SLAPP motion and strike the defamation complaint was upheld yesterday by the Court of Appeal . See Neville v. Chudacoff, __ Cal.Rptr.3d __, 2008 WL 650658 (Cal.App. 2d. Dist. March 12, 2008).

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A federal court in the Southern District of California recently burst the bubble on a plaintiff’s suit alleging that the defendant, the alleged creator of a novelty chewing gum product, had stolen the plaintiff’s idea for a NASCAR-themed bubble “chew” by granting the defendant’s motion for summary judgment.

The decision provides a reminder to companies that provide confidential and trade secret information to others under non-disclosure agreements that they need to follow the precise terms of those agreements, including properly designating all information that they seek to protect, otherwise they run the risk of their information being exposed and compromised.

In the colorful case, Hoffman v. Impact Confections, Inc., Case No. 06cv0489 BTM (NLS), 2008 WL 413751 (S.D. Cal.), the plaintiff alleged that together with a partner they established a bubble gum company named Ollie Pop Bubble Gum, Inc. (“Ollie Pop”). Plaintiff claimed that he came up with the concept of marketing novelty gum and candy “which was designed to combine the popularity of NASCAR and its drivers with the lure of the chew tobacco favored by many of NASCAR's fans by providing a gum or candy in an original new packaging intended to appeal to all ages.” First Am. Complaint 11.

Plaintiff alleged that he contemplated two different packaging options, both to be sold under the mark “Pit Crew Chew.” Id. at 12. The first packaging option was a pouch containing gum or candy and the second packaging option was a plastic container shaped like a tire and wheel that would also contain gum or candy. Id. Plaintiff’s idea purportedly was to have the products licensed by NASCAR and bear NASCAR's logos. Plaintiff also wanted to have the products endorsed by at least one NASCAR driver and display the driver's image and/or his car and/or associated number. Id.

According to the plaintiff, he designed both packages and began working with Motorsports Management to establish a relationship between Ollie Pop and NASCAR. Id. at 13. Plaintiff claimed he entered into discussions with Joe Gibbs Racing to have one of its drivers endorse the product and allegedly was able to obtain the promise of an endorsement from Tony Stewart. Id. at 15.

Plaintiff claimed that in 2003, he entered into negotiations with the defendant regarding the marketing and selling of “Pit Crew Chew” products. Id. at 16. The parties entered into a written non-disclosure agreement in May 2003.

As part of his discussions with the defendant, plaintiff contended that he disclosed confidential information and materials to defendant, including, but not limited to, “the idea/concept of marketing and selling a NASCAR and NASCAR driver endorsed bubble gum, the idea/concept of providing gum and/or candy in a package which would appeal to NASCAR fans' noted fondness for ‘chew,’ and the specific drawings of both the pouch and wheel to be marketed and sold.” Id. at 18. Plaintiff also claimed he introduced defendant’s employees to Motorsports employees.

According to plaintiff’s complaint, by July of 2003, defendant had submitted an application for a license to NASCAR seeking to market and sell “Pit Crew Chew” products with the NASCAR logos in place. Id. at 20. Following defendant’s submission of the licensing application to NASCAR, Motorsports allegedly informed defendant and Ollie Pop that NASCAR was indeed interested in licensing the “Pit Crew Chew” products. Id. at 21. Plaintiff alleged that by August 2003, Dale Earnhardt, Jr. was interested in endorsing “Pit Crew Chew” products. Id. at 22.

Then, around the beginning of September 2003, according to plaintiff, defendant abruptly ended its relationship with Ollie Pop and plaintiff. Id. at 24. With the failure to launch “Pit Crew Chew” products, Ollie Pop encountered financial difficulties and as a result plaintiff took a controlling interest in Ollie Pop. Id. Under the deal he allegedly struck with his former partner, plaintiff claimed that Ollie Pop granted him all right, title, and interest in and to and all intellectual property rights related to the “Pit Crew Chew” mark and products, all rights of Ollie Pop under the non-disclosure agreement, and all patent and copyright rights relating to the tire and wheel design and artwork. Id. at 26.

In 2005, plaintiff allegedly obtained copyright registrations for the two-dimensional artwork on Ollie Pop's candy wheel design. Plaintiff also claimed in 2005 he learned that defendant had launched its own product, “Champion Chew.” According to plaintiff, the product consisted of gum enclosed in a tire and wheel and was designed to bear a resemblance to “chew” tobacco. Id. at 27. Plaintiff alleged that “Champion Chew” was licensed by NASCAR and was endorsed by one of NASCAR's drivers. Id. at 28.

Plaintiff filed suit and his first amended complaint asserted claims for: (1) misappropriation of trade secrets under California’s trade secret misappropriation statute (Cal. Civ. Code § 3426.1); (2) intentional interference with economic relationships; (3) negligent interference with economic relationships; (4) breach of contract; (5) breach of implied contract; (6) copyright infringement; (7) quantum merit; (8) unfair business practices in violation of Cal. Bus. & Prof.Code § 17200 and California common law; (9) constructive trust/accounting; and (10) injunctive relief.

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Alliant Insurance Services, Inc. v. Gaddy, No. C055192, 2008 WL 331065 (Cal. App. 3 Dist., Feb. 07, 2008)

On February 7, 2008, the California Court of Appeals affirmed a preliminary injunction, enjoining defendant G. Scott Gaddy from competing against his former employer, Alliant Insurance Services, Inc., within the entire state of California. The appellate court also upheld a non-solicitation provision prohibiting Gaddy from contacting Alliant customers. Alliant acquired Gaddy’s insurance brokerage business in 2004. Prior to the acquisition, the brokerage competed directly with Alliant to provide insurance for construction companies. In the Stock Purchase Agreement, Gaddy agreed, for a period of 5 years from the date of acquisition, “to refrain from carrying on a business, directly or indirectly, which provides any [of Alliant’s] business” within the 58 counties of the State of California. Alliant employed Gaddy after the acquisition until it terminated his employment in October 2006. In both the Stock Purchase Agreement and in his employment agreement with Alliant, Gaddy agreed that, for a period of 3 years after termination of his employment with Alliant, he would not solicit clients of his former business or Alliant clients known to him by virtue of his employment with Alliant. After his termination, Gaddy started a business that provided insurance and surety consulting in the construction industry. In connection with that business, he contacted, and admitted to contacting, “[h]alf a dozen to a dozen” former clients. Alliant sued Gaddy and moved for preliminary injunctive relief.

The trial court’s tentative ruling was to deny injunctive relief, but after a hearing during which Gaddy testified, the court ultimately issued an order preliminarily enjoining Gaddy from:

(a) directly or indirectly using or willfully disclosing to any person (without [Alliant]’s permission or court approval) information about [Alliant]’s clients, as defined by the court; (b) directly or indirectly soliciting [Alliant]’s clients within the 58 counties of California; (c) carrying on business directly or indirectly which “provides any Company business” within the 58 counties of California; (d) directly or indirectly soliciting, hiring, retaining the services of plaintiffs’ employees or independent producers who were employees or independent producers of [Gaddy’s former business] or [Alliant]; (e) destroying or altering any information regarding the facts at issue in this case; and (f) directly or indirectly soliciting, hiring, assisting, or accepting assistance of any other person or entity in attempting to accomplish any of the acts prohibited by the preliminary injunction.

On appeal, Gaddy focused only on whether the non-competition and non-solicitation of customers covenants were enforceable. The court of appeal held that substantial evidence supported the enforceability of these provisions.

Although California has a strong public policy of prohibiting non-competition provisions in the employment context (Bus. & Prof. Code § 16600), an exception exists for a non-competition covenants in connection with the sale of a business (Bus. & Prof. Code § 16601). Section 16601 provides, in part: “Any person who sells the goodwill of a business, or any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity . . . may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold . . . has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein.” Id. (emphasis added). In this case, the geographic area encompassed by the non-competition agreement was the entire state of California. Defendant Gaddy argued that the acquired business’s clients were in Northern California. Plaintiff’s supplemental declaration in support of its request for an injunction stated that, although its construction company clients were in Northern California, it procured insurance products from insurance companies located throughout the 58 counties of California. Thus, the court of appeal found that substantial evidence showed that the acquired business “carried on” its business in every county in California. As for the non-solicitation agreement, the trial court found that Alliant’s client information constituted trade secrets and that Gaddy had used trade secret information. The court of appeal rejected Gaddy’s effort to challenge the trade secret ruling on appeal because it was raised for the first time in his reply brief. The court, deciding that the non-solicitation provision was a valid restraint to protect trade secrets, found the non-solicitation provision enforceable.

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After granting summary judgment for plaintiff in late November 2007, Judge Susan Illston of the U.S. District Court for the Northern District of California recently awarded plaintiff $6.6 million in damages, the majority of which related to future lost profits due to breach of contract and misappropriation of trade secrets. Although the motion for summary judgment was uncontested, the court's ruling and damages award highlights the importance non-disclosure and confidentiality agreements can play in trade secret disputes.

Plaintiff Oculus Innovative Sciences Inc. entered into non-disclosure and purchase agreements with Nofil Corp. related Oculus' MicrocynTM disinfectant, antiseptic and sterilization technology. Under the agreements, Nofil agreed to manufacture certain machines for the production of MicrocynTM and to not disclose confidential information obtained from Oculus.

After ruling that Nofil had breached the agreements, the court held that Nofil had misappropriated Oculus' trade secrets. The court first held that Oculus had established the existence of a trade secret through reference to language in the non-disclosure and purchase agreements ("while the Court does not find this evidence to be overwhelming, it will assume for present purposes that Oculus can establish the presence of some trade secrets that fall within the scope of the [non-disclosure agreement]").

The court then determined that Nofil had misappropriated such trade secrets through its manufacture and sale to a competitor in Mexico of two machines covered by the agreements between the parties . Specifically, the court found persuasive PMC, Inc. v. Kadisha, 78 Cal. App. 4th 1368 (2000), which held that "[e]mploying … confidential information in manufacturing, production, research or development, marketing goods that embody the trade secret, or soliciting customers through the use of the trade secret information, all constitute use."

In a January 23, 2008 Order, the Court awarded Oculus $916,206 for lost profits for 2006 through part of 2008. The Court awarded future lost profits of $5,727,829 for a period of 5 ½ years discounted to present value.

The case is Oculus Innovative Sciences, Inc. v. Nofil Corporation, et al., Case No. 06-1686, N.D. Cal. 2006.

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Trujillo v. Great Southern Equipment Sales, LLC, No. A08A0245, 2008 WL 269606 (Ga. Ct. App. Feb. 1, 2008).

Reviewing the “Confidentiality and Restrictive Covenant Agreement” signed by Sarah Alexandra Trujillo while employed by Great Southern Equipment Sales, LLC, the Georgia Court of Appeals reversed the part of the trial court’s judgment that enjoined Ms. Trujillo from competing with Great Southern and soliciting its customers.

Ms. Trujillo had worked as a salesperson for Great Southern, a company primarily engaged in the business of selling transportation equipment, for over two years at the time of her resignation and departure for a competitor. In the early months of Ms. Trujillo’s employment, Great Southern’s president gave her on-the-job training; provided her with lists of Great Southern’s customers; and introduced her to many of the company’s customers and suppliers. After nine months of service, she was asked to sign the “Confidentiality and Restrictive Covenant Agreement.” At issue on appeal were the agreement’s non-solicitation and non-competition clauses.

Under Georgia law, restrictive covenants found in an employment contract must be strictly limited as to time, territorial effect, capacity in which the employee is prohibited from competing, and as to overall reasonableness. Moreover, unless a non-solicitation covenant pertains only to those clients with whom the employee had a business relationship during the term of the agreement, the covenant must contain a territorial restriction. Here, the court looked to the language of the non-solicitation provision in finding that it applied to a broad class of customers:

“The non-solicitation restriction set forth in this Section 2 is specifically limited to Customers of Employer with whom Employee had contact (whether personally, telephonically, or through written or electronic correspondence) during the three (3) year period immediately preceding the Separation Date or about whom Employee had confidential or proprietary information because of his/her position with Employer.”

The latter category of customers was not, as Great Southern argued, merely a reiteration of the separate confidentiality clause found in the agreement. Instead, the court said it was “an effort to impermissibly broaden the class of customers whom Trujillo could not solicit.” Because the non-solicitation clause at issue purported to apply to an expansive class of customers, but failed to include a geographical restriction, the court held that the provision was overbroad and unenforceable. Further, Georgia does not employ the “blue pencil” doctrine of severability, so the non-competition clause of the agreement was also unenforceable.

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National Elevator Cab & Door Corp. v. H & B, Inc., 2008 WL 207843 (E.D.N.Y.) No. 07 CV 1562

United States Magistrate Judge Levy recently denied a motion for reconsideration after he granted the plaintiff National Elevator Cab & Door Corp.’s motion for a preliminary injunction against defendant H & B, Inc. The litigation stems from the failed acquisition talks between National (a supplier of elevator entrances and cabs in the New York metropolitan area) and H & B (also an elevator cab and entrance supplier, working nationally and internationally), and the resulting alleged breaches of non-compete and confidentiality provisions in an agreement between the two parties.

In 2005, H & B, having little presence in the New York metropolitan market, expressed interest in acquiring National. During discussions between the two corporations, National asked H & B to sign an agreement stating that if the acquisition did not occur, H & B would not solicit business with three of National’s customers (Fujitec New York, ThyssenKrupp Elevator, and the New York City Housing Authority) for five years, would not use National’s confidential information or intellectual property to compete with National, would not test or reverse engineer National’s products, and would not solicit National employees for three years. H & B signed the agreement, and National eventually disclosed such information to H & B as its business model, marketing strategies, internal projections for sales and expenses, and information on its pricing, outsourcing, gross margins, and annual sales.

The acquisition discussions failed, and H & B eventually began to do business with Fujitec and solicited National employees. H & B admitted these facts, but argued that the terms of the agreement were unenforceable. National was granted a preliminary injunction against H & B, and H & B moved for reconsideration.

In evaluating the motion, Judge Levy discussed whether National had demonstrated that it would suffer irreparable harm in the absence of an injunction. He noted that not only would it be difficult to calculate monetary damages to redress National’s losses, but also that in the agreement, H & B expressed admitted that money damages would be an insufficient remedy for breach. Judge Levy found that National made a sufficient showing that H & B’s continued solicitation of the three specified National customers would result in irreparable harm in the absence of an injunction. Although H & B argued that it had been unsuccessful in attracting business from two of the three specified customers, Judge Levy declared that National “need not wait until its relationships…are damaged before seeking an injunction.”

Next, Judge Levy reviewed whether National was likely to succeed on the merits of its claims, first analyzing the non-compete and non-solicitation provisions of the agreement. He noted that a non-compete covenant must pass a reasonableness test, and New York courts will only enforce such a provision between businesses where it protects a legitimate business interest, and its terms are reasonable, both temporally and geographically. Judge Levy expressly held that the agreement was reasonable and did not impose undue restraint on competition, because it applied only to three identified customers in one market (the New York metropolitan area). He noted that the customers were not obliged to work with National, but instead could employ other suppliers, and as such, the anti-competitive effects were not so great as to outweigh the harm to National.

Finally, Judge Levy addressed the confidentiality provisions of the agreement. He outlined the factors that New York courts consider in determining whether information constitutes a trade secret: the extent to which the information is known to the public, the extent to which it is known by employees and others in the business, what measures are taken to protect the information, the value of the information to the business and its competitor, the amount of effort or money used by the business to develop the information, and the ease or difficulty with which the information could be acquired by others.

Judge Levy found that the information given to H & B was confidential, and that National had taken adequate steps to guard this information. Despite the fact that National presented no evidence that H & B misused some of its information, Judge Levy found that H & B attempted to procure some of the materials from a mutual client of the two businesses after the acquisition talks failed and it was forced to return what it had been given. Thus, Judge Levy reasoned, the materials contained information that was valuable and not publicly available at the time. Additionally, Judge Levy noted that almost immediately after receiving National’s materials, H & B began offering installation (which it had never done before), changed its design, and was able to successfully attract one of National’s clients. Finding the timing more than merely coincidental, Judge Levy held that H & B violated the terms of the agreement, and further held that the confidentiality provisions were enforceable. Thus, H & B’s motion for reconsideration was denied.

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Coldwell Banker Residential Brokerage v. D’Ambrosia, No. 08-CV-00166, Complaint (D. Md. Jan. 18, 2008)

On January 18, 2008, Coldwell Banker Residential Brokerage filed a federal lawsuit in Maryland against three former key employees and newly-formed competitor Car-Tay, Inc., an affiliate of GMAC Real Estate. The complaint alleges that the former employees, two of whom had been high-level executives, conspired to form the competing brokerage in violation of their employment agreements, the federal Computer Fraud and Abuse Act, and state law.

Coldwell Banker claims that the former employees began actively, but covertly, planning, staffing, and building the competing venture more than one year before their departure. Key evidence cited in the complaint includes an extensive trail of emails purportedly sent and received by the defendants while still employed by Coldwell Banker. In the emails, the defendants openly discuss solicitation of Coldwell Banker salespersons, tips for persuading Coldwell Banker clients to move their listings to GMAC, how to access Coldwell Banker’s highly-guarded commercial document database, and how to copy data from Coldwell Banker computers. This “scheme,” the complaint says, was a targeted effort “to eviscerate [Coldwell Banker’s] ability to compete with GMAC.”

Indeed, Coldwell Banker points out that the very day following defendant Ann D’Ambrosia’s resignation, the defendants’ GMAC office opened its doors for business. Within one month, two dozen Coldwell Banker salespersons joined the defendants at GMAC. In six weeks time, Coldwell Banker had received requests from approximately ten clients to cancel and void their listing agreements; all of these clients re-listed with GMAC after securing the releases. Each of these results, Coldwell Banker contends, arose directly from the defendants’ pre-resignation solicitation efforts.

In its fourteen-count complaint, Coldwell Banker claims the defendants violated the federal Computer Fraud and Abuse Act by improperly accessing protected computers and removing confidential and proprietary Coldwell Banker information, including client files, listing agreements, contracts, and property records; breached their employment contracts and duty of loyalty owed to Coldwell Banker; tortiously interfered with contractual and prospective economic relations; and misappropriated trade secrets in violation of the Maryland Trade Secrets Act. Coldwell Banker seeks monetary damages in the amount of $2 million – $1 million as compensatory damages and $1 million as punitive damages – as well as injunctive relief enjoining the defendants from soliciting Coldwell Banker’s clients and employees for one year, and from using Coldwell Banker’s confidential and trade secret information.

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On December 7, 2007, the Illinois First District Appellate Court in Cambridge Engineering, Inc. (“Cambridge”) v. Mercury Partners 90 BI, Inc., No. 1-06-0758 (1st District Appellate Court of Illinois, Sixth Division) determined that Cambridge’s non-solicitation and non-competition provisions were overly broad and unenforceable because the provisions prevented former Cambridge employees from (a) taking any job, “even that of a janitor,” with a competitor (b) working in markets that Cambridge did not do business in, and (c) speaking with Cambridge customers that the employer never serviced or knew were Cambridge customers (thereby requiring the former employee to speculate about who he can and cannot contact/solicit). Although the Appellate Court’s decision was not surprising given Illinois case law, the Appellate Court’s unsolicited opinion/warning to employers who write overly broad restrictive covenants is noteworthy.

Specifically, the Appellate Court wrote/warned after its analysis that:

Allowing extensive judicial reformation of blatantly unreasonable post-termination restrictive covenants may be against public policy, because of the potentially severe effect it could have on the employees who are subject to such covenants. Such reformation, if permitted by courts, would give employers an incentive to draft restrictive covenants as broadly as possible, since the courts would automatically amend and enforce them to the extent that they were reasonable … This could have a severe chilling effect on employee post-termination activities.

The Appellate Court went on to state that judicial reformation (i.e. blue penciling) is unfair to the employee who is “unschooled in the law” and “cannot be expected to know to what extent such a covenant is in enforceable.” Accordingly, “blatantly unreasonable” restrictive covenants, such as the ones authored by Cambridge, should not be revised to comply with Illinois law.

The Appellate Court’s unsolicited opinion will likely find its way into the response of every employee who is faced with an employer’s request to modify or blue pencil an existing restrictive covenant. Accordingly, Illinois employers who rely on the enforcement of restrictive covenants should confer with legal counsel familiar with Illinois restrictive covenant law to ensure that the restrictions contained in their Agreements do not fall into the “blatantly unreasonable” category enunciated in Cambridge.

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A half-dozen H&R Block employees in LaCrosse, Wisconsin, who had worked for the company for periods ranging from 10-25 years, left and within a few months began competing with their ex-employer. Each of the former employees had signed non-compete and non-solicitation covenants reciting that they lasted for a two-year period, but “such period to be extended by any period(s) of violation.” Seeking to enforce the covenants, H&R Block filed an injunction action immediately in a Wisconsin circuit court. The ex-employees moved for summary judgment on the ground that the restrictive clauses were unenforceable. H&R Block’s motion for an injunction was denied, the former employees’ motion for summary judgment was granted, and those decisions were affirmed on appeal. H&R Block Eastern Enterprises, Inc. v. Swenson, No. 2006AP1210 (Wis. Ct. of App., Distr. 4, Dec. 20, 2007).

The lower court reasoned that two-year limitations were more than H&R Block needed, and with the potential extension, the covenants were plainly invalid. The appellate court assumed “without deciding that the two-year period is reasonable.” Although a Wisconsin employer has a legitimate “interest in protecting its stock of customers” who have been dealing with a particular employee who departs, the State has a “strong public policy against the enforcement of unreasonable trade restraints on employees.” The appellate court concluded that the H&R Block covenants imposed unreasonable restraints because (a) “a former employee cannot tell from the terms of his or her contract how long the extension will be for particular conduct in violation of the clauses,” and (b) the duration of the restraint is “not a fixed and definite time period but a time period that is contingent upon outcomes the employee cannot predict,” namely a court decision as to whether the conduct is a violation. Under Wisconsin law, if any covenant contains both reasonable and unreasonable restraints, the entire covenant is unenforceable. Therefore, H&R Block’s case was doomed.

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In Celtic Maintenance Services, Inc. v. Garrett Aviation Services, Inc., No. CV 106-177, 2007 WL 4557775 (S.D. Ga. Dec. 21, 2007 (Wood, J.)), the United States District Court for the Southern District of Georgia upheld a no-hire provision between two businesses. The case involved an agreement between Celtic and Garrett in connection with Garrett paying Celtic to perform aviation maintenance at Bush Field in Augusta, Georgia. Garrett and Celtic agreed not to “directly or indirectly solicit, hire, or contract for services with any person employed by the other party.” Celtic alleged that Garrett used Greenwood, Inc., a third party, to circumvent the restrictions in the no-hire provision by inducing Greenwood to hire Celtic employees to perform aviation maintenance tasks on behalf of Garrett after Celtic ceased performing services for Garnett. Greenwood hired three Celtic employees, and Celtic went out of business. Celtic brought claims against Garrett for breach of contract and against Greenwood for tortious interference with contract.

The District Court held that the no-hire provision is enforceable under Georgia law. The District Court first held that the agreement was more analogous to a partnership agreement than to an employment agreement because of the relatively equal bargaining position of the two parties and because the provision bound both parties (Celtic and Garrett) equally. Thus, the District Court applied intermediate scrutiny to the agreement. The District Court then went on to conclude that the no-hire provision was enforceable and implied that it would be enforceable even under the strict scrutiny standard applied to employment agreements because Georgia courts have upheld similar provisions in the employment context. The District Court concluded that summary judgment was inappropriate and that the matter should progress to trial.

The District Court also addressed an “intriguing argument” put forward by Greenwood in response to the tortious interference claim brought by Celtic against Greenwood. Greenwood argued that Garrett had already decided to terminate its contract with Celtic and seek a third party straw man to circumvent the no-hire provision before Greenwood got involved in the process. The Court rejected this argument, holding that Greenwood may have shown that it did not induce Garrett to breach its contract with Celtic, but it may have conspired with Garrett and aided and abetted Garrett in its breach. Thus, the Court concluded that summary judgment on the tortious interference claim was inappropriate.

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A recently filed action in state court in Duluth, Minnesota illustrates the problems that can arise when a business divorce goes wrong. The case involves EmpowerMX, a Duluth-based maker of software for airlines. EmpowerMX filed a lawsuit against its founder, Barry Sinex, alleging that Sinex intended to violate the non-compete provision in his separation agreement with the company.

Sinex argues that the provision is unenforceable, not for the typical reasons relating to the geographic scope covered by the agreement or the activities proscribed, but instead because of a provision in the agreement that states that the non-compete provision becomes null and void if “holders of common stock are paid less than $1 per share for their stock.” Sinex’s claim is that the company has not been managed properly since his departure and that the value of the shares is now less than $1.

The company counters by arguing that the non-compete provision is rendered null only in the event that shares are actually sold for less than $1 in connection with a “sale, merger, consolidation or other significant change in ownership of the company.” EmpowerMX obtained a temporary restraining order against Sinex on or shortly after filing the complaint on December 17, 2007.

http://www.duluthnewstribune.com/articles/index.cfm?id=57689§ion=homepage&freebie_check&CFID=80821590&CFTOKEN=94821650&jsessionid=88303c98b0845370581d

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Innovative Technologies Corp. v. Kenton Trace Technologies LLC et al., case number 03-cv-3674

Innovative Technologies Corp. (ITC) has won nearly $23 million in a trade secret suit against three former employees who competed against ITC while still employed by the Ohio-based defense contractor. The state jury awarded $17 million in punitive damages, in addition to $5.7 million in compensatory damages. The employees also were ordered to return the salary earned in their final year working for ITC, close to $300,000.

According to the lawsuit, filed in May 2003, now-former ITC employees David P. Nicholas, James R. Silcott and Sheila K. Silcott set up Kenton Trace Technologies (KTT) in April 2000 to bid for defense contracts, despite the fact that they were still employed at ITC, had signed confidentially agreements, and were bound by contractual agreements not to compete with ITC.

The suit also alleged that the three enlisted the help of Virginia-based competitor Advanced Management Technology Inc. to lure away ITC customers using trade secrets. Testimony in the trial established that the three former employees won a share of a major services contract in 2001 while still working for ITC. At the time, ITC was under contract with the federal government to provide support services for the Wright-Patterson Air Force Base; the contract had been ITC’s since 1995. ITC did not learn of KTT’s existence until a competitor, Modern Technologies Corp., alerted ITC in May 2001 that KTT was trying to win the contract.

The Montgomery County Common Pleas Court issued a temporary restraining order in 2002 to keep KTT from competing with ITC, and a month later issued a preliminary injunction against the employees. Nevertheless, KTT conspired with Advanced Management to get around the injunction and acquired the Wright-Patterson contract.

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A California appellate court held in a recent decision that a broad “no-hire” provision contained in a consulting agreement was unenforceable as a matter of law because it was an impermissible restraint on trade in violation of the California Business and Professions Code Section 16600.

Despite the frequent use of “no-hire” and “non-solicitation” provisions in consultant and employment agreements, the validity of these provisions in California, especially broad “no-hire” provisions, is far from certain in light of the Court of Appeals for the Fourth Appellate District’s recent decision in VL Systems Inc. v. Unisen Inc., 152 Cal.App. 4th 708 (2007).

The full text of the Court’s decision can be found at http://www.courtinfo.ca.gov/opinions/archive/G037334.PDF

Though the holding in VL Systems appears to be limited to broad “no-hire” provisions, the Court’s policy analysis in the decision suggests, though it is far from certain, that even more narrow “non-solicitation” provisions would be subject to scrutiny by California courts and enforceable only to the extent that they are necessary for legitimate business reasons and are not overly broad in time and scope.

The contract in question included a “no-hire” provision. Specifically, the contract provided that defendant would not hire any of plaintiff’s employees for 12 months after the computer consulting contract’s termination, subject to a liquidated damages provision.

In analyzing the validity of the “no-hire” provision, the Court found that this type of contractual provision may seriously impact the rights of a broad range of third parties, including those who were not even employed by plaintiff at the time of its contract with defendant.

To this end, the court noted that the employee in question was not employed by plaintiff at the time the contract was performed, and that the employee had independently sought employment with defendant.

The court recognized that certain narrower restrictions have been held valid in the past by California courts and expressly stated that it took no position on whether a more narrowly drawn and limited “no-hire” provision would be permissible under California law.

However, it found that the “no-hire” clause at issue was too broad in that it covered not only solicitation by defendant, but all hiring, and it applied to all of plaintiff’s employees, regardless of whether they worked for defendant or were even employed at the time.

The court’s emphasis on the employees’ freedom of mobility protected by Section 16600 of the Business and Professions Code suggests that any contractual restriction on such mobility will be highly scrutinized by California courts.

In light of VL Systems, businesses should reconsider the inclusion of broad “no-hire” provisions in both business service agreements and employment agreements.

Prior to requiring your California employees to sign agreements containing such restrictive covenants, a consultation with a Seyfarth Shaw LLP attorney is recommended.

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In Kinesis Advertising, Inc. v. Hill, 652 S.E.2d 284 (N.C. Ct. App. 2007), the North Carolina Court of Appeals reversed the trial court’s grant of summary judgment and touched on two important issues under North Carolina law. Kinesis filed the action, attempting to enforce non-compete and non-solicitation provisions against its former employees, Larry Hill and Dan Robinette, as well as the former employees’ new business, Altyris Incorporated, among other claims. The trial court found that the agreement containing the restrictive covenants was unenforceable, and therefore, granted summary judgment in favor of the defendants on the breach of contract claim. The trial court had two bases for finding that the covenants were unenforceable: (1) Kinesis did not provide consideration to Hill and Robinette when they signed the agreements, and (2) the restrictions were overly broad. The Court of Appeals reversed on both grounds.

Kinesis contended on appeal that it had transferred shares to Hill and Robinette. The Court of Appeals found conflicting evidence as to whether Kinesis had actually done so. The parties agreed that Hill and Robinette never received stock certificates representing their shares, so the Court of Appeals sought to determine whether Kinesis had performed the tasks necessary to issue uncertificated shares under North Carolina’s Business Corporations Act. The Court of Appeals found conflicting evidence on the point and concluded that final determination of the question was a province of the jury. The Court of Appeals concluded that ”a genuine issue of material fact remains as to whether the Kinesis shares promised to Mr. Hill and Mr. Robinette were actually issued, such that they constituted valuable consideration to make the covenant-not-to-compete and confidentiality and non-solicitation agreement valid and enforceable.”

On the question of the scope of activity proscribed by the agreements, the Court of Appeals distinguished between non-competes that prevent employees from performing any type of activity for competitors and non-competes that prevent employees from performing acts in competition with their former employer. Kinesis’s agreement was the latter rather than the former and was therefore enforceable because “the restrictions imposed by Kinesis in the covenant-not-to-compete are ‘no wider in scope than is necessary to protect the business of the employer.’” The Court of Appeals concluded by stating that the question of whether Hill and Robinette actually were engaging in activities similar to those they performed for Kinesis was a matter for a jury.

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The District Court for the Southern District of New York recently demonstrated the importance of including nonsolicitation language in employment agreements, in addition to noncompetition language, where employers seek to protect their customer base from departing employees. In Silipos, the court, despite finding that the noncompetition covenant in the subject agreement was not enforceable, nevertheless found that the nonsolicitation covenant was enforceable and that the defendant would be bound by the restriction - effectively preventing defendant from competing with plaintiff for its customers.

In the action, the court found that the defendant, a former executive vice president of plaintiff, had entered into a valid employment agreement containing: (1) a post-employment, worldwide, one-year noncompetition covenant prohibiting defendant from having employment with anyone direct or indirect competitor in plaintiff's industry; and (2) a post-employment, worldwide, one-year nonsolicitation covenant prohibiting defendant from soliciting any of plaintiff's current or prospective customers, distributors, suppliers and/or vendors.

The court, applying New York law, repeated the well-established precept that noncompetition and nonsolicitation covenants are enforceable only to the extent necessary to protect Silipos's "legitimate interests." In the action, plaintiff asserted that both covenants were necessary to protect three legitimate interests: (1) protection of its trade secrets; (2) protection of its confidential customer information; and (3) protection of its client base. Plaintiff further alleged that defendant, due to his position within the company and his responsibilities, had access to various types of information during his employment, including business strategy information and pricing information, which constituted trade secrets and/or confidential customer information.

The court, however, found that plaintiff only had one demonstrable "legitimate interest," to wit, protecting its client base. In particular, the court concluded that none of the business information to which defendant had access rose to the level of trade secrets or confidential customer information, and as such, plaintiff lacked a "legitimate interest" to warrant enforcement of the noncompetition covenant.

In contrast to the noncompetition covenant, however, the court found that the worldwide nonsolicitation covenant was enforceable because the protection of a client base was a "legitimate interest" of plaintiff. Consistent with this "legitimate interest," the court enforced the nonsolicitation covenant with respect to: (1) customers that defendant brought to Silipos; (2) customers for whom defendant was the primary contact; and (3) customers with whom defendant had a substantial degree of long-term involvement. The court moreover found that the restriction was not unreasonably broad, holding that "in light of [Silipos's industry's] intimate yet geographically diffuse nature, Silipos's legitimate interests in protecting its customer base extend worldwide."

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RRK Holding Co. v. Sears, Roebuck & Co., No. 04-CV-3944, Verdict (N.D. Ill. Nov. 19, 2007)

A family-owned Wisconsin company that makes power tools recently won a $21.5 million verdict against Sears, Roebuck and Co. after the jury found the national retailer guilty of stealing the design for the popular Craftsman all-in-one cutting tool. Plaintiff RRK Holding Co., formerly known as Roto Zip, convinced the federal jury in Chicago that Sears had willfully and wantonly misappropriated its trade secrets under the Illinois Trade Secret Act and breached the parties’ nondisclosure agreement.

In the late 1990s, Roto Zip was one of Sears’ major suppliers of the rotary saw. The suit alleged that in 1999, pursuant to a nondisclosure agreement, Roto Zip disclosed to Sears drafts for a next generation, hand-held combination power saw, but after negotiations broke down over price, Sears declined to make a deal. Instead, Sears took the design to a Chinese manufacturer for lower-cost production. Unaware of Sears’ breach of the nondisclosure agreement, Roto Zip continued to develop the tool to bring it to market. While Roto Zip’s finished product sold for $119, Sears’ Craftsman combination tool undercut at just $59. Sales of Roto Zip’s rotary saw declined dramatically after the Sears version launched.

The $21.5 million verdict includes $13.5 million for lost profits and an additional $8 million in punitive damages. Sears plans to appeal. http://www.suntimes.com/news/metro/658969,CST-NWS-tool20.article; http://ip.law360.com/secure/ViewArticle.aspx?Id=41303

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New lawsuit filed in Utah accuses a former research scientist employed by a nutritional supplement company of stealing trade secrets, customers, and employees when forming a rival vegan supplement company.

Systemic Formulas, Inc. claims that its former research director, Daeyoon Kim, is using Systemic’s trade secrets and proprietary information as the basis for its formula in the rival vegan supplement company. In its complaint against Kim, Systemic alleges that Kim executed Confidentiality and Non-Disclosures Agreement intended to protect Systemic’s proprietary information. Systemic alleges that Kim was specifically hired to develop a line of nutritional supplements without the RNA/DNA factor that is considered to be an animal product and therefore less appealing to certain portions of the supplement-consuming public that want a more natural supplement. Kim asserts that his primary duty was an employee manager and claims that Systemic did not have a research facility. However, Systemic’s website states, “Systemic Formulas uses a technologically advanced research and production facility to manufacture the bottling and capsulation process of its product’s raw materials.”

After Kim resigned from Systemic, he requested a modification to the Confidentiality Agreement to allow Kim to manufacture a line of vegan dietary supplements. Systemic alleges that Kim admitted that the proposed line of vegan dietary supplements would represent a line of products in conflict with his obligations under the Confidentiality Agreement and therefore requested a modification. Kim asserts he reached an agreement with Systemic in June regarding his request to develop the vegan supplements and that the lawsuit surprised him.

This case should be full of classic trade secret issues including an analysis of the scope of the confidentiality agreement and Kim’s exposure to proprietary information as a research director or an employee manager. Another area of inquiry will no doubt be whether the confidentiality agreement was altered by an oral or written agreement. Ultimately, the degree of similarity between Systemic’s supplements and Kim’s vegan supplements will be a major factor in this dispute. Another interesting issue may be whether Kim had a certain amount of knowledge before he was an employee of Systemic or whether he developed his vegan formula idea independently from the scope of his duties at Systemic.

This case can be monitored under Case No. 07-CV-159 in the District Court of Utah, Central Division.

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The taking and using of customer lists is no longer just a matter for civil proceedings and injunctive relief. On Monday, November 26, 2007, the Georgia Court of Appeals affirmed a jury’s criminal conviction of an individual who took and used her former employer’s master client list to solicit customers, who used company computers to plan her new business venture, and otherwise misappropriated client files.

Defendant Shan DuCom was tried and convicted after it was discovered that she had attempted to wipe out her former employer (C&D)’s property management business completely by converting the property management function to her own, newly created entity. Indeed, DuCom conspired with other employees to start a new firm, used C&D’s computers to create new “letterhead and logos, press releases, solicitation postcards, and various ‘to-do’ lists,” as well as to engage in “massive” copying of information maintained on C&D’s computer hard drives to discs. Her actions were apparently so wanton that the day after she left, the former employers’ team came to work and found the office had “been left barren, ‘cleaned out.’ The computer server was turned off, the hard copies of client files were missing, the fax and credit card phone lines had been sabotaged, and office supplies and equipment were missing.” Once the computer service was restored, C&D found that entire databases were missing and that the C&D website had been transferred to DuCom’s new firm. Three of DuCom’s co-workers resigned and joined her new firm as well. Georgia’s Uniform Trade Secrets Act specifically protects client and customer lists as trade secrets, provided they

(A) Derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

(B) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

O.C.G.A. § 16-8-13(a)-(b). The appellate court remarked, in particular, that as a new business, DuCom’s new firm “would have opened its doors with little or no property to manage, and with no property to manage, it would have very little income,” reflecting that her head-start approach runs afoul of the law. Noting the damage that she caused by her acts in stealing the client list, the court affirmed the lower court’s award of restitution based on valuation of C&D’s “book of business.”

DuCom also was convicted of “computer theft” under O.C.G.A. § 16-9-93(a) for using C&D’s computers without authorization. The appeals court reflected that she had downloaded data she was not permitted to use and that the jury could have found “beyond a reasonable doubt that DuCom used a computer, owned by her employer, with knowledge that such use was without authority and with the intention of removing programs or data from that computer and appropriating them for her own use.” Under Georgia law, unauthorized use includes “the use of a computer or computer network in a manner that exceeds any right or permission granted by the owner of the computer or computer network” O.C.G.A. 16-9-92(18). With a broad definition and unassailable facts, the appellate court did not waste much time in discussing its reasoning to affirm.

Although it is not unusual to hear tales of such wanton conduct in preparing to compete in a new business, it is not very often that we hear of criminal prosecutions of such matters at the state level in Georgia. We’ll be keeping our eyes and ears open for any further such cases.

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An Illinois Appellate Court recently affirmed a preliminary injunction granted to a medical products manufacturer against its former employee, enforcing 24-months’ non-competition and non-solicitation agreements. The non-competition agreement barred the defendant-employee from competing with the plaintiff with respect to all products and territory assigned to the defendant during his final 18 months of employment. The non-solicitation agreement prohibited the defendant from soliciting or assisting in the solicitation of sales or leases of such products competitive with the plaintiff’s products in that same territory.

The court concluded that the defendant possessed confidential information concerning his ex-employer’s method of calculating so-called “open quotes,” offers to sell products in bulk to specific customers, even though the open quotes themselves were not confidential and they resulted in orders less than 50% of the time. Moreover, the competitor for whom the defendant went to work already was selling similar products to the same customers before the defendant changed employers. Furthermore, many of the plaintiff manufacturer’s employees did not have confidentiality agreements, and the defendant was not charged with taking any information with him when he left the plaintiff’s employ, other than what he had in his head. Lifetec, Inc. v. Edwards, No. 4-07-0300 (Ill.App., 4th Dist., Nov. 6, 2007).

The three appellate court justices were somewhat divided in their reasoning. Two ruled that the plaintiff had “legitimate business interests” in protecting its trade secrets, and found that the time and territorial restrictions applicable to the defendant were reasonable. The third justice concurred in the result. He expressed his opinion that enforcement is appropriate if an employer demonstrates that reasonable time and territorial restrictions were violated, but that courts should not impose on a plaintiff the additional burden of proving that it had a protectible or “legitimate” business interest.

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Clients often ask whether they need to provide any consideration to their existing employees when they ask their employees to sign non-compete or non-solicitation agreements. The answer in Georgia typically is that continued employment is sufficient consideration for such an agreement. (The answer is different in Texas and North Carolina, for example.) Glisson v. Global Security Services, LLC, Georgia Court of Appeals, No. A07A1456, 2007 Ga. App. LEXIS 1047 ( Sept. 25, 2007), however, reminds us that this is not a universal rule. In that case, William Glisson entered into a two-year employment contract with his employer, Global Security Services. The agreement contained a non-compete provision, as well as a two-year term for employment. Approximately eighteen months after entering the agreement, GSS requested that Glisson sign a more extensive, non-competition agreement. Glisson did so, but shortly thereafter left GSS and formed a competing business. GSS brought an action against Glisson under the second non-compete provision that Glisson had signed.

The trial court ruled that the non-compete provision was enforceable and that GSS was entitled to an injunction preventing Glisson from competing in a certain area. The Georgia Court of Appeals reversed that judgment, holding that GSS was already obligated to employ Glisson through the end of his two-year term when it compelled him to sign the second non-compete agreement. Thus, the second non-compete agreement lacked consideration and was unenforceable.Glisson illustrates that continued employment may not be sufficient consideration for an existing employee to sign a non-compete agreement where the employee is not an at-will employee (instead, the employee is under contract). This could be an important exception to the general rule that an employer does not have to provide its employees any consideration for execution of a restrictive covenant.

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The Texas Supreme Court recently held that no Texas precedent allows a Texas court to ignore a forum selection clause in an employment agreement.

Autonation owns automobile dealerships across the country, including Houston , Texas , and its corporate headquarters and principal place of business is in Florida . In re Autonation, Inc., 2007 WL 1861341, *1 (TX 2007) (orig. proceeding). Garrick Hatfield worked as a general manager for one of Autonation's dealerships in Houston . In 2003, Mr. Hatfield signed a non-competition agreement that contained a Florida choice-of-law provision and forum-selection clause. Two years later, Hatfield went to work for a competitor. Autonation sought to enforce the non-competition agreement in Florida . But before learning of the first-filed Florida action, Hatfield filed a declaratory judgment action in Harris County, Texas, asking the court there to rule that Texas law governed the non-competition agreement and that the agreement was unenforceable. After learning of the Florida action, Hatfield also sought an anti-suit temporary restraining order and temporary injunction to enjoin further proceedings in the Florida action. Hatfield argued that Autonation was attempting to circumvent Texas law by pursuing the Florida action and that Florida would likely refuse to apply Texas law. (Note: The agreement also had a Florida choice of law provision in it.)

The trial court issued the anti-suit injunction, and the Houston Court of Appeals denied the petition for writ of mandamus by holding that the trial judge did not abuse his discretion by issuing the anti-suit injunction because "fundamental Texas public policy requires the application of Texas law to the question of enforceability of a non-compete agreement." Id. (citing DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 679-81 ( Tex. 1990)).

The Supreme Court of Texas acknowledged this prior precedent in DeSantis , but rejected the application of DeSantis on the grounds that a forum-selection clause is not the same as a choice-of-law clause.

The Court held that "even if DeSantis requires Texas courts to apply Texas law to certain employment disputes, it does not require suit to be brought in Texas when a forum-selection clause mandates venue elsewhere." Autonation, 2007 WL at *4. The Court also stated that "[n]o Texas precedent compels us to enjoin a party from asking a Florida court to honor the parties' express agreement to litigate a non-compete agreement in Florida , the employer's headquarters and principal place of business." Id . According to the Court, this holding (1) gives deference to the first-filed Florida action; (2) honors the parties' contractual commitment; and (3) also honors principles of interstate comity. Id.

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It appears that the Georgia Court of Appeals narrowly interpreted the phrase “on behalf of” in a non-solicitation clause to prevent application of a non-solicitation provision to support a breach of contract claim. Although the parties did not dispute that the Clause applied to clients who transacted business with the plaintiff, Atlantic Insurance Brokers LLC (“AIB”), and dealt with the agent (“Phillips”) during the course of the relationship, the Court nonetheless concluded that there was no breach of the Agreement.

The Clause provided, in pertinent part, that

Phillips covenants that during the term of this Agreement, and for a period of two (2) years following termination of this Agreement for any reason, he shall not at any time, directly or indirectly, solicit, sell, attempt to divert or provide competing insurance services or coverages to any insureds who transacted business with AIB and with whom Phillips dealt with on behalf of AIB and had material contact . . . .

Atlantic Ins. Brokers LLC v. Slade Hancock Agency Inc., Case No. A07A1177, 07 FCDR 3002 ( 10/12/07).

In some unusual facts, the client at issue, 24/7 contacted Phillips for assistance in procuring insurance after Phillips left AIB but before the Agreement terminated. He referred the business to AIB to assist him in procuring insurance. AIB assisted in procuring the insurance for 24/7 (splitting the commission with Phillips’s new employer), but the insurer declined to renew the policy the following year. 24/7 again asked Phillips for help, and he brokered insurance for them through his new company, without assistance from AIB. AIB sued, alleging that 24/7 was an insured covered by the Clause, and thus Phillips breached the agreement. The Court rejected AIB’s claim because AIB did not ask Phillips to work with 24/7. In other words, it appears that the Court may have equated the phrase “on behalf of” to be equivalent to “at the request of.” Although the factual scenario is highly unique, one should consider whether through its interpretation of the agreement the Court created unusual defenses in upcoming breach of contract cases about the meaning of “on behalf of.”

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In a recent decision, Bender v. Xcel Energy, Inc., the Eighth Circuit Court of Appeals suggested that attempts by executives to replace employer release agreements must comply precisely with contractual requirements. A unanimous panel affirmed the District Court’s grant of summary judgment to defendant Xcel Energy, Inc., on the claims of former executives of a subsidiary company of Xcel, NRG Energy, Inc. Most interesting to those in the non-compete/restrictive covenant arena was Xcel’s (successful) argument regarding the company release form. Xcel argued that because two of the executives did not use the provided form, and instead attempted to use their own, they had not satisfied their obligations under the contract. Thus, the executives could not participate in the severance plan.

For executives to receive their NRG stock options after its merger with Xcel, the severance plan then in effect for NRG executives required that they provide the company with a release “in a form to be provided by the Company.” Plaintiffs James Bender and Craig Mataczynski thought that the release language was too broad, and provided an alternative release, which they said satisfied the same obligations under the severance plan. Specifically, Bender and Mataczynski argued that the release they were asked to execute was much broader than a “standard release of claims.” The Eighth Circuit noted, however, that not only was it generally appropriate for employers to condition severance payments on releases, but, more importantly, the plain language of the severance plan clearly called for a release form “to be provided by the Company.” Accordingly, the Eighth Circuit affirmed the district court’s summary judgment against Bender and Mataczynski’s claims, because, simply put, they did not use the form provided by the company and there was nothing inherently wrong in requiring such a form.

By holding to a “plain language” understanding of the severance agreement, the Eighth Circuit did not undertake any significant analysis of the non-competition issues. It is fair to question whether the Court even cared whether the release form was too broad since it never posed that question. Moreover, the Court undertook no unconscionability test, nor did it evaluate the non-compete or confidentiality provisions, all issues raised by Bender and Mataczynski. In other words, while the Court was at least nominally concerned with the release and strict compliance with the form to be provided, it did not express any trepidation about confidentiality or non-competition issues.

The moral of the story for executives (and the companies for which they work): do not plan to rely on competition-related arguments in the Eighth Circuit where a strict textualist approach to severance plan contracts seems to carry the day.

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