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

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