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

By Molly Joyce

The Idaho Supreme Court, in the case of T.J.T., Inc. v. Mori, 2011 WL 5966870, No. 37805 (Id. Nov. 30, 2011), recently found that a two-year non-compete agreement executed in connection with the sale of a business was enforceable under California law, despite the fact that the seller also became an employee of the purchasing company as a result of the sale. The Idaho high court also remanded the case for consideration of whether the non-compete agreement’s overbroad geographic restriction could be “blue-penciled” to comply with California law.

The case arose out of a 1997 non-compete agreement between plaintiff, T.J.T., and defendant, Mori, executed in connection with the sale of Mori’s tire and axel recycling business, Leg-It Tire Company, Inc., based in California. The agreement prohibited Mori from operating anywhere within 1,000 miles of any facility owned or operated by T.J.T. or Leg-It for two years following the termination of his employment with T.J.T. Although Mori became an employee of T.J.T. as part of the deal, his employment was governed by a separate employment agreement. 

Mori worked for T.J.T. until February 7, 2007. Within weeks of his resignation, Mori began work with a competitor of T.J.T. In June 2007, T.J.T. filed a complaint seeking injunctive relief and a constructive trust based on several claims, including breach of fiduciary duty and breach of contract. The district court denied T.J.T.’s request for injunctive relief and ultimately granted Mori’s motion for summary judgment, finding that the agreement was void under California law. The district court concluded that the agreement was tied to Mori’s employment instead of the sale of his business, and that the durational and geographical scopes of the agreement were too broad. 

The Idaho Supreme Court reversed and remanded the district court’s opinion. First, the court held that the non-compete provision was indeed enforceable. The court recognized that, as a general proposition, California has a strong public policy against non-compete agreements. An exception, however, to this prohibition is in the case of the sale of the goodwill of a business, citing California Business and Professions Code § 16601, the purpose of which “is to permit the purchaser of a business to protect himself or itself against competition from the seller which competition would have the effect of reducing the value of the property right that was acquired.” Citing Monogram Industries, Inc. v. SAR Industries, Inc., 64 Cal. App. 3d 692, 701, 134 Cal. Rptr 714, 720 (Ct. App. 1976). 

Mori argued that the non-compete provision was clearly tied to his employment with T.J.T., and therefore unenforceable. The Idaho Supreme Court disagreed, noting that “California courts have held that a non-competition agreement can be incidentally linked to the seller’s employment agreement with the buying business without offending section 16600 [which prohibits non-compete agreements generally].” Even though Mori’s non-compete agreement referred to Mori’s employment with T.J.T. to determine its duration and enforceability, the court found that such an “incidental” link does not necessarily mean the provision is unenforceable. Instead, the court reasoned that Mori’s employment only came about as part of the larger transaction -- the sale of the business to a competitor -- and was therefore enforceable.

The Idaho Supreme Court also found that non-compete provision’s duration, which was to last for a period “ending two (2) years following Seller’s termination of employment with the Company for any reason,” was not unreasonable. Mori argued that the non-compete was not enforceable beyond six years (his term of employment, which was four years, plus two years). Yet, the court found that because the language of the non-compete agreement was not tied to the employment agreement, it existed independently of the employment agreement and operated pursuant to its own plain terms. Again relying on the language of California Business and Professions Code §16601, which provides that a seller may agree to refrain from competing so long as the buyer carries on a like business, the court found that the agreement was not unreasonable because T.J.T. continued to operate in the same line of business that Mori’s former business (Leg-It) did at the time of the alleged breach.

Finally, the Supreme Court remanded the case to the district court for consideration of whether geographical component of the non-compete, which prohibited Mori from working anywhere within 1,000 miles of any facility owned or operated by T.J.T. could be judicially narrowed, or “blue-penciled,” to comply with California law. The court recognized that the geographical restriction was indeed overbroad under California law as written, but queried whether the provision could be narrowed. The court reasoned that courts construing California agreements have the authority to narrow otherwise enforceable provisions pursuant to the portion of Section 16600 of the California Business and Professions Code that provides that “[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The agreement at issue also contained a “Reformation” clause, giving courts the power to reform the agreement to the extent necessary to be enforceable.  The court was careful to note that while California courts refuse to modify the agreements before them, they do have a continuing ability to narrow the scope of an otherwise valid agreement. 

The T.J.T. court concluded that the key factor in determining a covenant’s proper geographic scope is the determination of what area is necessary to protect the goodwill of the sold business from competition by the seller. The Idaho Supreme Court refused to narrow the agreement, finding that the parties demonstrated a genuine issue of material fact as to the scope of Leg-It’s business. It nonetheless remanded the case to the district court to determine the question of fact and whether the agreement could be narrowed within a scope that was reasonably necessary to protect the goodwill of the sold business.

Although this case involves an Idaho court construing California law, T.J.T. serves as a reminder that one should not automatically assume that a California non-compete agreement with certain employees (particularly those selling their interest in a business) is always unenforceable – even if the party seeking to enforce the agreement is the employer or former employer of the defendant. Likewise, just because a California non-compete agreement contains an overbroad restriction, that might not render the entire non-compete agreement unenforceable if it can be narrowed in scope by the court. 

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By Bob Stevens and Daniel Hart

As we have discussed on this blog before, on May 11, 2011, Georgia reissued its new Restrictive Covenant Act (the “New Act”). The New Act reflected a fundamental change in Georgia’s law regarding restrictive covenants because it permitted Georgia courts to “blue pencil” (i.e., partially enforce) restrictive covenants that otherwise would be overbroad and, therefore, completely unenforceable under then-existing Georgia case law. While the New Act permits Georgia courts to partially enforce overbroad restrictive covenants, it does not require that they do so.

For the first time since Georgia passed the New Act, a Court in Georgia has elected to exercise its discretion to blue pencil restrictive covenants that it found to be overbroad. In Pointenorth Insur. Group v. Zander, No. 1:11-cv-3262-RWS, 2011 U.S. Dist. LEXIS 113413 (N. D. Ga. Sept. 30, 2011), the Court found that, among other things, the non-solicitation covenant contained in the employment agreement at issue was overbroad because it extended to any of the former employer’s clients, not just the ones with whom the former employee had contact during her employment. 

Rather than attempting to excise or mark out the overbroad provision and enforce the remaining restrictive covenants, the Court modified or altered the restrictive covenant and enjoined the former employee only from soliciting the clients with whom she had contact while employed by the plaintiff. The Court also enjoined the new employer from soliciting the same clients. 

This suggests that at least the Court interprets the New Act as providing it with the discretion to re-write restrictive covenants to make them enforceable, rather than merely providing a court with the power to remove overbroad covenants. It remains to be seen if other courts in Georgia follow the Pointenorth Court’s lead and use the New Act as a basis for re-writing restrictive covenants that are found to be overbroad. For the time being, this decision represents the lone voice on the stage and indicates that there may be a willingness to modify restrictive covenants instead of simply excising them and enforcing the remaining provisions.

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By Dan Hart, Atlanta

Following Georgia Governor Nathan Deal’s signing of House Bill 30 (“H.B. 30”) on May 11, Georgia’s Restrictive Covenant Act is now law, effective immediately. The Governor’s signing of the bill caps months of debate and speculation about the effective date of a nearly identical bill that the Legislature enacted in 2009. That legislation, H.B. 173, was contingent on voters’ approval of a ballot referendum to amend the Georgia Constitution – a measure that voters overwhelmingly approved last November. Although the legislature clearly intended the 2009 bill to become effective the day after last November’s election, uncertainty about the effective date of the constitutional amendment raised concerns about the effective date of the statute.  Accordingly, the legislature enacted H.B. 30 to fix these problems. (For our previous posts on this issue, see here and here.)   The new law thus applies to all restrictive covenants entered into on or after the statute’s May 11 effective date.

The statute effects a sea-change in the law in Georgia, which historically has been an inhospitable forum for employers seeking to enforce restrictive covenants against former employees. Among other changes, the Act creates statutory presumptions under which courts must presume that restraints two years or less in duration are reasonable in time and that restraints more than two years in time are unreasonable. It also eases the drafting requirements for specific restrictive covenants, abolishes the previously existing requirement of a time-restriction for non-disclosure provisions, and creates a statutory burden-shifting regime whereby, if employers can meet an initial burden of showing that restrictive covenants are in compliance with the statute, parties challenging such restrictive covenants bear the burden of establishing that the covenants are unreasonable. Perhaps most significantly, the new law also permits Georgia courts to “blue pencil” (i.e., partially enforce) restrictive covenants that otherwise would be overbroad and, therefore, completely unenforceable under existing Georgia case law.

With the new law now officially enacted, should employers now assume that Georgia courts will always uphold restrictive covenants against their employees? Not exactly. As ESPN’s Lee Corso might say, “Not so fast, my friends!” Employers should continue to exercise caution in this area for at least three reasons:

First, the Restrictive Covenant Act applies only to restrictive covenants entered into on or after May 11, 2011.   Existing Georgia case law applies to restrictive covenants entered into on or before November 2, 2010 (the day that Georgia voters approved a constitutional amendment upon which the new law depends), and might also apply to restrictive covenants entered into between November 3, 3010 and May 10, 2011. For that reason, employers may continue to face an uphill battle in enforcing restrictive covenants that predate the new law unless they meet the narrow requirements that previously existed under Georgia law.

Second, while the Act permits Georgia courts to partially enforce overbroad restrictive covenants, it does not require that they do so. Until case law develops under the new statute, employers and their lawyers cannot be certain of what situations Georgia courts will exercise or decline to exercise their blue-penciling power. Based on law in other jurisdictions, however, it appears likely that Georgia courts may decline to exercise their blue-penciling power in cases where they believe that employers have unreasonably overreached for the purpose of creating an in terrorem effect on employees. Thus, employers should continue to exercise restraint when drafting restrictive covenants and should avoid drafting unreasonably broad covenants with the expectation that they will be fixed by the courts.

Third, although most provisions of the Act are beneficial to employers, the Act places restrictions on the types of employees who may be subjected to true non-compete provisions (as opposed to non-solicitation or nondisclosure provisions). Such provisions may be enforced only against employees who:

·        “Customarily and regularly solicit for the employer customers or prospective customers;”

·        “Customarily and regularly engage in making sales or obtaining orders or contracts for products or services to be performed by others;”

·        Perform specified management duties (which are set forth in the Act using language that closely follows the U.S. Department of Labor’s (“DOL) definition of the Fair Labor Standards Act’s (“FLSA”) “executive” exemption);

·        Perform the duties of a “key employee” (which the Act defines as “ an employee who . . . has gained a high level of influence or credibility with the employer's customers, vendors, or other business relationships or is intimately involved in the planning for or direction of the business of the employer or a defined unit of the business of the employer” or “an employee in possession of selective or specialized skills, learning, or abilities or customer contacts or customer information who has obtained such skills, learning, abilities, contacts, or information by reason of having worked for the employer”); or 

·         Perform the duties of a “professional” (which the Act defines using language that closely follows the DOL’s definition of the FLSA’s “professional” exemption.

Before requiring employees to execute new non-compete agreements, employers should ensure that employees who are subject to the restriction fall within one of the definitions included in the statute.

Notwithstanding these necessary precautions, employers might consider revamping their standard restrictive covenants to take full advantage of the changes created by the Act. When undertaking such an effort, employers may want to consider the following issues:

·        Are your non-solicitation provisions consistent with the language approved by the Act? The Act provides that “[a]ny reference to a prohibition against ‘soliciting or attempting to solicit business from customers’ or similar language shall be adequate [for non-solicitation restrictions] and narrowly construed to apply only to: (1) such of the employer’s customers, including actively sought prospective customers, with who the employee had material contact; and (2) products and services that are competitive with those provided by the employer’s business.” Because this provision loosens the previously-existing rules for drafting non-solicitation covenants, employers may be able to streamline the language that they use for such covenants.

·        Are your definitions of restricted geographic territories and competitive activities consistent with the language approved by the Act? The Act provides that “[a]ctivities, products, or services [covered by a restrictive covenant] shall be considered sufficiently described if a reference to the activities, products, or services is provided and qualified by the phrase ‘of the type conducted, authorized, offered, or provided within two years prior to termination’ or similar language containing the same or a lesser time period.” Likewise, the Act provides that “[t]he phrase ‘the territory where the employee is working at the time of termination’ or similar language shall be considered sufficient as a description of geographic areas if the person or entity bound by the restraint can reasonably determine the maximum reasonable scope of the restraint at the time of termination.” These provisions significantly loosen rules that previously existed for drafting restrictive covenants in Georgia and may likewise provide some employers with an opportunity to streamline their agreements.

·        Are your nondisclosure provisions drafted as broadly as reasonable? Existing case law in Georgia requires nondisclosure provisions to bear a reasonable time limitation (usually a period of two years or less) with respect to any information that does not constitute a “trade secret” as defined by relevant law. Consistent with this requirement, many employers in Georgia historically have drafted their nondisclosure covenants to apply to a period of two years or less. Because the Act abolishes the requirement of a time limitation for nondisclosure covenants, employers should consider whether they want to revise the language in their existing nondisclosure covenants.

If you are interested in reviewing your existing restrictive covenant agreements for compliance with the new statute, or if you would like assistance drafting such agreements for your workforce, contact a Seyfarth Shaw Trade Secrets Group attorney.

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A recent Indiana Court of Appeals opinion, designated as non-precedential, discussed that state’s law concerning non-competition agreements. Most significant, the court upheld a commitment not to solicit the employer’s current or recent customers for two years even though the covenant contains no geographical limitation. However, provisions precluding any “contact with” such customers, and forbidding acceptance of “referrals of” them, were “blue penciled.” The court reversed the entry of summary judgment for the ex-employees and remanded for trial. Think Tank Software Dev. Corp. v. Chester, Inc., No. 64A03-1003-PL-172 (Ind. Ct. Appeals, Apr. 11, 2011).

Think Tank Software Development Corporation, and a number of companies affiliated with it (collectively, “Think Tank”), sued 10 former employees almost all of whom went to work for defendant Chester, Inc. Think Tank and Chester are competitors, engaging in what the court called “computer-related business activities.” Think Tank alleged violation of covenants not to compete and misappropriation of trade secrets. 

After more than five years of motion practice and discovery, the trial court granted summary judgment to the defendants on the grounds that the covenant not to compete “is overbroad and is therefore unenforceable . . . and cannot be reformed,” and that the property rights in which Think Tank claimed confidentiality did not constitute trade secrets. What the trial court apparently viewed as the covenant’s fatal flaw was that it was unlimited as to an applicable territory. Further, the affidavit of a former Think Tank director of technology seemingly demonstrated that the company had no protectable business information.

The Court of Appeals disagreed. Although upholding a two-year restriction on solicitation of recent former customers, the appellate court struck as unreasonable the prohibition against contacting them. Similarly, the court approved a ban on selling to, servicing, consulting, or negotiating with those customers, but a prohibition on acceptance of referrals of new customers -- for example, by the ex-employer’s customers -- was invalidated. Indiana recognizes “blue penciling” as an option for a court. The absence of a territorial restriction was not fatal, according to the court, because “the class of prohibited contacts [customers who had been such within two years of the former employees’ termination] is well defined and specific, thereby eliminating the need for any geographical limitation.” 

As for trade secrets, the appellate tribunal held that Think Tank sufficiently raised genuine issues of material fact with respect to whether the company’s “customer identities” and “tailored solutions to the customers’ information technology needs combine to form confidential information.” Similarly, Think Tank provided enough evidence of “its extensive security provisions in protecting” that information to withstand a motion for summary judgment.

The enforceability of a non-compete and non-solicitation agreement in a particular case frequently turns on the applicable facts and circumstances, the precise wording of the restriction, and the jurisdiction. The question of whether particular information qualifies as a trade secret also is fact-intensive. When in doubt, contact a Seyfarth Shaw Trade Secrets Group attorney.

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           Delaware Court of Chancery Vice Chancellor J. Travis Laster, faced with an unreasonable non-compete/non-solicitation agreement, indicated that he would have preferred to hold it invalid but said that he had no choice other than to modify its terms because its Maryland choice-of-law provision requires judicial “blue penciling.” He did enjoin the ex-employee from using his ex-employer’s customer list, a trade secret, but held that the ex-employee may call on any customer whose name is within his own knowledge.

            Delaware Elevator, Inc. (“DEI”), a national elevator installer and servicer, sued ex-employee John Williams who had 20 years of experience in the industry (six of them with DEI) at the time he left that corporation and started his own -- one man -- competing elevator maintenance company. He had signed an agreement with DEI (a) barring him for three years after leaving its employ from working in a competing business within 100 miles of any DEI office, and (b) prohibiting him from soliciting business from anyone who during the last six months of his employ had been either an actual DEI customer or a potential customer DEI was actively soliciting. While he claimed his signature on the agreement was a forgery, the court said that no rational fact finder could accept his claim. 

            The agreement contained a Maryland choice-of-law provision and a stipulation that a violation would inflict irreparable harm on DEI. Maryland law upholds non-competes if the restraints are reasonably necessary for the protection of the employer, do not impose an undue hardship on the employee, and are in the public interest. Even DEI recognized the unreasonableness of the territorial restriction as written (within 100 miles of any DEI office) and sought to enforce the agreement within 100 miles of just the Newark, Delaware office where Williams worked.   

            The Vice Chancellor observed that Williams has 34 years in the workforce, has personal and family ties to the area where he has been working, and could not readily re-locate or find an equivalent job in a new field. Rhetorically, the court asked DEI’s attorneys “how they would fare if forced to re-start in a far-off jurisdiction, to re-invent themselves as practitioners in a completely different subject-matter area, or to leave the law entirely and find employment in another industry.” 

            While he might have preferred to invalidate the agreement altogether, the Vice Chancellor stated that Maryland “does not authorize a policy-based refusal to enforce an unreasonable non-compete agreement. Maryland law instead calls on the court to carve back overly broad restrictive covenants by wielding the judicial ‘blue pencil.’” Accordingly, he modified the restrictive provisions to a two-year-30-miles-from-Newark-radius (since the two year period began January 17, 2010, Williams’ date of termination, it will expire less than one year after the decision was announced in March 2011). The court observed that, as modified, Williams would be able to earn a living by using his contacts and knowledge of the industry outside the non-compete zone immediately, and within the zone shortly, while at the same time DEI’s relationships with existing and prospective customers were adequately protected. 

            Williams admitted that he took a DEI customer list with him and used it. Because the list was held to constitute a trade secret, he was ordered to destroy all electronic and paper copies. However, the court said he is free to call on customers he knows, even if their names are on the list. A hearing on damages for wrongful use of the list will be scheduled.

            Employers should be cognizant of the applicable legal principles when they include a choice-of-law provision in a non-compete or non-solicitation agreement. If DEI’s agreement with Williams had provided for application of Delaware law, the agreement might have been voided altogether. By applying Maryland law, the employer salvaged at least some protection. Designation of another state’s law might have been even more favorable to the employer. Ask your Seyfarth Shaw trade secrets attorney for advice about choice-of-law provisions.

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Can a California corporation with virtually no ties to Rhode Island nonetheless be sued in Rhode Island federal court for misappropriation of a Rhode Island company’s trade secrets because the California corporation lured away a Florida employee who had a confidentiality agreement with the Rhode Island company?   Yes, according to the United States Court of Appeals for the First Circuit.  Astro-Med, Inc. v. Nihon Kohden America, Inc., Nos. 08-2334 and 08-2335, 2009 WL 3384786, 158 Lab. Cas. ¶60,887, and 29 IER Cas. 1543 (1^st Cir., Oct. 22, 2009). 

Although the three judges did not agree on the reason for upholding the district court’s jurisdiction over the California corporation and although the non-compete clause in the ex-employee’s employment agreement with his former employer contained an undeniably excessive territorial restriction, the court affirmed judgment against the ex-employee for breach of contract – and against the California corporation for tortious interference with the Rhode Island competitor’s prospective economic advantage. 

Astro-Med is a Rhode Island company that manufactures and sells “instruments for sleep and neurological research and clinical applications of sleep science and brain wave recording and analysis.” It employed Kevin Plant as a trainer and product demonstrator in Rhode Island. His employment agreement contained a comprehensive trade secrets-confidentiality provision as well as a one-year non-compete clause covering a vast territory: the whole of Europe and North America. The agreement recited that it would be governed by Rhode Island law and that all disputes would be heard in a Rhode Island court. 

When Plant asked Astro-Med for a transfer to Florida, Astro-Med agreed and soon promoted Plant to District Sales Manager. In his positions with Astro-Med in Rhode Island and Florida, Plant had access to his employer’s most sensitive proprietary and secret business information. 

Two years following Plant’s transfer, Astro-Med competitor Nihon Kohden America, a California company that had virtually no ties to Rhode Island but was fully aware of Plant’s contract, lured Plant away from Astro-Med to be Kohden’s Florida sales representative. Astro-Med promptly sued both Plant and Nihon in a Rhode Island state court. Both defendants were charged with misappropriation of trade secrets, which is a violation of the Rhode Island Uniform Trade Secrets Act. Astro-Med also accused Plant of breach of contract and Nihon of tortious interference with prospective economic advantage. 

The defendants removed the lawsuit to federal court on the basis of diversity of citizenship. Then, Nihon moved to dismiss the complaint as against it for lack of in personam jurisdiction or, in the alternative, to transfer the case to Florida or California as a more convenient forum, and Plant joined in the venue motion. The district court denied both motions.

Following “especially hard-fought” litigation, a jury returned a verdict in favor of Astro-Med against both defendants and awarded $375,000 in damages. The court added exemplary damages, attorneys’ fees, costs, and sanctions that brought the judgment to $1.16 million. The defendants, of course, appealed from the denial of their motions as well as the judgment. The appellate court affirmed the district court’s rulings.

Precedent in the First Circuit holds that minimum contacts with the forum state means satisfaction of three requirements: relatedness, purposeful availment, and reasonableness. Attacking relatedness, the defendants argued that all activity between Nihon and Plant occurred in Florida or California, and that Nihon never came in contact with Rhode Island in the course of wooing or employing Plant. Further, Nihon had no place of business, assets or employees in Rhode Island. Yet, District Judge Woodcock, sitting in the appellate court by designation, agreed with the trial judge that the relatedness requirement was satisfied by applying the “effects test” since Nihon’s “conduct in Florida and California was a cause of the breach of contract – the actual injury – that occurred in Rhode Island.” 

The “effects test” is commonly applied in determining whether a tort action bears a significant relationship to the forum state even though the tortfeasor, while not physically present there, purposefully engages in acts that cause injury there. The Astro-Med decision is unusual because the court held that the relatedness prong of the jurisdictional analysis was satisfied in Rhode Island on the basis that Nihon’s conduct outside that state caused breach of a Rhode Island contract. 

Judge Woodcock said that there was purposeful availment because Nihon was aware of Plant’s contract at all relevant times and knowingly accepted the risk of a possible lawsuit in Rhode Island by Astro-Med. The reasonableness test was met by litigation against Nihon in Rhode Island because, even though all of the events relevant to Nihon’s relationship with Plant took place in Florida and California, because “the Florida and California witnesses and evidence were heading for trial in Rhode Island” in any event since, indisputably, Astro-Med had a right to litigate with Plant in that state. 

The defendants insisted that the non-compete clause in Astro-Med’s contract with Plant was invalid because its territorial coverage obviously was over-broad. Over-broad? Yes, said the district and appellate courts, but not invalid. The clause could be “partially enforced” by “restricting its territorial application to the state of Florida and to a limited subset of Astro-Med customers.” Moreover, as the “breaching party,” Plant had no cause to complain since he “is being held to a more narrowly circumscribed agreement than the one he signed.”  

In separate opinions, the other two jurists on the appellate panel, Circuit Judges Howard and Lipez, concurred in the result. Judge Howard took exception to Judge Woodcock’s jurisdictional analysis on the ground that it was irreconcilable with First Circuit precedent, while Judge Lipez challenged the legitimacy of that precedent. 

Judge Howard noted that, to justify jurisdiction over an out-of-state defendant, the plaintiff must demonstrate that the claim relates to or arises out of the defendant’s contacts with the forum state. He stressed that Judge Woodcock’s application of the “effects test,” that is, where the injury occurred, to the relatedness prong of minimum contacts is irreconcilable with unequivocal First Circuit holdings that relatedness cannot be based solely on the in-forum consequences of distant conduct. He concluded that Judge Woodcock’s jurisdictional decision nevertheless was correct because a special rule can be applied in a business tort case where the defendant’s conduct was purposeful and where exercising jurisdiction is reasonable. In those circumstances, a court may construe the relatedness requirement “slightly more generously than we might in [other cases, thereby permitting] the best-suited forum to entertain the dispute.” The Rhode Island district court was that “best-suited forum.” 

Circuit Judge Lipez, also concurring, bemoaned what he called “an analytical flaw in our precedent” which seemingly confines the “effects test to the purposeful availment prong of the specific jurisdiction inquiry. It is the illogic of that precedent that has required my concurring colleague to justify our outcome here by raising the possibility of a special relatedness test for business torts.” Rather, according to Judge Lipez, the “in-forum impacts of conduct undertaken outside the forum” – the “effects test” – is properly considered both “in evaluating personal availment [and in] the relatedness inquiry. In my view, therefore, there should be no need for a special category of economic or business tort.”

The Astro-Med case shows that an employer of someone who has a confidentiality and non-compete agreement with a former employer can be forced to defend misappropriation of trade secrets and tortious interference litigation in an inconvenient forum, especially when the prospective employer was aware of the agreement at all relevant times and the former employer is located within the First Circuit. Further, the prospective employer and ex-employee will not necessarily prevail in their challenge to an invalid non-compete clause where a court exercises “blue pencil” authority to modify the clause.

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In Baird and Warner Residential Sales, Inc. v. Mazzone, No. 1-07-2179, the Illinois Appellate Court, First District reversed the circuit court’s determination that a restrictive covenant between Patricia Mazzone and her former employer, real estate broker Baird & Warner, was unenforceable as a matter of law. The ruling was issued in June as an unpublished order but was later published on August 15, 2008, upon the motion of Baird & Warner, which requested publication to provide guidance to the real estate industry where restrictive covenants are commonplace.

Baird & Warner sued Mazzone and her current employer, competing broker Midwest Realty Ventures, seeking to enjoin Mazzone for violating the restrictive covenant that prohibited her from soliciting Baird and Warner employees and independent contractors for one year following the end of her employment there. Although the circuit court initially granted a temporary restraining order and ordered expedited discovery, Mazzone and Midwest Realty quickly moved to dismiss on the ground that the non-solicitation agreement was unreasonable, overly broad, and thus enforceable because it sought to impose a “poison pill” whereby any competitor that hired any Baird & Warner manager was then precluded from hiring any of Baird & Warner’s thousands of employees and independent contractors. 

Baird & Warner opposed the motion, contending that, based on other language in the agreement, the covenant should be interpreted to apply only to the Baird & Warner office where Mazzone had worked.   But the circuit court dismissed the complaint and dissolved the TRO, concluding that the plain language of the agreement was not limited to the one office and declining to “blue pencil” the agreement because doing so would discourage precise drafting of agreements.

In an interlocutory appeal, the Appellate Court determined that even though the agreement was ambiguous as to whether it applied to one office or all of the company’s employees, “there is insufficient evidence to support a finding that the agreement was overly broad.” The court noted that under Illinois law, a court determining the reasonableness of a restrictive covenant should consider, among other factors, the hardship caused to the employee and the effect upon the general public. Here, the court concluded, there was no evidence on the face of the complaint to weigh those factors, and therefore it cannot be determined that the covenant is unreasonable as a matter of law. 

Based on this ruling, the court concluded that it need not address Baird & Warner’s alternative argument that the circuit court erred in refusing to exercise its “blue pencil” powers to modify the non-solicitation agreement to render it enforceable.

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