On November 1, 2018, the California Court of Appeal, Fourth Appellate District affirmed a trial court’s ruling in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. et al., No. D071924, 2018 WL 5669154 (Cal. App. 2018), which (1) invalidated the plaintiff’s non-solicitation of employees provision in its Confidentiality and Non-Disclosure Agreements (CNDAs), (2) enjoined AMN from enforcing or attempting to enforce the employee non-solicitation provision in its CNDA with any of its former employees, and (3) awarded $169,000 in reasonable attorneys’ fees to defendants for plaintiff’s use of the provision.

The case is a significant decision which may impact some employers’ continued use of employee non-solicitation provisions with their California employees, at least in certain industries. There is now a split in California authorities and the issue is likely ripe for California Supreme Court guidance.

AMN and Aya are competitors in the business of staffing temporary healthcare professionals, namely providing “travel nurses” to medical care facilities across the country.  When former employees, named as individual defendants in the action and who worked as travel nurse recruiters in California, left AMN for Aya, AMN brought suit against Aya and the former employees, asserting 11 causes of action, including for breach of contract and trade secret misappropriation. Continue Reading California Appellate Panel Affirms Injunction Blocking Use of Employee Non-Solicitation Provision in Dispute Between Travel Nurse Providers

By Bob Stevens and Dan Hart

For many in Alabama, the holiday season does not end until after the college football national championship game, which has featured one of the state’s two top college football programs (the Auburn University Tigers and the University of Alabama Crimson Tide) for each of the five past years. While not quite as exciting as Auburn’s narrow fourth-quarter loss to Florida State in last week’s BCS National Championship Game, a ruling by an Alabama federal district judge issued on the same day could prove to be much more significant for employers and employees in Alabama.

In Dawson v. Ameritox, Ltd., 2014 WL 31809 (S.D. Ala. Jan. 6, 2014), Ameritox, a healthcare company, sought to enforce non-compete and non-solicitation covenants against its former Assistant Director of Medical Science and Health Outcomes Research, Dr. Eric Dawson, who had left Ameritox for a similar position with a competitor. Perhaps believing that its claims would be as safe a bet as hearing the cry of “War Eagle!” at an Auburn football game, Ameritox sought a preliminary injunction against Dawson. But as ESPN’s Lee Corso might say, “Not so fast, my friend!” In a January 6 order, District Judge Kristi DuBose ruled that the covenants in question were void and unenforceable because Dawson had executed the agreement before his employment with Ameritox began.

Under Alabama Code § 8-1-1, a contract by which anyone “is restrained from exercising a lawful profession, trade, or business of any kind” is void, except that “one who is employed as an agent, servant or employee may agree with his employer to refrain from carrying on or engaging in a similar business and from soliciting old customers of such employer within a specified county, city, or part thereof, so long as the . . . employer carries on a like business therein.” Relying on the Alabama Supreme Court’s prior decision in Pitney Bowes, Inc. v. Berney Office Solutions, 823 So. 2d 659 (Ala. 2001), Judge DuBose noted that employee non-compete agreements are valid only if signed by an employee and that prospective employment is not sufficient to meet the exception in Section 8-1-1. Thus, because Dr. Dawson was not an employee of Ameritox at the time he signed the agreements, Judge DuBose reasoned that the agreements were void and unenforceable. The decision is currently on appeal to the Eleventh Circuit.

The decision in Dawson is an important reminder of a requirement in Alabama for enforceability of post-termination restrictive covenants. Most employers provide prospective employees with copies of required non-compete agreements before the employee’s first day of work so that prospective employees will be aware of their non-compete obligations in advance. Indeed, some states (such as New Hampshire) expressly require employers to disclose such agreements before making a job offer. While such practices are prudent, a restrictive covenant may be void in Alabama if a prospective employee signs the agreement before his or her first day of work. To avoid this unintentional fumble, employers in Alabama should ensure that employees execute (or re-execute) such agreements on or after their first day of employment, ideally in the presence of a representative of human resources. In addition, because continued at-will employment is sufficient consideration for new restrictive covenants in Alabama, employers with operations in Alabama should consider periodically reviewing their existing restrictive covenants and requiring employees to execute new agreements from time to time as appropriate.

In Corporate Technologies, Inc. v. Harnett, et al., U.S. Court of Appeals for the First Circuit recently upheld the issuance of a preliminary injunction barring a former employee (Harnett) from doing business with his former employer’s (CTI) customers, even if the customers initiated the contact. 

CTI had employed Harnett as an account executive/salesman for nearly a decade, and required that he sign an agreement when he joined the company that contained non-solicitation and non-disclosure provisions.  In October 2012, Harnett “jumped ship” to work for a competitor, OnX Enterprise Solutions.  As the court noted, “following his departure from CTI, Harnett participated in sales-related communications and activities with certain of his former CTI customers on behalf of  OnX.”  CTI quickly filed suit in state court, which Harnett removed to the U.S. District Court for the District of Massachusetts.  CTI sought, and obtained, a preliminary injunction that prohibited Harnett from engaging “in any marketing or sales efforts . . . for a period of twelve months” with respect to several CTI customers whom he formerly had serviced.  “With regard to those customers, [the preliminary injunction] also compelled [Harnett and OnX] to withdraw any bids that Harnett had helped to develop.”  Harnett and OnX appealed. 

The First Circuit (Selya, J.) opened its decision with the following statement:

Businesses commonly try to protect their good will by asking key employees to sign agreements that prohibit them from soliciting existing customers for a reasonable period of time after joining a rival firm. When a valid non-solicitation covenant is in place and an employee departs for greener pastures, the employer ordinarily has the right to enforce the covenant according to its tenor. That right cannot be thwarted by easy evasions, such as piquing customers’ curiosity and inciting them to make the initial contact with the employee’s new firm. As we shall explain, this is such a case.

The Court went on to note that “[t]he dispute between the parties turns on the distinction between actively soliciting and merely accepting business — a distinction that the Massachusetts Appeals Court aptly termed ‘metaphysical’” in Alexander & Alexander, Inc. v. Danahy, 488 N.E.2d 22, 30 (Mass. App. Ct. 1986).   Harnett argued that “because the customers in question initiated contact with Harnett, he was thereafter free to deal with them without being guilty of solicitation.”  The First Circuit disagreed, noting that “the customers only contacted Harnett following their receipt of a blast email announcing his hiring by OnX.”   After recognizing that “Massachusetts trial courts have accorded varying degrees of significance to initial contact depending on the facts at hand,” and that the Supreme Judicial Court has not addressed the issue directly, the First Circuit concluded:

After careful consideration, we conclude that the Massachusetts Supreme Judicial Court, if confronted with the question, would hold that a per se rule vis-à-vis initial contact has no place in this equation. . . .  In the employment context, restrictive covenants are meant to afford the original employer bargained-for protection of its accrued good will. . . .  According decretory significance to who makes the first contact would undermine this protection because that factor, standing alone, will rarely tell the whole tale. And because initial contact can easily be manipulated — say, by a targeted announcement that piques customers’ curiosity— a per se rule would deprive the employer of its bargained-for protection.  

* * * *

In the last analysis, we believe that the better view holds that the identity of the party making initial contact is just one factor among many that the trial court should consider in drawing the line between solicitation and acceptance in a given case.  This flexible formulation not only reflects sound policy but also comports with well-reasoned case law from other jurisdictions. . . .  Thus, we decline the defendants’ invitation to assign talismanic importance to initial contact.

Discerning no error of law, we need not tarry over the district court’s weighing of the facts. This is a situation in which the initial contacts by customers are necessarily preliminary, the sales process is sophisticated, and the products are custom-tailored. Viewed against this backdrop, the evidence of record is adequate to underpin the lower court’s binary determination that Harnett violated the non-solicitation covenant and that the plaintiff is therefore likely to succeed on the merits.

As no opinion by Judge Selya is complete without an extra helping of erudition, the Court went on: 

There is no need for us to wax longiloquent.  Solicitation can take many forms, and common usage suggests that the word has a protean quality. Seee.g., The Compact Edition of the Oxford English Dictionary 2911 (1971) (“To entreat or petition (a person) for, or to do, something; to urge, importune; to ask earnestly or persistently.”). Here, moreover, the non-solicitation provision specifically forbids Harnett from “entic[ing] away” customers of CTI.

Harnett’s own words and actions with respect to customers covered by the non-solicitation provision lend considerable credence to the district court’s tentative conclusion that he violated that provision. His calendar, email, and testimony show significant business communications with at least four of his former CTI customers on behalf of OnX. This persistent pattern of pursuing patronage permits a plausible inference that he was urging those customers to do business with OnX rather than CTI (in other words, an inference that he was trying to entice them away)

What is perhaps most interesting about this case is that Harnett’s agreement did not even include a non-acceptance provision, which are oftentimes included in non-solicitation provisions as an additional safeguard against an argument, like that raised by Harnett, that the customers initiated contact.

A recent Louisiana non-compete case involving two appellate decisions addresses three significant issues in non-compete litigation: 1) whether a former employee’s referral of customers to a new employer violated the employee’s non-solicitation of customer covenant; 2) the consequences of violating the covenant and court injunction; and 3) the appropriate standard of proof for contempt proceedings.

Summary of decision. Five years into her employment with Acadian Cypress & Hardwoods as a sales representative, Acadian had Joy Stewart sign a non-solicitation agreement.  It provided that for two years after her employment terminated, Stewart would not solicit Acadian’s customers in more than 20 specified Louisiana parishes, eight identified counties in Mississippi, and two specific counties in Alabama.  Several years later, she resigned from Acadian and went to work as a sales representative for one of its competitor.   

Acadian sued Stewart and obtained a preliminary injunction against soliciting sales in the restricted territory.  The new employer’s headquarters was in one of the restricted parishes, and she lived in another one.  Because of the covenant and injunction, she scrupulously avoided selling her new employer’s products to Acadian’s customers, or even calling on them.  However, she phoned other customers from her home, and she had materials shipped to them.  Further, if Acadian’s customers contacted her, she invited them to communicate with her new employer’s other salespersons or its warehouse.  Acadian accused her of violating the injunction and committing contempt of court. The trial court agreed with Acadian.  She appealed but, in a 2-1 decision last week, the Louisiana Court of Appeal affirmed.  Acadian Cypress & Hardwoods, Inc. v. Stewart, 2012 CA 2002 (La. App., 1st Circ., Sept. 3, 2013) (McClendon, J.) (not for publication).

The first appellate court ruling.  This case went to the Court of Appeal twice.  The first time was when Stewart appealed from issuance of the preliminary injunction.  She argued that the covenant was ambiguous and lacked consideration.  Those arguments were rejected.  Perhaps because the applicable statute provided a temporal limitation on restrictive covenants (two years) but was silent with respect to the maximum allowable territory, she did not take issue — at the injunction hearing or on appeal — with the breadth of the non-solicitation’s territorial restriction.

The injunction order was affirmed.  Case No. 2012 CA 1425 (La. App., 1st Circ., Mar. 22, 2013) (McClendon, J.) (also not for publication). Judge Whipple, concurring in the result, expressed concern with regard to “the extensive geographic area set forth in the agreement, which I find comes perilously close to rendering such a contract unenforceable as an overly broad restriction on the interests of free enterprise.  However, this issue was not specifically challenged on appeal.”  Judge Whipple did see merit in Stewart’s argument regarding a lack of consideration for the covenant, and cited “the well-reasoned dissenting opinion” in an earlier Court of Appeal case, but concluded that the court was required to follow the majority’s ruling in that older case to the effect that continued employment was adequate consideration. 

The second appellate court ruling.  The second appeal was taken from Stewart’s appeal of the finding of contempt.  After an evidentiary hearing regarding the motion for contempt, the trial court ordered her “to pay all costs regarding the motion.”  No conditions were attached to the order, apart from paying those costs, and there was nothing else that she was required to do to purge herself of the contempt. 

In a 2-1 decision on her appeal, the majority voiced misgivings about the proceedings below but nonetheless again affirmed the lower court.  The initial problem dealt with was whether Stewart was properly charged with criminal contempt for which the relevant standard of proof is “beyond a reasonable doubt.”  A “preponderance of the evidence” would suffice for civil contempt.  The majority reasoned that because the judgment below ordered payment of court costs and “is an unconditional penalty, one that Ms. Stewart cannot affect or end, it is criminal in nature.”     

The majority agreed with Stewart that the trial court’s interpretation of the injunction — seemingly prohibiting her from (a) speaking with customers outside the area by phone from her home (which was within the restricted territory), and (b) asking the home office (also within the territory) to send materials to those customers — “could effectively prevent her from engaging in her business anywhere in the United States.”  Still, the majority found that referring Acadian’s customers to her new employer “constituted a violation of the non-solicitation provisions of the injunction.  Therefore, based on the record before us, we conclude that any rational trier of fact could find the essential elements of criminal contempt beyond a reasonable doubt.”  The dissenting judge did not write an opinion.

Takeaways.  Stewart may have made two mistakes.  First, at the injunction hearing, she could have challenged the scope of the non-solicitation covenant’s territorial restriction.  Her challenge below might or might not have succeeded, but at least she would have preserved the issue for appeal.  Second, at the time the injunction was issued, and before engaging in any sales activities, she probably should have insisted on clarification with respect to permissible and impermissible conduct. In sum, the case demonstrates that there can be serious consequences for violating a customer non-solicitation provision, including criminal contempt.

Garrod, a salesman for more than 25 years in the field of elastomeric precision products (EPP), was terminated in mid-2012 after spending an aggregate of a dozen of those years working for manufacturers of EPP parts Fenner and a company acquired by Fenner.

He had signed both employers’ agreements containing non-compete and customer non-solicitation clauses–which appeared reasonable on their face–and Pennsylvania choice-of-law provisions. After Fenner discharged him, he was hired by Mearthane, another EPP company. When he began calling on Fenner’s customers, Fenner sued Mearthane and him in the U.S. District Court for the Western District of New York, seeking to enforce the restrictive covenants contained within the employment agreements.

Earlier this month, Fenner’s motion for a preliminary injunction was denied largely because the court found the non-compete and non-solicitation clauses to be unreasonable. According to the court, Pennsylvania law “disfavors enforcement of restrictive covenants against employees who are fired for poor performance” since the employer views those employees as “worthless.” Fenner Precision, Inc. v. Mearthane Products Corp., Case No. 12-CV-6610 CJS (W.D.N.Y., Feb. 4, 2013).

Garrod asserted that the agreements lack consideration, and that Fenner had not made a sufficient showing of irreparable harm, but the court rejected those assertions. He was more successful with his argument that the agreements are not enforceable because they are unreasonable. He pointed out that he is 58 years old, reducing the likelihood that he can obtain employment outside the EPP industry, and that Fenner gave no reason for his termination. He emphasized that he had worked in the EPP industry for more years before joining Fenner’s predecessor than he spent with that company and Fenner, and that he had significant contacts with, and knowledge about, EPP manufacturers before he became their employee.

The court concluded that Fenner’s concerns about Garrod’s ability to harm its sales “seem overstated in light of the fact that he yet to close any sales since commencing work for Mearthane.” Moreover, those concerns “are belied” by Fenner having “removed him from the company’s most profitable accounts” before firing him. In sum, “Considering all the relevant factors in the record, and weighing the parties’ competing interests,” the court found that “Garrod is likely to prevail in demonstrating that enforcement of the non-solicitation clause against him would not be reasonable.”

This case reminds us that employers can face an uphill battle in enforcing a non-compete clause against a terminated employee. However, there are courts that enforce such contracts as written regardless of the reason the employee left his or her prior employment.

 

MPI, a Texas company, went to Kentucky and allegedly attempted to hire two Luvata employees, Foster and Meredith. Foster joined MPI soon thereafter. Over the course of the next few months while Meredith remained a Luvata employee, he and Foster allegedly spoke by phone repeatedly. In addition, prior to leaving Luvata for MPI, Meredith allegedly copied his employer’s computer files that described a trade secret manufacturing process, identified its customers, and contained its financial information. Once Meredith became an MPI employee, it allegedly replicated Luvata’s confidential manufacturing process and began competing with Luvata which then sued MPI, Foster and Meredith in a Kentucky federal court.

MPI’s motion to dismiss for lack of personal jurisdiction, on the ground that the Kentucky long-arm statute does not permit the exercise of jurisdiction over MPI and a related defendant company, was granted. The ex-employees’ Rule 12(b)(6) motion to dismiss the misappropriation claim against them was denied. Luvata Electrofin, Inc. v. Metal Processing Int’l, L.P., Case No. 11-CV-00398 (W.D. Ky., Sept. 10, 2012).

Luvata is in the business of electrocoating (“e-coating”) coils used in the heat transfer industry. Luvata maintained that its e-coating process is unique, is a trade secret, and cannot be reverse engineered. Foster was allegedly the company’s production supervisor, and Meredith was “intimately involved in running the” e-coating process. All Luvata employees signed non-disclosure agreements (but there was no non-compete provision).

At an e-coating conference held in Kentucky, MPI endeavored to hire both Foster and Meredith. After both initially declined, Foster left Luvata and went to work for MPI. Over the course of the next few months, he allegedly spoke to Meredith by phone more than 30 times, and at least twice Meredith reviewed Foster’s computer files at Luvata which contained trade secrets. In addition, Meredith allegedly copied onto his own CD and thumb drives files from his and Foster’s computers. On his last day at Luvata before joining MPI, Meredith allegedly used a program that “cleaned ‘unnecessary files’” from his and Foster’s computers. Foster allegedly told Luvata’s general manager that MPI was building an e-coating line, based on information Foster learned at Luvata, and that MPI soon would be competing with Luvata. MPI allegedly proceeded to reproduce Luvata’s secret e-coating process and began soliciting Luvata’s customers, and Luvata sued.

MPI’s motion to dismiss Luvata’s complaint for lack of personal jurisdiction was granted because, according to the court, MPI did not engage in acts in Kentucky that bore a “reasonable and direct nexus” to Luvata’s allegations of misappropriation of trade secrets. The court conceded the possibility “that something fishy was occurring” between MPI and Meredith but added that was only conjecture since Meredith may have been acting unilaterally to increase his value to his new employer. However, the court found sufficient to state a cause of action Luvata’s claim that Foster and Meredith violated their non-disclosure agreement with Luvata by disclosing its trade secrets to MPI. Luvata’s breach of fiduciary duty claim against its two ex-employees was dismissed as preempted by the Kentucky Uniform Trade Secrets Act.

Under the circumstances of this case, and particularly in light of the court’s decision denying the ex-employees’ Rule 12(b)(6) motion, the order dismissing Luvata’s lawsuit against MPI could be described as harsh, especially without giving Luvata an opportunity to take discovery. The suggestion that Meredith might have been acting on his own seems far-fetched but possible. Moreover, it is surprising that Luvata’s allegations held to be conjectural in connection with granting MPI’s motion to dismiss were found “to plausibly give rise to an entitlement to relief” as against the individuals. Of course, Luvata might have had an airtight action against them if they had signed non-competition agreements. Please see our recent post regarding a  Kentucky appellate case containing an overview regarding enforcing non-competes in Kentucky.

On March 21, 2012, in the case of Pyro Spectaculars, Inc. et al. v. Souza, Case No. 12-CV-00299-GGH, Magistrate Judge Gregory G. Hollows of the USDC for the Eastern District of California (Sacramento Division), issued an order preliminarily enjoining a former Account Executive for a pyrotechnics company from soliciting the customers of his former employer.  There are several notable aspects of this decision:

1.  Employee Mobility vs. Protection of Trade Secrets: In analyzing the “public interest” considerations involved in potentially issuing a preliminary injunction, the court weighed the competing public interests related to California’s strong public policies favoring on the one hand employee mobility, and on the other hand, protection of trade secrets. The court decided to issue a time-limited injunction intended to prevent misuse of Plaintiff’s trade secrets while allowing lawful competition. In so doing, the court made some statements useful to California employers:

  • Given that Defendant was subject to a non-solicitation agreement, the court took care to not run afoul of Business and Professions Code section 16600, which presumes that contracts restraining one’s right to engage in a lawful business, trade or profession are void. Specifically, the court granted a “narrow, time-limited non-solicitation restriction…to prevent defendant’s misuse of [Plaintiff’s] trade secret information in competing with [Plaintiff].” The court found the non-solicitation restriction particularly justified given Defendant’s alleged surreptitious downloading of Plaintiff’s information, use of wiping software to cover his tracks, and failure to account for several thumb drives notwithstanding the court’s order that he do so.
  • As to the likelihood of irreparable harm element required for injunction, the court observed that “damage to a business’s goodwill is often very difficult to calculate”. This is a useful finding for rebutting arguments that damages are sufficient to address a plaintiff’s alleged harm and thus injunctive relief should be denied. This may be particularly so where customer list trade secrets are at issue because the goodwill of customer relationships is often closely related to, if not bound up with, the at issue trade secrets.

2.  The Viability of “Customer Lists” as Trade Secrets: Defendant argued that Plaintiff’s customer lists did not constitute trade secret information. The court found that, although several information components that comprised Plaintiff’s trade secrets were publicly available, the software used by Plaintiff provided a “virtual encyclopedia” of specific Plaintiff customer, operator, and vendor information allowing a competitor to solicit Plaintiff’s clients “more selectively and more effectively without having to expend the effort to compile the data”. See Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514, 1522 (1997). Appealing to common sense, the court also noted, if Plaintiff’s customer list was so readily available, “why was it necessary for defendant to surreptitiously download, retain, and funnel…[Plaintiff’s] information to his new employer in the first place.”

3.  Trade Secrets Retained in One’s Memory May Serve as a Basis to Enjoin Solicitation of a Company’s Competitors: Defendant’s other questionable conduct caused the court to be “skeptical” that an injunction requiring defendant to merely return Plaintiff’s information “will be sufficient to protect against misuse of [Plaintiff’s] trade secrets.” Importantly, the court further found that:

This skepticism is reinforced by the fact that defendant’s probable misappropriation thus far has “so tainted defendant’s base of knowledge that it would be very difficult, at least over the next several months, for defendant to separate his general pyrotechnics information and skills from [Plaintiff’s] legitimate trade secrets when competing with [Plaintiff].”

While California court’s do not recognize the so-called “inevitable disclosure” doctrine, the Pyro Spectaculars court’s injunction and above reasoning is not an articulation of that doctrine. The inevitable disclosure doctrine as applied in its purest form may be used in the absence of any wrongdoing by defendant to enjoin defendant from assuming employment with a competitor because allowing defendant to do so would cause defendant to “inevitably disclose” his former employer’s trade secrets due to the similarity of the duties defendant will have in his new job relative to the duties of his prior job. See Pepsico v. Redmond, 54 F. 3d 1262 (7th Cir. 1995).

In contrast, here the court found that, based on evidence of record, Defendant’s conduct was so unreliable and that his probable misappropriation had “so tainted his base of knowledge” that defendant would not be able to segregate his general knowledge and skills from Plaintiff’s legitimate trade secrets when competing with Plaintiff.

Although such reasoning and related injunction appear powerful indeed, the court tempered this aspect of its reasoning by imposing the qualification in the injunction that Defendant was enjoined only from initiating contact with Plaintiff’s current customers. If Defendant’s alleged bad acts have “so tainted defendant’s base of knowledge that it would be very difficult…for defendant to separate his general pyrotechnics information and skills from [Plaintiff’s] legitimate trade secrets”, query whether the initiating contact limitation is sufficient to fully protect Plaintiff’s trade secrets?

Perhaps anticipating this, the court noted that Plaintiff could use ongoing discovery to monitor compliance wit the preliminary injunction and seek damages if evidence showed any use by defendant and/or his new employer of Plaintiff’s trade secrets.

The court’s decision provides some comfort to California employers that there are at least some rules, even in California, to protect employers from former employees who steal company data and embark on campaigns to flip valuable customer relationships.

In Finkel v. Cashman Professional, Inc., et al., Case Nos. 54520, 55377, 2012 WL 669897 (Nev. March 1, 2012), the Supreme Court of Nevada addressed the validity of non-solicitation, non-competition, and non-disclosure covenants and the proper duration of a preliminary injunction prohibiting disclosure or use of trade secrets. The Nevada Supreme Court received the case after it consolidated two appeals from Marc Finkel: one challenging the original preliminary injunction entered against him and the second challenging the lower court’s denial of Finkel’s motion to dissolve the injunction after Finkel terminated a consulting contract containing the restrictive covenants.

Finkel is a former executive with Cashman Professional, Inc. (“Cashman”). While employed by Cashman, Finkel was responsible for expanding and streamlining Cashman’s Las Vegas-based wedding photography business. Among other things, Cashman designed business software, negotiated sales contracts with customers, developed new strategies, created training programs, and implemented new management techniques. Cashman went to “great lengths” to keep these aspects of its business confidential. 

When Finkel left Cashman in 2008, Cashman and Finkel entered into a consulting agreement (“Agreement”) providing that Finkel would abide by restrictive covenants prohibiting Finkel from, among other things, engaging in a business competitive with Cashman, soliciting Cashman’s employees, and disclosing Cashman’s confidential information.

In 2009, Finkel purchased a printing company which was the only printing company in Las Vegas that could provide overnight printing of wedding photo books (“PrintCo”). Prior to and after Finkel’s purchase of PrintCo, Cashman relied on PrintCo when overnight printing services were required. Finkel enlisted several Cashman employees to help establish PrintCo, solicited several Cashman customers to move their business to PrintCo, and in the process disclosed Cashman’s confidential information and misappropriated its trade secrets. 

Cashman then obtained a preliminary injunction (“PI”) against Finkel enforcing the Agreement’s restrictive covenants and concluding that Finkel had misappropriated trade secrets in violation of Nevada’s Uniform Trade Secrets Act. Finkel appealed the PI order and then exercised his right to terminate the Agreement. Finkel then moved to dissolve the PI upon termination of the Agreement. The lower court denied Finkel’s motion to dissolve and Finkel appealed.

The District Court Did Not Err in Granting the Preliminary Injunction

The Nevada Supreme Court found that substantial evidence supported the district court’s conclusions that Finkel likely competed with Cashman, solicited Cashman’s employees, disclosed Cashman’s confidential information, and misappropriated Cashman’s trade secrets. The court rejected Finkel’s argument that the information used by him were not Cashman trade secrets. Specifically, in rejecting Finkel’s argument, the court noted Finkel’s admission that costs, discounts, future plans, business processes, technical matters, and product designs are confidential trade secrets to hold that the Cashman information used by Finkel likely constituted trade secrets and that Cashman had taken reasonable measures to maintain the confidentiality of its information.

After Finkel Terminated the Agreement, the District Court Should Have Dissolved the Aspect of the PI Applying to the Restrictive Covenants

The Nevada Supreme Court held that the district court erred by refusing to dissolve the aspect of the injunction enforcing the restrictive covenants. The court reasoned that, because the Agreement was no longer in effect, the restrictive covenants were no longer enforceable. Although this was an issue of “first impression” in Nevada, the court cited the Ninth Circuit decision of Economics Laboratory, Inc. v. Donnolo, 612 F.2d 405, 408 (9th Cir. 1979) in support. Ultimately, the court reasoned that it was an abuse of discretion to restrict Finkel’s business activities based restrictive covenants within a terminated agreement. 

Finally, the Supreme Court held that, under Nevada’s adoption of the Uniform Trade Secrets Act, the district court had not made findings as to (1) whether the information alleged by Cashman to be trade secret remained trade secret at the time of Finkel’s appeal; and (2) the proper duration of the injunction. The court remanded this issue to the district court for reconsideration.

Takeaways:

In Nevada, confidential information that does not rise to the level of a trade secret may nonetheless be protected from disclosure by contract. Breach of such contracts may serve an independent basis to obtain injunctive relief.

Employers should carefully consider how to best structure termination clauses in non-disclosure agreements in order to help ensure that the duration of restrictive covenants within such agreements cannot be prematurely and unilaterally terminated.

By Justin Beyer

Thompson Reuters (Healthcare) Inc. sued three former executive employees, all formerly working for Thompson Reuters in its pharmacy benefits management and consulting division of its healthcare services arm, in the United States District Court for the Eastern District of Wisconsin on Monday and immediately filed a motion for partial summary judgment against the former executives for a declaration that their non-solicitation agreements are enforceable under Wisconsin law.

According to the complaint, all three former employees were originally employed by Trivantage Pharmacy Strategies, LLC, a private company located in Milwaukee, Wisconsin, which Thompson Reuters acquired in 2009. 

As alleged in the complaint, Trivantage was in the business of providing pharmacy benefit management consulting and auditing services to assist companies in lowering their healthcare costs, and specifically lowering their pharmacy costs. Prior to Thompson Reuters acquisition of Trivantage, one of the employee defendants was allegedly a co-founder of Trivantage and had served as its Vice President of Business Development and the other two individual defendants served as Vice Presidents of Consulting Services. Between the three defendants, they were allegedly responsible for identifying potential clients, marketing Trivantage’s services, developing and maintaining relationships with Trivantage’s customers and prospective customers, and developing relationship with the appropriate personnel for each customer, for the purpose of establishing goodwill and maintaining customer relationships.

According to the pleadings, during the course of their employment with Trivantage, each of the defendants also executed various employment agreements, which, among other things, prohibited them from soliciting Trivantage’s customers; specifically, one of the individual defendants agreed not to solicit Trivantage’s customers for two years and the other two individual defendants agreed not to solicit for 18 months. Also included in each of the various agreements was an assignment clause, in which each of the defendants agreed that their non-solicitation agreement was assignable to any Trivantage successor.

In April 2009, Thompson Reuters entered into an agreement to purchase Trivantage, according to the complaint. Before the deal was executed, one of the individual defendants allegedly entered into a separate deal with Trivantage, through which Caldwell allegedly reaffirmed his non-solicitation obligations in exchange, in part, for receiving five percent of the net proceeds from Thompson Reuters’ acquisition of Trivantage. Thompson Reuters attached an unexecuted copy of the alleged agreement to its complaint and claims that its agreement with that individual defendant constitutes an alleged oral contract.

For the following two years, the defendants continued to be employed by Thompson Reuters, performing the same functions that they had performed at Trivantage. In mid-2011, Thompson Reuters discovered that the defendants were not allegedly devoting their full energies to Thompson Reuters and suspected that the defendants were setting up and/or operating a new business. Specifically, Thompson Reuters claims that one of the individual defendants stopped logging his sales efforts into Thomson Reuters’ computer system, the other two individual defendants allegedly exchanged emails that seemed to indicate that they were brainstorming about the name for a new company, and, on at least one occasion, according to the complaint, the individual defendants or one of their associates appear to have funneled a Thomson Reuters’ payment to an unauthorized vendor.

Subsequently, Thompson Reuters terminated the individual defendants in August 2011. After their termination, Thompson Reuters sent a letter to each of the defendants reminding each of their non-solicitation agreements, but each defendant responded claiming that their non-solicitation agreement was unenforceable. 

Also after terminating the defendants, Thompson Reuters allegedly discovered that the defendants, in May 2011 and while still in Thompson Reuters’ employ, incorporated Remedy Analytics, a business which is competitive to Thompson Reuters and which is operated from two of the individual defendants’  home. In November 2011, Thomson Reuters further learned that the defendants, through Remedy Analytics, were allegedly soliciting and attempting to poach certain Thompson Reuters’ clients.

Interestingly, Thompson Reuters does not seek injunctive relief against the defendants in the complaint, instead seeking a declaration that the non-solicitation agreements are enforceable and seeking money damages for breaches of contract. In addition to filing its complaint, Thompson Reuters filed a motion for partial summary judgment seeking an immediate ruling from the court that the non-solicitation agreements are enforceable. 

This case is worth watching as it addresses significant issues such as the enforceability of the non-solicitation agreements under Wisconsin law, including whether the court will enforce non-solicitation agreements acquired through a stock purchase agreement.  Also, should the Court find that the restrictive covenants are enforceable, the amount of damages, if any, recovered, by Thompson Reuters should be interesting to follow.

By Marcus Mintz

Earlier this month, the Virginia Supreme Court issued an opinion in which it clarified the burdens an employer must meet to enforce a non-compete against a former employee. Specifically, that the employer must demonstrate that the non-compete is no broader than necessary to protect the employer’s “legitimate business interests” and does not “unduly burden” the ex-employee’s right to earn a living. Home Paramount Pest Control Cos., Inc. v. Shaffer, No. 101837, 2011 WL 5248212 (Va. Nov. 4, 2011). In doing so, the Virginia Supreme Court overruled a 1989 opinion in which it upheld the exact same non-compete brought by the plaintiff’s predecessor-in-interest. See Paramount Termite Control Co. v. Rector, 238 Va. 171, 380 S.E.2d 922 (1989). While a dissenting justice took issue with the court’s departure from its prior decision and the effect it may have on parties looking to rely on established precedent, the majority held that its 1989 opinion was effectively eroded over time and its current holding reflected the current state of the law.

The case itself focused on the “function,” or activity, restrictions within the non-compete which the plaintiff, Home Paramount Pest Control Companies, Inc. (“Pest Control”), sought to enforce against its former employee, Justin Shaffer (“Shaffer”). Pest Control claimed that Shaffer’s new employment with a direct competitor violated his non-compete. The specific language at issue prohibited Shaffer from “engage[ing] directly or indirectly or concern himself/herself in any manner whatsoever in the carrying on or conducting the business of exterminating, pest control, termite control and/or fumigation services as an owner, agent … stockholder” for two years in any area in which the employee worked on behalf of Pest Control. However, the case never went to the merits because the circuit court held that the activity restriction of the non-compete was overbroad on its face and consequently, was unenforceable.

Upon appeal, the Virginia Supreme Court affirmed the circuit court and held that the function restriction was facially over-broad because it could prevent Shaffer from performing any duties at a competitor, irrespective of whether such duties were similar to the duties Shaffer held at Pest Control or would have any effect on Pest Control’s legitimate business interests. For example, the court noted that on its face, the non-compete prohibits Shaffer from owning stock in a publicly-traded company which owned a pest control business and Pest Control was not found to have a legitimate business purpose “in such a sweeping prohibition.” After comparing the instant restrictions to non-competes which were upheld in several recent cases, the court affirmed the circuit court’s ruling that Pest Control failed to prove that its chosen language furthered its legitimate business interests and did not unduly burden Shaffer’s right to earn a living.

Ultimately, employers seeking to enforce a non-compete under Virginia law (as well as many other jurisdictions) must take care to utilize language which narrowly tailors the activity restrictions of a non-compete to actual services and/or activities which actually or potentially compete with the former employer and threaten its legitimate business interests.