Trade Secrets and Noncompete Blog : Non-Compete Lawyer & Attorney : Epstein Becker Green Law Firm : Trade Secrets & Confidentiality Agreements

The U.S. Court of Appeals for the Third Circuit recently held that a stock sale did not invalidate an employee’s non-compete. Zambelli Fireworks Manufacturing Co., Inc. v. Wood et al., Case No. 09-1526 (January 15, 2010).

In Zambelli, a company brought suit against a former employee to enforce his non-compete. The employee responded, in part, by arguing that the non-compete was invalid because, when a majority of the company’s stock had been sold, there was no specific assignment of the employee’s non-compete to the buyer of the stock.

Although this would not seem to be a novel question, the Third Circuit explained that it found no Pennsylvania appellate decisions which addressed “the impact of a stock sale on the enforceability of a non-compete agreement.” Nevertheless, relying on Pennsylvania cases holding that (a) “a stock sale, unlike a sale of assets, does not necessitate an assignment in order for the corporation to enforce an employment agreement” and (b) “the transfer of a corporation’s stock does not destroy the corporate entity” because its existence is “irrespective of, and entirely distinct from, the persons who own its stock,” the Third Circuit concluded “that the transfer of some or all of the stock of a corporation has no effect on its ability to enforce a non-compete agreement.”

Accordingly, the Third Circuit rejected the employee’s challenge to his non-compete based on the lack of an assignment agreement at the time of the stock sale. The Third Circuit added that if the non-compete was intended to be contingent on the company remaining a family-owned business, that should have been set out as a material condition to the agreement.
 

On January 14, 2010, Berkeley HeartLab, Inc. filed suit against Health Diagnostic Laboratory, Inc., and several former employees for trade secret violations and breach of contract. The suit was filed two weeks after a mass departure in which five sales representatives resigned from Berkeley.

Berkeley claims that in October 2008 a former Senior Vice President founded Health Diagnostic in Richmond, Virginia with the alleged intent to compete with Berkeley by providing diagnostic clinical tests that target cardiovascular disease and disease management similar to Berkeley’s clinical programs. On January 1, 2010, five sales representatives resigned from Berkeley within thirty minutes of each other, and allegedly began working for Health Diagnostic soon thereafter. The complaint asserts that within the first two weeks of January, several health care providers, who had previously conducted business with Berkeley, had switched their business to Health Diagnostic, causing an approximate 35% decline in Berkeley’s sales volume from the previous year. The complaint further alleges that the former employees had signed a Proprietary Information and Invention Agreement intended to protect Berkeley’s confidential information and customer goodwill, and their pre-resignation conduct as well as subsequent employment at Health Diagnostic breached their agreements.

The lawsuit, filed in the Eastern District of Virginia (known as the “rocket docket” for its swift processing of cases), alleges state law claims of breach of contract, breach of fiduciary duty, tortious interference, conspiracy, unfair competition, as well as a federal law claim under the Computer Fraud and Abuse Act (CFAA). While unclear from the court papers, it appears that Berkeley’s support for its CFAA claim is its allegation that two individual defendants accessed their Berkeley work computers without authorization, or in excess of their authorization, while still employed by Berkeley, to remove data to benefit Health Diagnostic.

This case could be of interest to employers and attorneys alike who are following the split in the courts across the country as to whether computer access while an employee meets the statutory test for “without authorization” under CFAA. As we reported on this blog on September 17, 2009, the U.S. Court of Appeals for the Ninth Circuit recently split with the U.S. Court of Appeals for the Seventh Circuit over the meaning of “authorization” under CFAA. The Ninth Circuit adopted the narrow view that CFAA only reaches conduct by individuals who do not have any permission to access the computer system (e.g., a hacker or terminated employee). The Seventh Circuit has adopted the more expansive view that a statutory claim could be made whenever an employee accesses a computer with an adverse interest in breach of his duty of loyalty without the employer’s knowledge. The U.S. Court of Appeals for the Fourth Circuit has not weighed in on this legal split under CFAA yet, and the issue will likely have to be resolved by the U.S. Supreme Court.

Berkeley is seeking preliminary and permanent injunctive relief, including an order restricting the defendants from using or disclosing confidential or proprietary information, misrepresenting Berkeley’s ability to perform clinical tests, soliciting healthcare providers, and soliciting Berkeley employees. Berkeley is also seeking an order to prevent the individual defendants from working at Health Diagnostic, and $350,000 in punitive damages from each defendant.
 

In a case applying Ohio law, the Indiana Supreme Court recently held that, for purposes of a non-competition agreement, competition with a subsidiary corporation also constituted competition with the parent.  Baker v. Tremco Incorporated, No. 29S02-0902-CV-00065 (Ind. 2009).

In Tremco, the parent corporation was a manufacturer of roofing-related products. It had a subsidiary which provided services related to roofing projects. The parent had one of its salespersons, who sold products for the parent and services for the subsidiary, sign a post-employment non-competition agreement which barred the employee from competing “in any aspect” of the parent’s business for 18 months.

The salesperson eventually left and started a new business which he conceded directly competed with the subsidiary. However, he argued that because he was not competing with the parent, he was not in violation of his non-competition agreement with the parent.

This argument was rejected by the Indiana Supreme Court, which noted that while the salesperson was employed by the parent, he sold for both the parent and the subsidiary and all compensation was paid by the parent, regardless of whether commissions were earned for selling the parent’s products or the subsidiary’s services. Thus, the Court held that competition with the subsidiary was competition with the parent.

Non-compete cases are always fact and language-specific; in this case, both weighed in favor of enforceability.