Trade Secrets & Noncompete Blog

Trade Secrets & Noncompete Blog

News & Updates On Developments in the Law of Restrictive Covenants, Unfair Competition & Trade Secrets

Employers Under the Microscope: Is Change on the Horizon? – Attend Our Annual Briefing (NYC, Oct. 18)

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Employers Under the Microscope: Is Change on the Horizon?

When: Tuesday, October 18, 2016 8:00 a.m. – 4:00 p.m.

Where: New York Hilton Midtown, 1335 Avenue of the Americas, New York, NY 10019

Epstein Becker Green’s Annual Workforce Management Briefing will focus on the latest developments in labor and employment law, including:

  • Latest Developments from the NLRB
  • Attracting and Retaining a Diverse Workforce
  • ADA Website Compliance
  • Trade Secrets and Non-Competes
  • Managing and Administering Leave Policies
  • New Overtime Rules
  • Workplace Violence and Active-Shooter Situations
  • Recordings in the Workplace
  • Instilling Corporate Ethics

This year, we welcome Marc Freedman and Jim Plunkett from the U.S. Chamber of Commerce. Marc and Jim will speak at the first plenary session on the latest developments in Washington, D.C., that impact employers nationwide.

We are also excited to have Dr. David Weil, Administrator of the U.S. Department of Labor’s Wage and Hour Division, serve as the guest speaker at the second plenary session. David will discuss the areas on which the Wage and Hour Division is focusing, including the new overtime rules.

In addition to workshop sessions led by attorneys at Epstein Becker Green – including some contributors to this blog! – we are also looking forward to hearing from our keynote speaker, Former New York City Police Commissioner William J. Bratton.

View the full briefing agenda here.

Visit the briefing website for more information and to register, and contact Sylwia Faszczewska or Elizabeth Gannon with questions. Seating is limited.

Non-Solicitation Violation Leads to $6.9M in Damages – Employment Law This Week

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Featured in the top story on Employment Law This Week:  Former employees turned competitors in Pennsylvania are hit with $4.5 million in punitive damages.

An insurance brokerage firm sued a group of employees, claiming that they violated their non-solicitation agreements by luring away employees and clients to launch a new office for a competitor. A lower court awarded the firm nearly $2.4 million in compensatory damages and $4.5 million in punitive damages because of the defendants’ outrageous conduct. On appeal, the appellate court agreed and upheld all damages.

See the segment below and read our recent blog post on this topic.

Appeals Court Divided On Bad Faith Under Illinois Trade Secrets Act

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In a question of first impression, the Illinois Appellate Court recently addressed what constitutes “bad faith” for purposes of awarding attorneys’ fees to the prevailing party under §5 of the Illinois Trade Secret Act (ITSA). That section provides, in pertinent part, that if “a claim of [trade secret] misappropriation is made in bad faith” or “a motion to terminate an injunction is made or resisted in bad faith,” “the court may award reasonable attorney’s fees to the prevailing party.” The Illinois Appellate Court delivered a split decision on the legal standards for assessing whether a “bad faith” fee award is warranted under the statute.

Specifically at issue before the court in Conxall Corp. v. ICONN Systems, LLC, et al., 2016 IL App (1st) 10158 (Sep. 2, 2016), was “whether the trial court had applied the correct legal standard in determining whether Conxall’s claims were brought in ‘bad faith,’ as that term is used and understood in the Act.”  The sharply divided court proposed divergent standards for analyzing this question, despite reaching the same conclusion that the issue should be remanded to the lower court for consideration anew.

One of the three Justices adopted the California Court of Appeal’s approach, which found that “bad faith” under California’s version of the Uniform Trade Secrets Act consists of two components: “(1) objective speciousness and (2) subjective bad faith.” Attentive to the goal of deterring such “bad faith” claims, the resultant standard embraces “speciousness [as a] looser standard” which accomplishes that goal, paired with a finding of “subjective bad faith.”

The other two Justices criticized this two-pronged test (which they noted appears to have taken hold among a number of federal courts), and instead held that the guidepost for an award of attorneys’ fees under ITSA should be “the preexisting definition of ‘bad faith’ in this state.”  While no Illinois court has had the opportunity to define “bad faith” specifically in the context of ITSA prior to ICONN, a “bad faith” test had already been articulated by the Illinois Supreme Court in Kratsack v. Anderson, 223 Ill. 2d 541 (2006) in the context of Illinois’ Consumer Fraud and Deceptive Business Practices Act.  Construing the Kratsack opinion, the ICONN majority held that Illinois state courts should resolve the “bad faith” issue by asking “whether the pleadings, motions and other papers which were filed by the party violated Illinois Court Rule 137” or if “the party’s other conduct during the course of the litigation ran afoul of the underlying purpose of Rule 137, which is to prevent abuse of the judicial process.” Rule 137, Illinois’ frivolous pleading rule, allows for attorneys’ fees when a party interposes its pleading or motion with “any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.” Kratsack, 223 Ill. 2d at 561-62.

There are several take-aways from the ICONN Court’s debate and ultimate finding.

Ask: Has your jurisdiction already made a decision to follow California and the federal court approach to determining “bad faith” under your state’s trade secrets act? If not, has your jurisdiction defined “bad faith” under any other statute?

Whatever the answer to these questions – and regardless of picking the “fed/Cal” or “state” side of the debate as to which legal standard should apply – any such motion for “bad faith” attorneys’ fees under your trade secrets act needs to clearly articulate the applicable standard for “bad faith” and consider the facts of the case in light of that standard.

Non-Solicit Violation: $4.5 Million Punitive Damage Award Upheld

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Rarely do we see punitive damages being awarded in cases involving the movement of employees and information between firms. The Superior Court of Pennsylvania last week affirmed a punitive damage award granted by a Judge of the Court of Common Pleas in such a matter, albeit which also found tort liability against the new employer and the five former employees.

The decision in B.G. Balmer & Co., Inc. v. Frank Crystal & Co. Inc., et al. sets forth a classic example of “bad leavers” and a complicit new employer. Confidential information concerning clients was copied and given to the new employer.  The senior employees, on Company time and using Company facilities, conspired with the new employer to hire the junior employees and solicit existing clients, including the largest and best clients of the Company.  Complete indemnification was provided by the new employer to the employees.  Personnel files were purloined and not returned upon request.  Upon resignation they immediately solicited the company’s largest client and did so using trade secret and confidential information of the Company while disparaging the Company in the process.

Applying Pennsylvania law, the Appellate Court found that the trial court did not abuse its discretion in finding that the defendants’ conduct was outrageous and shocking to the Court’s sense of justice. As summarized by the trial court:

All [Appellants] met on June 25, 2003 in New York City to discuss their resignations and start date at FCC Philadelphia. All [Appellants] knew of the existence of the employment agreements.  The individual [Appellants] cleared out personal belongings at the Balmer Agency, attempted to delete information from Balmer Agency computers, immediately went to work at FCC Philadelphia and immediately began soliciting Balmer Agency clients using Balmer Agency trade secrets in violation of the employment agreements, all with the knowledge and assistance of FCC and for the purpose of benefitting FCC Philadelphia.  This conduct was deliberate and reckless with respect to the violation of their contractual and fiduciary obligations at the Balmer Agency and the resultant damage their actions would create.  The [trial court] finds these actions to be with unjustifiable malice with the intent to establish FCC Philadelphia at the direct and crippling expense of the Balmer Agency.  As a result of this conduct, the Balmer Agency suffered damage.  All revenues in the first year of FCC Philadelphia w[ere] received from Balmer clients.  This intended malice is reflected in [Appellant] Reilly’s letter to Craig Richards stating that 50% of FCC Philadelphia  revenues for 2004, 2005 and 2006 will come from solicited Balmer Agency clients.  He states:  “In short, why compete when we do not have to do so….”

The conduct of the defendants in Balmer provides a roadmap on how not to recruit employees from a competitor and the resulting punitive damages award should be a further deterrent to all bad leavers and their new employers.

Illinois Passes Law Banning Noncompete Agreements for Low Wage Workers

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Illinois Capitol BuildingIllinois recently became one of the first states to ban non-compete agreements for low wage workers when it passed the Illinois Freedom to Work Act. The law, which takes effect on January 1, 2017 and applies to agreements signed after that date, bars non-compete agreements for workers who earn the greater of 1) the Federal, State, or local minimum wage or 2) $13.00 an hour.  At present, because the State minimum wage is below $13.00 per hour, $13.00 an hour is the operative figure in Illinois.

While Illinois is one of the first states to enact this type of blanket ban on non-competes based on the employee’s salary status, in other states, including New Jersey and Maryland, legislation based on eligibility for unemployment compensation has been proposed. Moreover, as we have previously blogged, the New York Attorney General has sought to prohibit companies from agreeing to non-competes with low wage workers.  The White House has also weighed in on the issue of non-compete agreements for low wage workers, questioning whether they protect  legitimate business interests or instead merely hamper labor mobility.

In sum, the political winds are clearly blowing against non-compete agreements for low-wage workers. Employers should be wary of attempting to secure stability in their low wage workforce through non-compete agreements and employers in Illinois should review and, if necessary, revise their employment agreements in light of this new law.

New York Attorney General Targets Non-Competes for Rank-and-File Workers

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This summer, New York Attorney General Eric T. Schneiderman has reached agreements with a number of companies curtailing their use of non-competition agreements with respect to non-executive and low-wage employees in New York. The issue appears to have caught the attention of Mr. Schneiderman, who stated recently that “restricting rank-and-file workers from being able to find other jobs is unjust and inappropriate” and “workers should be able to change jobs without fear of being sued.”

For example, on August 4, 2016, Examination Management Services, Inc. (“EMSI”), a medical information services provider headquartered in Texas, agreed to stop using non-compete agreements for most of its employees in New York. Prior to the agreement, EMSI’s mandatory non-compete agreements prohibited employees for nine months after leaving the company from working for competitors within fifty miles of any locations they worked for EMSI.

As another example, on June 15, 2016, the legal news website Law360 reached a similar agreement with Mr. Schneiderman’s office. Prior to that, Law360 required a majority of employees, including all editorial employees, to sign an employment contract with a non-compete provision that prohibited them for one year after leaving the company from working for any media outlet that provides legal news.

The Attorney General’s actions on this issue may be part of a larger trend. A March 2016 report by the U.S. Treasury Department found that non-compete agreements cause various harms to “worker welfare, job mobility, business dynamics, and economic growth more generally.” A May 2016 report published by the White House reached similar conclusions. Employers thus should make sure that their non-compete agreements with employees protect legitimate business interests such as safeguarding trade secrets and/or customer relationships.

Connecticut and Rhode Island Enact Statutes Restricting Physician Non-Competes

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David J. Clark

David J. Clark

Last month, two New England states enacted laws restricting the use of non-competition provisions in agreements governing an employment, partnership or other professional relationship of a physician.

Broadly speaking, the aim of both of these laws is to protect patients’ choice regarding medical care by limiting the ability of employers or partners to contract with physicians such that the physicians’ ability to practice medicine would be restricted at the end of the professional relationship.

Effective on July 12, 2016, the new law in Rhode Island (R.I. Gen. Laws §5-37-33) prohibits non-compete language in most physician agreements.  It renders void and unenforceable “any restriction on the right to practice medicine” found in virtually any contract creating the terms of employment, partnership or other professional relationship involving a state-licensed physician.  The new law therefore invalidates non-competition or patient non-solicitation provisions for Rhode Island physicians.  The new law does not apply in connection with the purchase and sale of a physician practice, provided the restrictive covenant is less than five years in duration.

Effective on July 1, 2016, the new law in Connecticut (Public Act No. 16-95) is less sweeping than the Rhode Island law.  Rather than prohibiting physician non-competes, the Connecticut law limits the allowable duration (to one year) and geographical scope (up to 15 miles from the “primary site where such physician practices”) of any new, amended or renewed physician agreement.  The new law also renders physician non-competes unenforceable if the physician’s employment or contractual relationship is terminated without cause.

Rhode Island and Connecticut are the latest in a slowly growing number of states that have taken legislative action to limit the use of physician non-competes.  Their neighbor Massachusetts was an early adopter of such a statute.  Mass. Gen. Laws chapter 112, §12X (enacted in 1977) bars physician non-competes which include any restriction of the right of a physician to practice medicine in any geographic area for any period of time after termination.  Much of the language in the Massachusetts law appears in the recently enacted Rhode Island statute.

Similar language appears in Delaware and Colorado statutes dating from the early 1980s, which state that covenants are void if they restrict the rights of physicians to practice medicine upon termination of the agreements containing the covenants.

More recently, Texas (in 1999) and Tennessee (in 2012) both enacted statutes (as did Connecticut) applying stricter standards to physician non-competes than are applicable to employee non-competes in general, while stopping short of invalidating such physician non-competes.

It remains to be seen if the enactment this summer of these statutes in Connecticut and Rhode Island is merely a coincidence, or foreshadows more state legislatures pursuing such limitations of physician non-competes.

No New Non-Compete Law for Massachusetts in 2016

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David J. Clark

David J. Clark

The Massachusetts legislature ended its 2015-2106 session on July 31, 2016, and lawmakers did not pass new legislation regarding non-compete agreements before doing so.

For the last few years, numerous efforts have been made in the Commonwealth to limit the use of non-compete agreements, resulting in several bills introduced in the Statehouse.  The latest bills, introduced in the House in June and the Senate in mid-July, would have set clear boundaries on the use of non-compete agreements by employers, including by establishing requirements that such non-compete provisions be signed and in writing, not exceed 12 months in duration, and be limited to geographic areas where the employee actually provided services. Another notable feature of the proposed bills was the incorporation of the concept of “garden leave” into non-compete provisions, in which an employer would be required to pay its former employee at least 50% of his or her pay, on a pro rata basis, during the non-compete period. The bills also would have prohibited judicial modification of non-competes and enforcement of non-competes against certain types of workers like students, interns, or fired employees.

As the legislative session drew to a close, however, legislators were unable to reach compromises upon issues such as whether and in what form garden leave might be allowed, and whether an employer and employee could agree upon a payment to support a non-compete entered at the termination of employment.

In this presidential election year, the Massachusetts legislature is adjourned until the start of a new session in January 2017. Renewed efforts to pass a non-compete bill in Massachusetts can be expected then.

Criminal Enforcement Protects Trade Secrets Taken By Departed Employees

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James P. Flynn

James P. Flynn

In the recent case of United States v. Nosal, the United States Court of Appeals for the Ninth Circuit confirmed the applicability of both the Computer Fraud and Abuse Act and the Economic Espionage Act as safeguards against theft of trade secrets by departed former employees.  Importantly, Nosal applied such laws to convict a former employee in a case involving domestic businesses and personnel without any alleged overseas connections.  Because of civil enforcement provisions in the CFAA itself and the recently enacted Defend Trade Secrets Act, Nosal represents a possible guide to employers seeking to protect their trade secrets through civil or criminal mechanisms, or both.

In assessing the implication of Nosal, one may consider three framing questions:

  1. How does this case take the trend of criminalization and federalization of trade secret law a step further?

The Nosal case is a great example of three trends coming together to give corporate employer and trade secret owners access to new avenues for relief.

First, Nosal pushes forward the trend that began in 2013 when the Department of Justice announced that trade secret prosecutions would become an area of emphasis.  Since then, DOJ has been much more receptive to business crime claims.

Second, it is the next step in the law’s evolution—the majority decision construed both the Consumer Fraud & Abuse Act and Economic Espionage Act in a complementary manner consistent with their plain language and applied them to common sense circumstances that seemed like theft. The CFAA is written in language beyond that of  a technical anti-hacking statute, and it is important that a federal appeals court has recognized that scope.

Third, and most importantly, Nosal is a step in the right direction on protecting trade secrets whether or not there are later criminal prosecutions on similar theories.  That is because the CFAA and now, since April, the Defend Trade Secrets Act also allow for civil remedies. Nosal’s common sense result was that one is acting without authorization when one uses another’s password because the actor’s password  has been revoked—that holding is not only a tool for prosecutors, but is one that civil litigants could use as well.

2. Why have there been more criminal convictions in trade secrets cases in the past few years?

Changes in in policy, changes in politics, and changes in perceptions.

First, the Obama administration formally issued a written policy in February 2013 announcing ADMINISTRATION STRATEGY ON MITIGATING THE THEFT OF U.S. TRADE SECRETS.  So one is seeing more prosecutions, and convictions, in some sense because DOJ has pursued that policy.

Second, there is a growing sense that these crimes not only hurt individual companies economically, but hurt the United States and its citizens more generally. That is why so many of the higher profile trade secret prosecutions have involved defendants who were foreign nationals or were assisting foreign companies.  Public and political support for pursuing such cases cannot be underestimated.

Finally, in light of the announced policy and the evolving political reality, companies are simply more likely to report such crimes. In the past, victimized companies hesitated to draw attention to their own losses or injuries and thought doing so also required them to give up control of recovery efforts to prosecutors.  Those perceptions have changed, and Nosal and cases like it are examples of such changes.

3. What were the key takeaways from the dissent in Nosal that might gain traction as other circuits address these issues?

The dissent had three main criticisms of the majority opinion.

The first criticism was that, in the dissent’s view, the 9th Circuit improperly expanded the CFAA beyond its anti-hacking roots to apply it to what the dissent described as mere password sharing.

Second, the dissenting judge contended that the decision effectively turns employers’ computer use policies into non-public criminal codes of which defendants have inadequate notice.

Third, and what likely in some ways probably motivates the dissent’s first two points, the dissent observed that this decision potentially empowers corporate employers to have undue influence in criminal prosecutions.

These statutes and the criminal prosecution of trade secret theft continue to be areas of interest that trade secret owners and their counsel should follow, and should consider in enforcing their own rights in these matters.

Assignment Lessons: 8th Circuit Finds Assigned Non-Competes Enforceable — Under Certain Facts

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The 8th Circuit’s recent decision in Symphony Diagnostic Servs. No. 1 v. Greenbaum, No. 15-2294, __ F.3d __ (8th Cir. July 6, 2016), upheld the enforceability of non-compete and confidentiality agreements assigned by Ozark Mobile Imaging to Mobilex as part of Mobilex’s purchase of Ozark’s assets.  Although the 8th Circuit is careful to ground its analysis in that case’s specific factual and legal framework, this decision is helpful in providing some guidance to those dealing with the assignability of rights under non-compete and confidentiality agreements.

The non-compete and confidentiality agreements at issue were (1) “free standing” and (2) assignment did not “materially change the obligations of the employee” nor (3) were the agreements dependent upon “qualities specific to the employer.” Symphony Diagnostic Servs. It is also notable that the agreements contained no language regarding assignability, i.e. they did not expressly restrict or permit assignment. Symphony Diagnostic Servs. No. 1 v. Greenbaum, 97 F. Supp. 3d 1126 (W.D. Mo. March 16, 2015).  Under those factual circumstances, the 8th Circuit, applying Missouri law, concluded that a Missouri court would find the agreements assignable and enforceable.

There are lessons for both those seeking to enforce or to avoid enforcement of non-compete and confidentiality agreements following the acquisition of a business via an asset purchase.

The first lesson is “pay attention to state law.” While the 8th Circuit applying the Missouri framework is helpful, it may vary significantly by state.  For example, in Ohio, courts generally construe non-compete clauses against the employer, and do not view non-competes as per se assignable. Fitness Experience, Inc. v. TFC Fitness Equip., Inc., 355 F. Supp. 2d 877 (N.D. Ohio Dec. 17, 2004) (looking to factors such as contract language, protection of the employer’s goodwill, and additional employee burden to determine assignability).  In fact, the Ohio Court of Appeals stated that “the employment relationship is a personal matter between an employee and the company who hired him and for whom he chose to work. Unless an employee explicitly agreed to an assignability provision, an employer may not treat him as some chattel to be conveyed, like a filing cabinet, to a successor firm.” Cary Corp. v. Linder, No. 80589, 2002-Ohio-6483, 19 I.E.R. Cas. (BNA) 1170 (Ohio Ct. App. Nov. 27, 2002); see also Reynolds & Reynolds v. Hardee, 932 F. Supp. 149 (E.D. Va. July 11, 1996) (employment agreement is based on mutual trust and confidence; non-compete is not assignable).  Pennsylvania also takes a dim view of the assignability of such agreements in the asset purchase context. See Hess v. Gebhard & Co. Inc., 570 Pa. 148, 808 A.2d 912 (Pa. Oct. 16, 2002)(“We hold that a restrictive covenant not to compete, contained in an employment agreement, is not assignable to the purchasing entity, in the absence of a specific assignability provision, where the covenant is included in a sale of assets”). Non-compete restrictions are generally not enforceable and void in California, subject to certain exceptions including acquisition of a business that includes purchase of goodwill or sale of an of an ownership interest in a business, with such restrictions limited to similar businesses to the acquired business and a specific geographic area.  Cal. Bus. & Prof. Code §16601.  Non-compete restrictions are generally not enforceable and void in Colorado. Colo. Rev. Stat. §8-2-113(2).  New York has also emphasized the need to determine whether the contract containing such a covenant is a personal services contract, and therefore not assignable. Seligman & Latz, Inc. v. Noonan, 201 Misc. 96, 104 N.Y.S.2d 35 (N.Y. Sup. Ct. April 23, 1951). On the other hand, Kentucky law takes a more assignment friendly approach and generally views non-competes as assignable. Managed Health Care Assocs. v. Kethan, 209 F.3d 923 (6th Cir. (Ky.) March 10, 2000) (where “the only thing that changed was the entity now entitled to enforce” the agreement, and the contractual rights and duties of an employee remain, non-competes are assignable).   New Jersey takes a similar approach, noting that “[u]pon the sale of a business a restrictive covenant …is assignable without express words to that effect and passes as an incident of the business sold even though not specifically assigned” and should “be assignable as an incident of the business even if not made so by express words.” JH Renerde, Inc. v. Sims, 312 N.J. Super. 195, 711 A.2d 410 (N.J. App. Div. Feb. 19, 1998).

Based on the 8th Circuit’s decision, another lesson for employers is that they may want to consider stand-alone non-compete or confidentiality agreements, taking care, of course, to assure that there remains valid supporting consideration under applicable law.  Having the non-compete or confidentiality agreement stand alone and apart from any employment contract at issue was critical for the 8th Circuit in distinguishing assignable agreements from personal service contracts that may not be assigned. Likewise, such employers may want to negotiate agreements that include language specifically allowing assignment to an acquirer of the business without consent of the other party, typically found in a successors and assigns clause.  Use of language that precludes working in a particular field or a narrow subset within that field may make assigned rights easier to enforce than more generic references to prohibiting competition with any aspect of the employer’s business, which, post sale, may have expanded greatly.

For those seeking to avoid assignability of rights under non-compete or confidentiality agreements, the lessons are inverse, save the common direction to make sure that the law of the applicable state is considered first and foremost. Challengers should review agreements to see whether they include language that prohibits assignability, or whether assignability language is absent. They may wish to argue that where non-compete or confidentiality provisions are integrated into broader employment agreements, a personal services contract exists, which may impact on assignability under state law. Finally, they should look to whether the terms of the non-compete or confidentiality agreement are linked to the specific practice of the former employer or to the employee’s particular duties, customers and territories, or are of broader scope, preventing competition against the employer’s business generally.  In the latter case, it is more likely that assignment could result in a material change to the restrictions and obligations placed upon the employee where the acquiring employer’s overall business varies significantly from that of the original assigning employer.  Though such rights may be assignable, they are less likely to be enforceable. As noted above, any such assessments are also made in light of each state’s approach to assignability of non-competes – which varies across the country.

Would-be purchasers of another employer’s assets can also take such lessons into account. If any of the aids to enforceability are absent from the contracts to be assigned, a purchaser or its counsel may seek to leverage such facts in negotiating price or in adjusting escrow or indemnification obligations.  Conversely, a purchaser could suggest, or a seller could decide, that existing and possibly deficient agreements be amended pre-sale.  Of course, in such circumstances, the amending employer must again resort to state law analysis of such terms.

In those same circumstances, one must also consider whether the amended agreement is supported by adequate consideration. Such consideration requirement can vary, depending on the state.  For instance, mere continued at-will employment is sufficient consideration to support a new non-competition agreement in New Jersey under various cases. See Martindale v. Sandvik, Inc., 173 N.J. 76, 800 A.2d 872 (N.J. Supreme Court July 17, 2002); see also Quigley v. KPMG Peat Marwick, LLP, 330 N.J. Super. 252, 749 A.2d 405 (N.J. App. Div. 2000), certif. denied, 165 N.J. 527, 760 A.2d 781 (N.J. Sep. 7, 2000) (stating that employment can be deemed consideration for employee’s submission to employer’s demands, including arbitration); Hogan v. Bergen Brunswig Corp., 153 N.J. Super. 37, 378 A.2d 1164 (N.J. App. Div. Sep. 29, 1977) (holding that continuation of plaintiff’s employment after plaintiff signed letter acknowledging restrictive covenant against post-employment competition constituted sufficient consideration to enforce agreement). But, in a state like Illinois, the continued employment must meet a certain threshold minimum time period. See Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327, 993 N.E.2d 938 (Ill. 1st Dist. June 24, 2013) (noting that Illinois courts have “repeatedly held that two years of continued employment is adequate consideration to support a restrictive covenant”).  Further, in other jurisdictions like Texas and Pennsylvania, there is a requirement that non-competition agreements be supported by independent consideration beyond continued employment. See, e.g., Alex Sheshunoff Management Serv. v. Johnson, 209 S.W.3d 644, 50 Tex. Sup. J. 44, 25 I.E.R. Cas. (BNA) 481 (Tex. Sup. Ct. Oct. 20, 2006) (training or disclosure of confidential information could provide additional necessary consideration); Socko v. Mid-Atlantic Systems of CPA, Inc., 126 A.3d 1266, 40 I.E.R. Cas. (BNA) 1568  (Pa. Sup. Ct. Nov. 18, 2015) (“In the context of requiring an employee to agree to a restrictive covenant mid-employment, however, such a restraint on trade will be enforceable only if new and valuable consideration, beyond mere continued employment, is provided and is sufficient to support the restrictive clause.”)  These factors thus also become issues that one must consider in valuing the agreements assigned or to be assigned.

Of course, it is also important for transactional attorneys to specify expressly in the transactional documents themselves that such employment agreements are among the assets being transferred. This was highlighted in a district court case in Washington DC decided only two days after Symphony Diagnostic Servs. See Hedgeye Risk Mgmt., LLC v. Heldman, __ F. Supp. 3d. __ (DDC July 8, 2016) (denying enforcement of covenant, holding that “[t]he text and structure of the APA answer that question [i.e. whether the agreement were conveyed], and they belie any claim that PRG’s employment contracts were among the ‘assets’ conveyed in the APA).  The court rejected plaintiff’s argument that the overall purpose of the asset purchase agreement precluded the need for an express reference to the agreements as assigned assets:

Hedgeye’s only remaining argument—and, in truth, its primary argument—is that “the entire point of the sale between PR[G] and Hedgeye was that Hedgeye was desirous of obtaining PRG’s talent.” Dkt. 3-1 at 8. That is, Hedgeye argues that its goal in acquiring PRG (and thus in executing the APA) was to acquire the services of PRG’s employees, and particularly Heldman. See id. (arguing that the APA provision requiring Hedgeye to pay Heldman’s bonus “evidenc[es] Heldman’s clear value to the transaction”). It is not hard for the Court to believe that Hedgeye desired to hire PRG’s employees, nor that it wanted to hire Heldman in particular. But it is hard to read the APA to achieve that result itself—not in light of the APA’s express statement that Hedgeye may “offer employment” to all PRG employees. See Dkt. 1-2 at 15 (APA at 14) (emphasis added).

Thus, the Hedgeye Court offered a lesson at the asset sale stage that care be taken to be clear, just as Symphony Diagnostic Servs. provided lessons on considerations for drafting the post-employment restrictions originally.

Whether seeking to support or challenge assigned agreements or just trying to determine the value of restrictive covenant agreements to be assigned, cases like Symphony Diagnostic Servs. merit continued attention, especially as they emerge in additional jurisdictions.  The ability to determine what rights may exist for an acquired business to protect from direct competition by its former employees may be vitally important in determining the value to be paid for the assets of the business, whether to proceed with the acquisition at all, and the options that are presented in its aftermath.

A version of this article appeared in Bloomberg BNA Daily Labor Report (PDF). 

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