shutterstock_547628332In Spring 2011, the Georgia legislature passed a new restrictive covenant statute, which, for the first time, allowed Georgia courts in reviewing non-competition agreements between employer and employee to blue-pencil or “modify a covenant that is otherwise void and unenforceable so long as the modification does not render the covenant more restrictive with regard to the employee than as originally drafted by the parties.” O.C.G.A. § 13-8-53(d). Since the new Georgia statute only applies to agreements executed after its enactment, there has been limited litigation concerning the meaning and scope of this provision.

Most of the litigation between 2011 and the present has involved requests by a party that the Court strike an offending provision in a non-compete agreement. Recently, the Northern District of Georgia was given the opportunity to determine whether Georgia’s blue-pencil provision also gives Georgia courts the authority to modify an unenforceable non-compete provision. In LifeBrite Labs., LLC v. Cooksey, No. 1:15-CV-4309-TWT, 2016 WL 7840217, at *1 (N.D. Ga. Dec. 9, 2016), the former employer, LifeBrite, sued its former employee, Cooksey, after she began working for a competitor company. Cooksey’s non-compete provision provided as follows:

7.2. Non-Competition. For as long as she is employed and for a period of one (1) year thereafter, employee shall not participate, directly or indirectly, as an owner, employee, consultant, office management position, in any proprietorship, corporation, partnership, limited liability company or other entity, engaged in any laboratory testing that is being sold by employee on behalf of company.

The Northern District of Georgia found that this provision was overbroad and unenforceable as it did not contain any geographic limitation. Consequently, the Court considered whether or not Georgia’s blue-pencil rules allowed it to modify the non-compete provision to insert a reasonable geographic limitation. In reasoning through the analysis, the Court referred to pre-2011 cases in which Georgia courts interpreted a similar non-compete provision in the context of sale of business agreements. In those cases, Georgia courts held that the blue-pencil marks but it does not write. Thus, the NDGA declined to enforce Cooksey’s non-compete and held that in applying Georgia’s blue-pencil statute, “courts may not completely reform and rewrite contracts by supplying new and material terms from whole cloth.”

The NDGA also noted that Georgia’s employers are “sophisticated entities” which “have the ability to research the law in order to write enforceable contracts; courts should not have to remake their contracts in order to correct their mistakes.” This case is simply further caution to Georgia employers to review their non-competition agreements for overbreadth, vagueness, and the absence of essential limiting terms. As always, the attorneys at Seyfarth Shaw LLP are available to assist in these endeavors.

The LifeBrite Laboratories, LLC v. Cooksey case was dismissed with prejudice on January 25, 2017.

shutterstock_413782369There were significant developments and a near miss in trade secret and restrictive covenant law both federally and in Massachusetts in 2016, including the passage of the federal Defend Trade Secrets Act and the failure again of the Massachusetts legislature to pass noncompete reform legislation.  In addition, the Obama White House issued a “Call to Action” with respect to noncompete agreements in its waning days.  Understanding the impact of these changes, and what to expect in 2017, will help your company safeguard its most valuable assets and maintain its advantage over competitors.

On Wednesday, December 14th at 8:00 a.m. Eastern, the Boston office is hosting a Breakfast Briefing entitled “Change is in the Air: 2016 Developments in Trade Secret and Restrictive Covenant Law in Massachusetts and Beyond, and What to Expect in 2017.” Attorneys Katherine Perrelli, Erik Weibust, and Dallin Wilson will discuss recent developments in restrictive covenant and trade secrets law, and what to expect in 2017.

The program will focus on practical responses to the following issues and questions:

  • What you need to know about the federal Defend Trade Secrets Act of 2016
  • What to expect with respect to noncompete reform in Massachusetts in 2017
  • What does the White House’s Call to Action mean for Massachusetts businesses, and will it stick with the new Administration?
  • Important decisions of 2016 in Massachusetts and beyond

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There is no cost to attend but registration is required and seating is limited. Members of the general counsel’s office, HR professionals, corporate executives, risk managers, and directors are invited to attend. The breakfast briefing will take place from 8:00 a.m. to 10:00 a.m. Eastern at Seyfarth’s Boston office: Two Seaport Lane, Suite 300, Boston, MA 02210.

Cross Posted from Employer Labor Relations Blog.

Seyfarth Synopsis: The U.S. Court of Appeals for the D.C. Circuit recently denied Quicken Loans, Inc.’s petition for review of an NLRB decision finding that confidentiality and non-disparagement provisions in the company’s Mortgage Banker Employment Agreement unreasonably burdened employees’ rights under Section 7 of the NLRA.

Back in 2013, an NLRB administrative law judge found that certain confidentiality and non-disparagement provisions contained in Quicken’s Mortgage Banker Employment Agreement violated the NLRA (see our earlier blog post here). The Board agreed with the ALJ, and the Company petitioned the D.C. Circuit for review. Recently a three-judge panel of the D.C. Circuit denied the Company’s petition for review and granted the NLRB’s cross-application for enforcement, finding that there was nothing arbitrary or capricious about the Board’s decision and there was no abuse of discretion in the Board’s hearing process (Case No. 14-1231).

Facts

As a condition of employment, mortgage bankers were required to sign a Mortgage Banker Employment Agreement that included a confidentiality provision and a non-disparagement provision. The confidentiality provision prohibited employees from disclosing nonpublic information regarding the company’s personnel, including personnel lists, handbooks, personnel files, and personnel information of coworkers such as phone numbers, addresses, and email addresses. The non-disparagement provision prohibited employees from publicly criticizing, ridiculing, disparaging or defaming the company or its products, services, policies, directors, officers, shareholders or employees.

Court’s Reasoning

The D.C. Circuit noted that its review of the Board’s decision was limited, as Congress has entrusted the Board with implementing Sections 7 and 8(a)(1) of the Act and determining when an employer’s workplace rules run afoul of those provisions. The three-judge panel noted that the Board’s determinations are therefore entitled to considerable deference and will be sustained as long as the Board “faithfully applies” the legal standards and its textual analysis of a challenged rule is “reasonably defensible” and adequately explained.

In finding that the Board properly determined that the confidentiality provision violated employees’ Section 7 rights, the court noted that the very information the provision forbids employees from sharing (i.e., personnel lists and employee rosters) has long been recognized as information that employees must be permitted to gather and share among themselves and with union organizers. With respect to the non-disparagement provision, the court found that the Board “quite reasonably found that such a sweeping gag order would significantly impede mortgage bankers’ exercise of their Section 7 rights because it directly forbids them to express negative opinions about the company, its policies, and its leadership in almost any public forum.”

In reaching its conclusions, the appeals court noted that the validity of a workplace rule turns not on subjective employee understandings or actual enforcement patterns, but on an objective inquiry into how a reasonable employee would understand the rule’s disputed language. The court observed that this approach serves “an important prophylactic function: it allows the Board to block rules that might chill the exercise of employees’ rights by cowing the employees into inaction,” rather than forcing the Board to wait until that chill is manifest and then try to undertake the difficult task of dispelling it. The court also noted that the absence of enforcement “could just as readily show that employees had buckled under the Employment Agreement’s threat of enforcement.”

Employer Takeaway

In recent years, the Board has issued numerous decisions in which workplace rules were found to unlawfully restrict employees’ Section 7 rights, and the D.C. Circuit’s decision demonstrates that employer petitions for review of such decisions may not be successful. The decision also highlights the need to not just draft and review employee handbooks and policies for possible non-compliance with the NLRA, but employment agreements as well.

shutterstock_394290406As a thank you to our valued readers, we are pleased to announce the webinar “Enforcing Non-Compete Provisions in Franchise Agreements” is now available as a podcast and webinar recording.

In Seyfarth’s seventh installment in its series of Trade Secrets Webinars,  Seyfarth attorneys John Skelton, James Yu and Dawn Mertineit focused on the importance of State specific non-compete laws and legislation and recent Federal and State efforts to regulate the use of non-compete agreements; enforcement considerations for the Franchisee when on-boarding and terminating employees; and lessons learned from recent decision regarding enforcing non-compete provisions upon termination and non-renewal.

As a conclusion to this well-received webinar, here are three key takeaway points:

  • As reflected by the May 5, 2016 White House report (Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses), state and federal non-compete legislative proposals and recent enforcement action by the Illinois Attorney General challenging the use of non-compete agreements for lower level employees, Franchisors and Franchisees need to anticipate more regulation and scrutiny.
  • With respect to their own employees, Franchisors and Franchisees need to develop and implement on-Boarding, termination and other procedures designed to ensure that both departing and prospective employees understand their ongoing obligations with respect to the company’s confidential and proprietary information and trade secrets and that such information is protected throughout the employment relationship.
  • The enforceability of non-compete provisions are most often litigated in the context of a request for a preliminary injunction and several recent decisions confirm that to enforce a non-compete against a departing franchisee the franchisor (1) should be able to show harm to actual competition; (2) needs to act promptly and that enforcement delays likely means that any alleged harm is not irreparable; and (3) should develop and implement a post-termination plan beyond simply sending a notice of termination as the franchisor will need to present evidence of actual harm.

shutterstock_208182985A severance agreement executed in connection with a Stark Truss employee’s resignation included a one-year non-competition clause.  It allowed the company unfettered discretion to decide if his new employer was a competitor and, if so, to terminate his severance.  The ex-employee took another job and sued Stark Truss in an Ohio court, seeking a declaration that he was entitled to 100% of his severance.  The trial court’s judgment for Stark Truss was affirmed on appeal.  Saunier v. Stark Truss Co., Case No. 2015CA00202 (Ohio App., May 23, 2016).

The parties.  Stark Truss is an Ohio manufacturer and distributor of wood and steel components used in building construction.  Saunier, a 35-year employee, was the company’s asset manager.  Immediately after his separation from Stark Truss, Saunier accepted a similar position, nearby, with Carter Lumber.

Stark Truss’ “sole discretion”.  Under the severance agreement, Start Truss had “sole discretion” to denominate Saunier’s subsequent employer a “Competitor.”  The definition of “Competitor” was a business located within 100 miles of Stark Truss and “substantially similar” to that company.  Saunier was required to provide the company with detailed information concerning his new employment.  If Saunier affiliated with a “Competitor” within one year from his separation date, he forfeited further severance payments.  Stark Truss determined that Carter Lumber was a “Competitor.”

Ruling on appeal.  The Court of Appeals noted that both parties were represented by counsel in negotiating the Severance Agreement.  Consistent with several Ohio judicial decisions involving a “sole discretion” contract provision in other contexts, the appellate tribunal determined that the clause was unambiguous and was valid.

The court did not address the issue of whether Stark Truss’ “sole discretion” was without limitations.  Perhaps the judges concluded that the company’s determination was within the bounds of sound judgment and, therefore, it was reasonable.  Nor did the judges say whether the same ruling would have been issued to a “sole discretion” provision in a traditional employment contract non-compete rather than a severance agreement.

Takeaways.  The Saunier appellate court held that, under the circumstances there, an employer may reserve to itself the unilateral right to decide whether an employee has violated a non-compete.  Is such “sole discretion” unqualified?  Probably not.

There are very few reported decisions mentioning, much less adjudicating, the limits of a “sole discretion” contract provision in a non-compete context.

  • One opinion that refers to a “sole discretion” provision within a non-compete agreement is SkyHawke Technologies LLC v. Unemployment Commission, 27 A.3d 1050, 1052-53 (Pa. Commonwealth Court 2011).  However, the court did not address the provision’s validity.  There, an individual had a contract to provide services to a company.  He was permitted to furnish similar services to others, but he could be fired if the company determined, in its “sole discretion,” that his performance of those similar services was not in its best interests.  The company apparently made such a determination and terminated the contract.  The litigation concerned (a) the individual’s claim that he had been an employee and was entitled to unemployment compensation, and (b) the company’s counter that he had been an independent contractor to whom no such compensation was owed.  The court ruled in favor of the company but without significant discussion of the “sole discretion” provision.
  • A case holding that “sole discretion” sometimes is unlimited is Sunshine Gas. Distributors, Inc. v. Biscayne Enterprises, Inc., 39 So.3d 978 (Fla. App. 2014).  Each party to a lease had “sole discretion” to decide whether or not to renew.  The jurists stated that imposing a duty of “good faith and fair dealing” with respect to a contract containing what they called a “binary choice” would frustrate, rather than protect, the parties’ interests.  39 So.3d at 980 n.1.
  • However, an older Florida Appellate Court decision, Cox v. CSX Intermodal, Inc., 732 So.2d 1092, 1097-98 (1979), explained when a “good faith and fair dealing” requirement should be imputed with respect to an exercise of “sole discretion.”  In the jurists’ view, if a “broad range of authority is reposed in one party” to a contract, “the reasonable expectations” of the parties may need to be protected from an arbitrary discretionary decision.  So, if the parties seem to have anticipated that community standards of honesty, decency and reasonableness would be applied, “good faith and fair dealing” is required.  Although the Cox lawsuit did not involve a non-compete, the same principles might well be applied to an employer exercising “sole discretion” to decide whether an ex- employee is engaging in prohibited competition.

 

WebinarOn Tuesday, June 21, 2016 at 12:00 p.m. Central, Seyfarth attorneys, John Skelton, James Yu and Dawn Mertineit will present the seventh installment of the 2016 Trade Secrets Webinar series. This program will focus on protecting a franchisor’s trade secrets, confidential information, and goodwill through the use of covenants against competition.

The Seyfarth panel will specifically address the following topics:

  • The scope of protectable interests (for both the Franchisor and the Franchisee) in the franchise relationship and with respect to the franchise operating system.
  • Enforcement considerations for the franchisee when onboarding and terminating employees and for the franchisor with respect to terminated or withdrawing franchisees.
  • State non-compete laws and legislation and other state specific nuances.
  • Enforcing in-term and post-term non-compete provisions in the franchise context.
  • Lessons to be learned from recent non-compete decisions.

Our panel of attorneys have significant experience advising franchise, dealer, and distributor clients on protecting their brands, trade secrets, and other intellectual property, including litigating trade secret cases, drafting protection agreements, and conducting trade secret audits.

*CLE Credit for this webinar has been awarded in the following states: CA, IL, NJ and NY. CLE Credit is pending for GA, TX and VA. Please note that in order to receive full credit for attending this webinar, the registrant must be present for the entire session.

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If you have any questions, please contact events@seyfarth.com.

shutterstock_406019920Palmetto bought the assets of Knight Systems’ mortuary transport business. The agreement of purchase and sale included (a) Palmetto’s commitment to buy body bags, at specified discounted prices, exclusively from Knight Systems for 10 years, and (b) Knight Systems’ promise not to provide mortuary transport services within 150 miles of Palmetto’s offices for the same period.  Notwithstanding the non-compete covenant, a few years later Knight Systems submitted a timely proposal — and was selected — to provide those services to a Palmetto customer within the 150-mile territory.  Palmetto sued Knight Systems for breach of contract, won below, but lost in the South Carolina Court of Appeals.

Status of the case.  By consent, Palmetto’s complaint and Knight Systems’ counterclaim were tried before a court-appointed referee.  Concluding that the geographic restriction in the non-compete was reasonable, he ruled in favor of Palmetto and awarded $373,000.  The Court of Appeals reversed and remanded. Palmetto Mortuary Transport, Inc. v. Knight Systems, Inc., No. 2014-001819 (S.C. Court of Appeals, May 4, 2016).

Background. Four years after the purchase and sale transaction, Palmetto customer Richland County published a RFP with regard to providing mortuary transport services to the county for five years.  The day before the deadline for responding, Knight Systems accused Palmetto of purchasing body bags from others in violation of its commitment to buy those products exclusively from Knight Systems.  Palmetto replied that it had spent a minimal amount, less than $450 (1% of the aggregate amount it had paid Knight Systems), for products covered by the contract’s exclusivity provision.

Knight Systems was the only source for the odor-proof body bags required by the RFP. Shortly before the contract was awarded, it informed Richland County that it (Knight Systems) intended to take those products off the market.  This would leave Palmetto unable to satisfy a contractual condition.  Whether for this reason or otherwise, and despite Palmetto’s contention that it had submitted the most favorable proposal, Knight Systems was awarded the contract.

Reversal of the referee’s decision. The only issue addressed on appeal was the reasonableness of the geographic limitation in the assets sale agreement.  According to the court, the referee cited two bases for his conclusion that the limitation was reasonable.

  • Palmetto’s owner testified that it wanted the 150-mile restriction included in the purchase and sale agreement because, although Knight Systems did mortuary transport business in only two South Carolina counties, Palmetto was considering an expansion of the territory.  The appellate tribunal held that this testimony did not justify a restriction encompassing parts of three states, especially since there was insufficient “evidence of definitive planning, acquisitions, or other overt acts” in support of possibly enlarging the service area.
  • A Knight Systems owner testified that the company did not object to including the restriction in the agreement because, at that time, Knight Systems had not intended to get back into the business after the sale to Palmetto.  The court said Knight Systems’ “intention of not returning to the mortuary transport business is [not] a relevant factor for analyzing whether a territorial restriction is reasonable.”

Lastly, the Court of Appeals addressed the possibility of “blue penciling” the 150-mile restriction. That would be permissible under South Carolina law, the judges said, only if the agreement authorized redrawing the provision.  The Palmetto-Knight Systems contract did not so authorize.  Accordingly, blue penciling would mean inserting “an arbitrary term” as to which the parties neither negotiated nor agreed.

Takeaways. Many judicial opinions state that restrictive clauses in a non-compete contained in an employment agreement must be reasonable or they are subject to being invalidated. Palmetto makes the same point regarding restrictions in an assets sale contract.

Palmetto also teaches that when drafting a non-competition and/or a non-solicitation clause for an employment or sales agreement, consider authorizing a decision-maker to modify unreasonable geographic and duration provisions.  However, trade secret confidentiality clauses — not involved in the Palmetto case — rarely are invalidated because of allegedly unreasonable territorial or time restrictions (such clauses are subject to being stricken in their entirety by a court holding that there is no substantial risk of disclosure).

shutterstock_149599301

By Gary Glaser, James McNairy and Marc Jacobs

We are pleased to announce the webinar “Trade Secrets, Restrictive Covenants and the NLRB: Can They Peacefully Coexist?” is now available as a podcast and webinar recording.

In Seyfarth’s fifth installment of its 2016 Trade Secrets Webinar series, attorneys Jim McNairy and Marc Jacobs conveyed strategies and best practices to help you, as in-house counsel and HR professionals, to ensure that your company and internal clients are protected.

As a conclusion to this well-received webinar, we compiled a list of  brief summaries of the more significant cases that were discussed during the webinar:

  • The National Labor Relations Act applies to all private sector workplaces — not just unionized facilities.   Among other things, the Act protects an employee’s right to engage in protected concerted activities, which in general are group action (usually by two or more employees) acting together in a lawful manner, for a common, legal, work-related purpose (e.g., wages, hours and other terms and conditions of employment).  Limits on these rights and retaliation against an employee for engaging in protected concerted activity violates the Act.  The National Labor Relations Board is aggressively protecting employees’ rights to engage in protected concerted activity. As part of this effort, the NLRB will find unlawful workplace rules, policies, practices and agreements that explicitly restrict Section 7 activities (such as a rule requiring employees to keep their wage rate confidential) or that employees would reasonably believe restricts their Section 7 rights (e.g., a confidentiality agreement or policy that generally includes in the definition of confidential information “personnel information”).
  • In the 2015 Browning-Ferris Industries decision, the NLRB substantially broadened the definition of “joint employer”.  Under this new expanded definition, an entity can be found to be a joint employer if it has the authority, even if unexercised, to control essential terms and condition of employment.  As a result, if one entity has agreements with other entities to provide labor or services, that entity may be a joint employer of the other entities’ employees based on the level of control it has over the terms and conditions of employment of the other entities/ employees.  One indicia of that control would be requirements for hiring or employment, such as requirements to sign agreements or adopt policies for the protection of confidential information and similar restrictions.
  • As a result, and also because of the signing of the federal Defend Trade Secrets Act, now is a critical time for all employers to review their policies, practices, procedures and agreements (1) regarding the protection of confidential information; and (2) with third-party service and labor providers.  In reviewing confidential information policies and agreements, the focus should be on narrow tailoring using specifics and examples to protect information that lawfully may be protected in a lawful manner.  For agreements with parties, the review should include an analysis of the factors that may show joint employer status so that you can balance the risk of a joint employer finding with the needs to protect your organization.

Join us Monday, May 16 at 2:00 p.m. Central. for our next webinar, “The Defend Trade Secrets Act: What Employers Should Know” To register, click here.

shutterstock_292151738While the federal Defend Trade Secrets Act is garnering a great deal of attention, it’s worthwhile to remember that state law remains critically important in drafting restrictive covenants.  This week, May 11, 2016, marks the fifth anniversary of Georgia’s revised trade secrets act, which fundamentally recast how courts view and enforce restrictive covenants.

Prior to enactment of the new law, Georgia was one of the most difficult states in which to enforce restrictive covenants against employees.  As a result, before the revised act, employees sometimes moved to Georgia to take advantage of Georgia’s extremely pro-employee public policy.  (In fact, some lawyers commented — only half -jokingly — that their clients should go to Las Vegas to get out of their marriage and go to Atlanta to get out of their non-compete.)

The new act implemented a sea change in Georgia’s public policy towards restrictive covenants.  The new act substantially liberalizes drafting requirements for restrictive covenants in Georgia (which, before the new act, were governed by a series of arcane court decisions that imposed a variety of highly technical drafting requirements).  Perhaps most notably, the new act permits Georgia courts to “blue pencil” or partially enforce overbroad restrictive covenants (though the Georgia courts have had few opportunities to exercise that new power).  As a result, with enactment of the new law, Georgia is one of the more favorable jurisdictions for enforcement of restrictive covenants in employment agreements.

In our one-year anniversary post on the act’s passage, we made three predictions: (1) Georgia courts would be considerably more likely to enforce restrictive covenants under the new act than they had under prior Georgia law, (2) Georgia courts would “blue pencil” overbroad restrictive covenants, and (3) Georgia courts would continue to apply prior Georgia law to agreements that predate the new act.  Five years later, the jury is still out.  Few published or appellate decisions have examined the revised act.  Although some trial courts have grappled with the act in recent years, there has not been enough time for agreements signed after May 11, 2011 to make their way into more than a handful of published or electronically-available decisions.

Nevertheless, one decision over the past few years, Cellairis v. Duarte, is particularly notable.  That case (which we previously examined here as an illustration of the difficulties in drafting effective carveouts from arbitration provisions) suggests that courts are more likely to enforce restrictive covenants under the new law, just as we predicted four years ago.

In Cellairis, a franchisor sued a former employee who, at various times, worked as an officer, employee, and independent contractor.  A 2014 franchise agreement between the franchisor and employee obligated the employee to refrain from owning or operating a competing business within 10 miles of any franchise operating as of the termination date.  The franchise agreement also contained a two-year non-solicitation provision prohibiting the employee from soliciting any customer who the franchisee or the employee did business with in the two years preceding the agreement’s termination.

The franchisor moved for and obtained a preliminary injunction.  The court sidestepped the employee’s multifaceted career with the franchisee by analyzing the restrictive covenants as if the employee worked only as an employee.

The court quickly found that a two-year restriction was “presumptively reasonable” under Georgia’s new act and brushed aside the employee’s attempts to argue that it was still unreasonable.  The court also honored the new act’s position on geographic limitations; it held that a 10-mile radius from any franchise, even those that did not exist when the agreement was signed, was reasonable.

Unlike previous restrictive covenant decisions, the court did not limit the non-compete and non-solicitation to customers that the employee managed.  This is a clear departure from pre-amendment Georgia law, which routinely struck down restrictive covenant agreements that were untethered from customers managed by the former employee.

Finally, the court found that the public interest now favored the entry of a preliminary injunction because “reasonable restrictive covenants . . . serve the legitimate purpose of protecting business interests and creating an environment favorable to attracting commercial enterprise to Georgia and keeping existing businesses within the state.”  Formerly, the public interest element always weighed against imposing a preliminary injunction.  This decision suggests a party moving for a preliminary injunction can always cite to public interest as a factor favoring preliminary injunctive relief because even overly broad restrictive covenants can be “blue penciled” to reasonable limitations on competition.

Takeaways

The Cellaris decision illustrates the profound impact that the new act has on restrictive covenants signed on or after May 11, 2011.  Restrictive covenant agreements governed by pre-act law remain vulnerable.  Employers with restrictive covenants signed before May 11, 2011 should sign new agreements to erase any doubts about which law governs.  (Some decisions have found that pre-act restrictive covenants amended after May 11, 2011 are still governed by pre-act law.)

Employers should also feel more comfortable about seeking preliminary injunctive relief if they can present evidence that a former employee is violating a restrictive covenant.  With the public interest on its side and a blue pencil in hand, courts seem less hesitant to impose preliminary injunctive relief — even though the federally governed standard for preliminary injunctive relief has not changed.

Finally, practitioners should look to federal Alabama and Florida decisions until Georgia state courts have established Georgia’s position on post-act restrictive covenants.  The Cellaris court looked to Florida law to guide its analysis.  Without any binding authority, these out-of-state decisions should serve as a rough proxy for how much evidence a district court wants to see before it grants preliminary injunctive relief.

If you have any questions about how the May 2011 revisions to Georgia’s law on restrictive covenants affects your restrictive covenants portfolio, or if you would like assistance drafting compliant agreements for your workforce, please contact a Seyfarth Shaw Trade Secrets Group attorney.

***

Alex Meier, a co-author of this post, had the honor to serve as a clerk to Judge O’Kelley the presiding district court judge in the Cellaris case. The analysis of the case in this blog reflect the author’s view alone and should not be construed as an endorsement of either litigant’s position.

shutterstock_325101959When is a microscope not needed? When the problem one is looking at is big as an elephant, not small as an amoeba.

Nion, an electron microscope manufacturer, contracted with Gatan, a spectrometer manufacturer, to use Gatan’s spectrometers in Nion’s microscopes. The contract contained both confidentiality and non-compete clauses. When Gatan learned that Nion had sold other parties microscopes that used Nion’s own spectrometer, Gatan sued, claiming that Nion had breached the non-compete (but not the confidentiality) provision of the contract. In ruling on Nion’s motion to dismiss, the court found that the non-competition provision was void and that Gatan’s claim that the provision was necessary to protect its trade secrets was without merit. Gatan, Inc. v. Nion Company, 2016 WL 1243477 (N.D. Cal. Mar. 30, 2016).

Gatan proffered some interesting arguments in opposition to Nion’s motion (kind of like your mother said it was “interesting” when you cut your own hair at the age of 5 using some rusty scissors that you found in the neighbor’s yard). Though Gatan’s complaint captioned a trade secret claim, it never used the word “misappropriate” anywhere in its complaint. Gatan also asserted that the covenant not to compete in its contract with Nion protected Gatan’s trade secrets. But the non-compete covenant said nothing whatsoever about trade secrets.

In making its arguments, it appears that Gatan was shooting for the so-called “trade secrets exception” to California Business and Professions Code 16600 (prohibiting covenants not to compete), but unfortunately had somewhat of a misfire. Still, the court’s order contains some notable analysis.

First, the court acknowledges that there is a trade secret exception to California’s prohibition on covenants not to compete. As we have discussed in earlier blogs, here and here, California courts are split on whether there is a trade secret exception to BPC 16600. Some, like those cited in the Gatan order, believe that an exception exists. Others, like Ret. Grp. v. Galante, 176 Cal. App. 4th 1226 (2009), deny (in dicta) that such an exception does or even needs to exist. Unfortunately, the Gatan court did not advance this discussion.

So lesson #1 from Gatan: If one is going to invoke the “trade secrets exception” to BPC 16600, then the covenant not to compete better expressly make reference to the alleged “trade secrets.” Companies cannot, as Gatan did, simply point to a theoretical exception to the rule as a way to enforce what some would argue is a facially void clause. As the court wrote, “under any reading of the Agreement …, [the non-compete clause] cannot be considered ‘necessary’ to protect Gatan’s trade secrets”—the court found that the agreement’s separate confidential information provision sufficiently did this.

Second, Gatan cites to Golden v. California Emergency Physicians Med. Grp., 782 F.3d 1083 (9th Cir. 2015), for the proposition that BPC 16600 applies in the business-to-business context as much as in the employer-to-employee context, on the ground that the section “does not specifically target covenants not to compete between employees and their employers.” (See our blog on Golden here.) Other courts have held similarly. See, e.g., Jan Marini Skin Research, Inc. v. Allure Cosmetic USA, Inc., 2007 WL 1508686, at *13 (Cal. Ct. App. May 24, 2007), as modified on denial of reh’g (June 25, 2007) (unpublished) (“While many cases applying section 16600 arise in the context of an employer-employee relationship, the statute also applies to other contracts, such as manufacture or distributorship agreements between businesses or individuals.”); Richmond Techs., Inc. v. Aumtech Bus. Sols., 2011 WL 2607158, at *17 (N.D. Cal. July 1, 2011).

Perhaps time will tell if Golden and Gatan accurately predict the breadth of BPC 16600.  In the meantime, one thing appears clear: if one seeks to enforce a covenant not to compete on the basis that the covenant is needed to protect trade secrets, the covenant better at least mention the term “trade secrets” at least before Judge Hamilton in the Northern District of California.