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

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

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

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

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

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

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

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

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The U.S. Court of Appeals for the Tenth Circuit recently held that a former employer’s price quotations to prospective customers were not trade secrets under Oklahoma law because they did not contain a confidentiality provision, but the former employee who took advantage of those quotations on behalf of his new employer did violate his non-compete covenant.  Southwest Stainless, LP v. Sappington, No. 08-5127 (10th Cir.  Sept. 21, 2009).

An Oklahoma court is permitted to blue-pencil unreasonable contractual geographic limits in a non-compete to make them reasonable. The Tenth Circuit held that the  trial court’s damages award with respect to business lost due to violation of the non-compete was properly based on the ex-employer’s historic profit margins on business with the relevant customers. Moreover, injunctive relief should have been awarded because the ex-employee took advantage of the "personal contacts [with] and a knowledge of the special needs and requirements of" the ex-employer’s customers which the former employee learned during the employment relationship.

Coincidentally, only a few weeks earlier, an Oklahoma district court granted a motion for partial summary judgment in a breach of contract and trade secrets case, based on the plaintiff company’s "legitimate interest in . . . relationships . . . with . . . existing and established customers."   The Court thereby upheld a "hands-off" non-solicitation covenant an independent contractor sales agent signed with the plaintiff.  The plaintiff’s trade secret misappropriation claim was not discussed in the ruling on the partial summary judgment motion.  Drummond Am., LLC v. Share Corp., No. CIV-08-1004-F (W.D. Okla., Aug. 3, 2009), 2009-2 CCH Trade Cases ¶ 76.701.

These decisions teach that in a state (such as Oklahoma) where covenants are enforceable, a breach of contract claim against former sales personnel may be at least as strong a cause of action for a jilted employer as a suit for misappropriation of trade secrets.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In Smith Barney, Inc. v. Darling, No. 09-C-540, 2009 WL 1544756 (E.D. Wis. Jun. 3, 2009), the United States District Court for the Eastern District of Wisconsin denied Smith Barney’s request for temporary injunctive relief in aid of arbitration against five departing financial consultants and their new employer. Smith Barney sought an injunction to: (1) require the former employees to return all customer information; and (2) prevent the departing employees from soliciting Smith Barney customers. The former employees countered by arguing that the non-solicitation and non-disclosure covenants relied upon by Smith Barney were unenforceable under Wisconsin law. They also argued that they were entitled to retain client contact information.

The District Court agreed with the departing employees on all fronts. It found that the non-disclosure of confidential information provisions were unenforceable because they did not contain time limitations. (Wisconsin and Georgia are the only two states that we are aware of that have such requirements.) It also found that the non-solicitation of customers provisions found in the former employees’ employment agreements were unenforceable because they covered customers “whose name became known” to the former employees during their time at Smith Barney. The Court reasoned that the provision would cover individuals who came into Smith Barney’s office to ask for directions, as well as individuals whom the former employees met at softball games. In fact, the Court went so far as to point out that the restriction covered customers of the departing employees’ new employer – Robert W. Baird & Co. – about whose existence the departing employees learned during their employment with Smith Barney. The Court went on to conclude that additional non-solicitation covenants in various agreements with the five former employees were unenforceable because they covered customers that did not do business with Smith Barney and/or with whom the departing employees had not had contact in years. Because Wisconsin courts do not blue pencil otherwise unenforceable restrictive covenants, these flaws in the provisions were fatal.

The Court also addressed the impact of the Protocol for Broker Recruiting, to which Smith Barney is a signatory. Even though Baird & Co. is not a signatory to the Protocol, the departing employees argued that Smith Barney could not show entitlement to injunctive relief because it had tacitly conceded that departing employees are not a threat by signing the Protocol. Smith Barney countered by noting that some of the accounts at issue were excluded from the Protocol. The Court concluded that Smith Barney’s argument was “not sufficiently developed” to merit an award of temporary injunctive relief. 

Ultimately, the Court ordered the departing employees to return or destroy client account information, but not client names, addresses, telephone numbers, and email addresses. The Court did not address explicitly in its published decision whether Smith Barney had shown that some or all of this information constituted a trade secret under Wisconsin law, despite the fact that Smith Barney had pled a claim for trade secret misappropriation against the defendants. The Court did state that Smith Barney could have an evidentiary hearing on an expedited basis, if it chose.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On April 29, 2009, Governor Sonny Perdue signed HB 173, legislation intended to revamp the way that non-compete, non-solicit and non-disclosure agreements are enforced in Georgia. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Ohio 12th District Court of Appeals recently upheld a lower court’s injunction against two former employees and their new employer in light of defendants’ apparent breach of duty of loyalty, misappropriation of trade secrets, and tortious interference with business relations. DK Prods., Inc. v. Miller, Case No. CA2008-05-060, 2009 WL 243089 (Ohio Ct. App. 12 Dist. Feb. 2, 2009)

System Cycle, a branch of DK Products, Inc., located in Springboro, Ohio, distributes BMX bicycles, parts and accessories to bicycle retailers throughout the United States. System Cycle employed Matthew Miller and Charles Johantges until System Cycle learned that Miller and Johantges had disclosed sensitive financial information to vendors and attempted to broker distribution deals on behalf of Two Zero Distribution, Inc., a company created by Miller while Miller and Johantges were still employed by System Cycle (“Two Zero”). Per a Dayton Daily News article discussing the case, System Cycle learned about Miller and Johantges’s activities by intercepting an e-mail from the defendants to one of System Cycle’s customers.  

 The Ohio courts granted System Cycle ’s request for injunctive relief on each of the counts in the complaint, rejecting each and everyone of defendants’ counter-arguments. With respect to System Cycle’s tortious interference claim that defendants improperly interfered with System Cycle’s existing business relationships through improper disclosure of financial information, defendants argued that System Cycle had not showed evidence of malice on their part, but the Court of Appeals declined to find that malice is a necessary showing for a claim of tortious interference. Additionally, there was ample evidence of irreparable harm to System Cycle. Even defendant Miller admitted that his disclosure of confidential financial information regarding System Cycle was “pretty devastating.”

The courts also rejected Defendants’ challenge to the injunction as it related to the trade secret misappropriation claim. Defendants had asserted that the injunction was improper because System Cycle did not proffer evidence that they used System Cycle’s trade secrets Yet, the Court of Appeals pointed to Defendant Miller’s admission that he had discussed certain trade secret information with a vendor, which falls within the definition of “misappropriation” under the Ohio Uniform Trade Secret Act. 

Defendants’ final challenge was to the injunction as a remedy for the apparent breach of defendants’ duties of good faith and loyalty. The defendants contended that System Cycle failed to show irreparable injury in connection with this claim, but the defense fell on deaf ears. The Court of Appeals deflected that criticism by pointing to the very real potential for irreparable injury in connection with the other two claims.

As a result, the Court of Appeals affirmed the trial court’s order enjoining Defendants from solicitng System Cycle’s customers and from misappropriating System Cycle’s confidential information for the benefit of Two Zero. The case now returns to the trial court, where System Cycle may pursue a permanent injunction and money damages.

The key to System Cycle’s success likely had much to do with the early interception of the e-mail from Miller to a System Cycle customer. Procedures designed to prevent the loss of trade secrets through electronic means are becoming more commonplace and more important to protecting a company’s intellectual property. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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

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

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

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

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

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

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

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

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

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

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

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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

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

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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

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

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

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

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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

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

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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

The Clause provided, in pertinent part, that

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

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

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link