On March 7, 2019, a group of six United States senators from both sides of the aisle submitted a letter to the Government Accountability Office (GAO) requesting a federal investigation into the use of non-compete agreements on the basis that their widening use in recent years raises concerns about their negative impact on both workers and the national economy.  Specifically, the letter asks the GAO to assess the following three questions:

  1. What is known about the prevalence of non-compete agreements in particular fields, including low-wage occupations?
  2. What is known about the effects of non-compete agreements on the workforce and the economy, including employment, wages and benefits, innovation, and entrepreneurship?
  3. What steps have selected states taken to limit the use of these agreements, and what is known about the effect these actions have had on employees and employers?

Continue Reading U.S. Senators Request Review of Non-Compete Agreements by the Government Accountability Office

An employee who had executed a two-year non-compete was let go.  He returned to work 10 days later but was not asked to sign a new agreement.  More than two years after his return, he was terminated and became an employee of a competitor.  A lawsuit seeking to enforce the non-compete was dismissed on the ground that it had expired.

Summary of the Case

Helmuth, like all employees of Nightingale Home Healthcare, signed a non-competition covenant with a term of two years from the date of termination.  He was fired in mid-October 2009 but was recalled 10 days later.  He was not asked to sign a new covenant.  In March 2012, his employment with Nightingale ended, and he went to work for a competitor.  Nightingale sued him and his new employer, but the trial judge entered summary judgment for the defendants.  On appeal, the judgment was affirmed.  The appellate court held that the covenant’s restriction ended in mid-October 2011, two years after his first termination by Nightingale and five months before he was employed by the competitor.  Nightingale Home Healthcare, Inc. v. Helmuth, No. 29A04-1403-PL-121 (Ind. App., 8/28/14).

The parties’ perception of what occurred in October 2011

Nightingale pointed out that Helmuth returned to the same job position at the same salary, with the same benefits, and without being required to reapply or complete any paperwork.  The company characterized these events as a revocation, rescission and voiding of his first termination.  Helmuth claimed that there was no continuity because he had been discharged and subsequently was rehired.

The Appellate Court’s Ruling

Stressing that Helmuth was required in mid-October 2009 to turn in his company-owned laptop, identification badge, and keys, his access to company property came to an end, and he was not paid for those 10 days, the appellate tribunal held that he had ceased to be a Nightingale employee.  The court wrote: “[B]ased on the evidence, Nightingale’s conduct is more properly defined as a separation from the company which was unconditional and intended to operate as a permanent termination of the employment relationship between Nightingale and Helmuth.”  (Although not cited by the Indiana court, a 2013 unpublished New Jersey appellate court ruling — Truong, LLC v. Tran, Docket No. A15752-1171 — involved similar facts and reached a similar result.)

Nightingale argued that, by returning to work on the same terms and conditions, Helmuth impliedly acquiesced to an extension of the non-compete.  The court of appeals held that this argument was inconsistent with the clause “no modifications, extensions, amendments, or waivers of this Agreement or any of its provisions shall be binding unless in writing and signed by” a Nightingale officer.  The court also said there was no ambiguity in the covenant, and so parol evidence concerning the parties’ intentions was inadmissible.

Takeaways

The appeals tribunal stressed that Indiana courts respect freedom to contract, but that non-compete covenants in an employment agreement are restraints on trade, are not favored, must be strictly construed against the employer, and are enforced only if reasonable (many other states concur).  Where there is a break in service but no relevant express contractual provision, an employer’s safest course is to obtain a new covenant upon the employee’s return.  Alternatively, a contention that employment was continuous could be supported (a) as in Helmuth’s case, by reinstating the same position, salary and benefits, (b) especially where the employee was not employed during the break, by compensating as if there had been no interruption, and (c) by written confirmation that all of the prior contractual terms and conditions, including the non-compete, remain applicable.     

By Ryan Malloy and Joshua Salinas

The Court of Appeals of Indiana recently reversed and remanded a 2008 suit brought by the North American Boxing Council (NABC) against HDNet LLC (HDNet), in which the NABC alleged that HDNet stole its idea for a mixed martial arts (MMA) broadcast series after the parties had discussed a broadcast arrangement that never materialized into a formal contract.

The Court of Appeals held that the trial court erred in granting summary judgment because NABC’s idea misappropriation claim fell under the Indiana Uniform Trade Secrets Act’s (IUTSA) preemption provision and NABC’s civil conversion claim did not fall within the “criminal law” exception to the preemption provision.

Plaintiff NABC is an MMA and professional boxing sanctioning body. Defendant HDNet is a high-definition television channel. In 2007, NABC and HDNet allegedly exchanged a series of e-mails to discuss HDNet’s potential broadcast of MMA events. Of significant importance was an alleged email NABC sent to HDNet where NABC allegedly proposed and outlined its ideas for a unique weekly fight series model that was significantly different from other fight series models within the industry. The parties allegedly continued to exchange correspondence and discuss NABC’s new proposed idea. While the parties did not have any confidentiality or non-disclosure agreements, NABC considered its unique fight series model to be a protectable commercial idea.

A dispute arose when HDNet formed a new company–HDNet Fights–to allegedly sanction, promote, and broadcast MMA events based on NABC’s initially proposed model. NABC brought action against HDNet and asserted claims of, inter alia, idea misappropriation, trade secret misappropriation, and conversion of trade secrets.

NABC later moved for partial summary judgment on grounds that its idea misappropriation and conversion claims were not preempted under the ITUSA. The trial court granted NABC’s motion, finding that the idea misappropriation and conversion claims against HDNet were not preempted under the IUTSA.

HDNet appealed. It argued that the IUTSA preempts common law idea misappropriation and civil conversion claims regardless whether the information at issue rises to the level of a statutorily-defined trade secret. The three-judge Appeals Court panel agreed.

As to the claim for idea misappropriation, the panel held that the claim amounted to a statutorily-defined trade secret, and stated that the “UTSA creates a ‘two-tiered’ approach to protection of commercial knowledge, under which information is classified only as either a protected ‘trade secret’ or unprotected ‘general skill and knowledge.’… NABC’s interpretation of the IUTSA would encourage piecemeal litigation and would thus fail to implement the legislature’s intended goal of uniformity.”

The panel rejected NABC’s “plain meaning” argument that the preemption provision applies only to “trade secrets” and not “idea” misappropriation claims. The panel explained that this was a minority view that departs from the essential goal of the UTSA–uniformity among states adopting the statute. Specifically, the panel noted that the majority of jurisdictions hold that the UTSA preemption provision “abolishes all free-standing alternative causes of action for theft of misuse of confidential, proprietary, or otherwise secret information falling short of trade secret statutes (e.g., idea misappropriation….).” (quoting the Hawaii Supreme Court in BlueEarth Biofuels, LLC v. Hawaiian Electric Company, 235 P. 3d 310 (Haw. 2010)). Accordingly, the panel concluded that the trial court’s summary judgment order was erroneous as a matter of law.

The panel also held that the trial court erred in granting summary judgment on the civil conversion claim because the claim does not delineate a criminal act and therefore is not saved by the criminal law exception to the IUTSA’s preemption provision. The panel explained that a civil claim is “derivative” of criminal law and falls under the applicable exception when the civil claim is part of the same statutory scheme designed to combat the same wrongful activity as the criminal law, not simply because the claim provides a civil remedy for a crime.

The facts of this case again remind us of the importance of having written confidentiality agreements when exploring and discussing potential business with others. Moreover, the case illustrates that Indiana has an expansive preemption statute and that information not rising to the level of a trade secret may be difficult to protect in Indiana in the absence of an enforceable non-disclosure agreement.

 

Soda cans

Shortly before leaving the employ of Swanel Beverage, Inc. (a manufacturer of soft drinks, juice products, and energy beverages), Bodemer — Swanel’s national sales and marketing manager who “was involved with almost every facet of Swanel’s business” — incorporated Innovative Beverage, Inc.  Right after Bodemer resigned from Swanel, Innovative commenced operations as a competitor.  Then, he and Innovative filed a declaratory judgment action in the Southern District of Indiana alleging that his confidentiality and non-competition agreements with Swanel were unenforceable and were not violated.  Swanel, of course, counterclaimed for breach of contract and violation of the Indiana Uniform Trade Secrets Act.  Following discovery, Bodemer moved for summary judgment with respect to both his complaint and Swanel’s counterclaim.  Federal Judge James Moody’s multi-faceted decision on Bodemer’s motion included the rulings mentioned in the title to this blog and others.  Bodemer v. Swanel Beverage, Inc., Case No. 2:09 CV 90 (S.D. Ind., July 31, 2012).

Swanel claimed that the mandated confidentiality was worldwide and lasted forever, and that it applied to every piece of information Bodemer had learned, and every document he had received, in the 15 years he had been employed by a corporation Swanel acquired and then by Swanel itself.  Thus, enforcement would confer confidentiality on much information and many documents that were not secret and would prevent Bodemer from being employed in the industry with which he was most familiar.  Judge Moody held that the agreement was invalid under Indiana law.  While recognizing that the state’s courts might be willing to enforce an unconditional promise to maintain business confidences if necessary in order to protect the employer’s reasonable interests, the confidentiality agreement here did not pass that test.  Further, it unduly restricted Bodemer’s future employment opportunities and was contrary to the public interest.

Swanel tried one more gambit, requesting the court to blue-pencil the confidentiality agreement by inserting appropriate restrictions.  According to Judge Moody, however, Indiana law authorizes a court to strike unreasonable provisions in a contract but not to add new ones.

The non-compete commitment provided a reasonable geographic limitation, 100 miles from the present location of the company, and it expressly permitted the court to modify that restriction if it was found to be unenforceable.  Judge Moody ruled that the agreement was not violated because the only Swanel customer Bodemer was accused of stealing was located more than 100 miles away.  (Swanel argued that, although the customer was more than 100 statute miles distant, it was closer than 100 nautical miles, but that argument was summarily rejected based on the “plain meaning” rule and because nautical miles are used only in sea and air navigation.)

Swanel had more success in resisting Bodemer’s summary judgment motion with respect to alleged misappropriation of Swanel’s list of distributors, the name of the vendor supplying Swanel with flavoring agents, Swanel’s recipe for drink products, and its pricing structure.  Bodemer insisted that these were not trade secrets, but the court held that a reasonable jury could disagree.  It could find that a competitor would have to make a substantial investment of time, expense and effort to create Swanel’s list of distributors.  There was value in identifying the source of the flavoring agents because replication of Swanel’s products by a competitor would be somewhat easier if the vendor’s name was public.  The fact that the name of the flavor house Swanel used was known to its employees was of no consequence because each had signed a non-disclosure agreement.

According to Judge Moody, since Swanel did not own the flavor house’s formula, it could not be the basis for a trade secret misappropriation case filed by Swanel.  However, notwithstanding Swanel’s president’s deposition testimony that the recipe for its drink products was “no big deal” because it simply consisted of the flavoring plus sugar and water, the court said that was just one man’s opinion and the jury had to decide whether the recipe was a trade secret.  Bodemer’s claim that he could not be said to have misappropriated Swanel’s pricing structure because he took no documents with him was rejected because that is not essential in order to prove misappropriation.

This case provides several lessons.  It reminds us that a confidentiality agreement lacking reasonable time, geographic and subject-matter limitations may be unenforceable as a matter of law.  Additionally, while some courts are unwilling to blue-pencil a contract under any circumstances, a court that will is more likely to exercise that power when the agreement can be made enforceable by modifying or excising provisions without adding new ones.  Perhaps Judge Moody’s very brief explanation for rejecting Swanel’s claimed right to sue Bodemer with regard to the secret formula — because Swanel did not own it — would have been different if Swanel proved that it was the exclusive purchaser of that flavoring and that its contract with the flavor house permitted Swanel to bring a misappropriation lawsuit despite not being the owner of the trade secret.  In that event, Swanel might have been held to have standing just as the holder of an exclusive patent, trademark or copyright license might have standing to sue for infringement, even though the licensee is not the owner of the patent, trademark or copyright, if the license includes a grant of the right to file such an action.

Indiana and several other states statutorily prohibit employers from “blacklisting” former employees, that is, attempting to prevent them — whether they were discharged or resigned — from obtaining subsequent employment. Responding recently to certified questions from the U.S. District Court for Southern Indiana, the Indiana Supreme Court held that former employer Loparex, LLC did not violate the statute when it sued (unsuccessfully) for an injunction to enforce a non-competition agreement signed by two ex-employees, one who was terminated and another who left voluntarily. Loparex, LLC v. MPI Release Technologies, LLC, 2012 WL 955426 (Ind. Sup. Ct. Mar. 21, 2012). In reaching that result, the Supreme Court rejected its almost century-old decision in Wabash R.R. Co. v. Young, 162 Ind. 102, 69 N.E. 1003 (1904).

Loparex makes “release liner” products such as nametags with peel-off backings, window films, and roofing underlayment. The formulas involved in these products allegedly are trade secrets. Odders and Kerber were employees of that company who had in-depth knowledge of its confidential information. Both were subject to one-year non-compete agreements. Odders was discharged and went to work for MPI, a competitor of Loparex. Kerber resigned from Loparex and also commenced employment with MPI.

Loparex asked the Southern District of Indiana federal court to enjoin Odders and Kerber from working for MPI (initially, Loparex requested injunctive relief from MPI too, but later withdrew the request). Odders and Kerber denied wrongdoing and counterclaimed for damages, including attorneys’ fees, contending that their ex-employer violated the Indiana Blacklisting Statute, Ind. Code §22-5-3-2, by filing the lawsuit. The district court overruled Loparex’s motion to dismiss the counterclaim and granted summary judgment to Odders and Kerber on the company’s complaint. Then, the federal court certified three questions to the Indiana Supreme Court each of which that court now has answered in the negative: Does an ex-employer violate the Blacklisting Statute by suing to enforce non-competition agreements signed by former employees? Is the decision in Wabash R.R. Co. v. Young still good law? Are attorneys’ fees recoverable as compensatory damages in a suit for violating the Blacklisting Statute?

A number of states besides Indiana have blacklisting laws. The Supreme Court made specific reference to statutes in Arizona, Iowa, Kansas, North Carolina, Ohio, and Oklahoma. According to the court, the majority of cases arising under those statutes hold that the employer’s conduct, whatever it happened to be, was not prohibited, and the principle to be gleaned by from the few decisions against employers is that they incur liability only where they act “with the wrongful intent to inhibit or prevent [former] employees from obtaining future employment.” The court continued: “Simply put, a lawsuit — successful or not — to protect trade secrets or seeking to enforce a noncompetition agreement does not, on its own, fall within that scope.” The court added that filing baseless or sham actions to restrain employees’ subsequent employment may constitute common law torts such as malicious prosecution and abuse of process, and may violate Federal Rule of Civil Procedure 11 and state counterparts, and antitrust laws.

Turning to the Young decision, the court pointed out that the title of the Indiana Blacklisting Statute mentions protection of discharged employees but is silent regarding employees who resign. The law’s text, however, safeguards employees who leave their positions voluntarily as well as those who are fired. At the time Young was decided, in 1904, Article 4, Section 19, of the Indiana Constitution mandated that statutes “embrace but one subject and matters properly connected therewith; which shall be expressed in the title.” Because the title of the Blacklisting Statute made no reference to employees who resigned, in Young the Indiana Supreme Court invalidated the portion of the blacklisting statute that concerned them.

The holding in Young has been relied on many times since 1904, but in several other cases courts have found ways to distinguish it. According to the Supreme Court in Loparex, the rationale for the ruling in Young — whether it was right or wrong in 1904 — has been undermined by subsequent amendments to the Constitution and because “a good many cases analyzing challenges to statutes under Section 19 have employed a more accommodating approach than that taken in Young.” So, in response to the certified question, the Indiana Supreme Court held that Young “is no longer stare decisis on the question of whether an employee who voluntarily leaves her employment may pursue a claim under the Blacklisting Statute.”

The court had little trouble rejecting the proposition that an employee who prevails in a blacklisting case is entitled to attorneys’ fees as part of compensatory damages. After summarizing the American and British rules on attorneys’ fee awards, the Supreme Court held that “there is nothing about the language, history, or nature of Indiana’s Blacklisting Statute that points to anything other than application of the American Rule.”

Employers in Indiana, and perhaps other states with blacklisting laws, can breathe a bit easier now that the Indiana Supreme Court clearly has held that, under that state’s law, filing a lawsuit to enforce a non-competition agreement — whether the plaintiff is or is not successful, and whether the defendant is an employee who was fired or who resigned — does not constitute blacklisting.

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.