Non-Solicit Agreements

The top story on Employment Law This Week: The DOJ intends to investigate anti-competitive trade practices.

The Department of Justice and the Federal Trade Commission released joint guidance for HR professionals on how antitrust laws apply to employment. The guidance explains that agreements among employers not to recruit certain employees—or not to compete on terms of compensation—are illegal. Notably, the DOJ announced that they plan to criminally investigate “naked no-poaching or wage fixing agreements” that are unrelated to legitimate collaboration between businesses. In the past, both agencies have pursued civil enforcement. Peter Altieri, co-editor of this blog and a Member of the Firm at Epstein Becker Green, is interviewed.

Watch the segment below and read our previous post on this topic.

Following up on a string of civil enforcement actions and employee antitrust suits, regarding no-poaching agreements in the technology industry, on October 20, 2016 the Department of Justice (“DOJ”) and Federal Trade Commission (“FTC”) issued Antitrust Guidance for Human Resources Professionals (the “Guidance”). The Guidance outlines an aggressive policy to investigate and punish employers, and individual human resources employees who enter into unlawful agreements concerning employee recruitment or retention.

The Guidance focuses on three types of antitrust violations:

  • Wage fixing agreements: agreements among employers to fix employee compensation or other terms or conditions of employment at either a specific level or within a range;
  • No poaching agreements: certain agreements among employers not to solicit or hire one another’s employees not ancillary to an overarching pro-competitive collaboration; and
  • Unlawful information exchanges: exchanges of competitively sensitive information which facilitate wage matching among market participants.

“Naked wage-fixing or no-poaching agreements among employers, whether entered into directly or through a third-party intermediary, are per se illegal under the antitrust laws. That means that if the agreement is separate from or not reasonably necessary to a larger legitimate collaboration between the employers, the agreement is deemed illegal without any inquiry into its competitive effects.” The Guidance goes on to warn that “going forward, the DOJ intends to proceed criminally against naked wage fixing or no poaching agreements. These types of agreements eliminate competition in the same irredeemable way as agreements to fix product prices or allocate customers, which have traditionally been investigated and prosecuted as hardcore cartel conduct.”

“Even if an individual does not agree explicitly to fix compensation or other terms of employment, exchanging competitively sensitive information could serve as evidence of an implicit illegal agreement.” Information sharing agreements which have anticompetitive effects are subject to civil antitrust liability, including treble damages (a monetary penalty of three times the amount of the actual damages suffered). The FTC has taken the position that “merely inviting a competitor to enter into an illegal agreement may be an antitrust violation—even if the invitation does not result in an agreement to fix wages or otherwise limit competition.”

Antitrust Red Flags

In addition to the Guidance, the FTC and DOJ issued a list of Antitrust Red Flags for Employment Practices that human resources professionals should look out for in the employment setting. Red flags include:

  • Agreements with another company about employee salary or other terms of compensation either at a specific level or within a range;
  • Agreements with another company to refuse to solicit or hire that other company’s employees;
  • Agreements with another company about employee benefits;
  • Agreements with another company on other terms of employment;
  • Expressing to competitors that they should not compete too aggressively for employees;
  • Exchanging company-specific information about employee compensation or terms of employment with another company;
  • Participating in a meeting, including a trade association meeting, where the above topics are discussed;
  • Discussing the above topics with colleagues at other companies, including during social events or in other non-professional settings; and
  • Receiving documents that contain another company’s internal data about employee compensation or benefits.

The above conduct is not necessarily unlawful in all circumstances. However, best practice is to consult counsel prior to engaging in this conduct to avoid antitrust law violations and if possible, restructure the agreement or information exchange to accomplish its intended legal purpose.

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.

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.

Restrictive covenant agreements are traditionally governed by state law and thus subject to various jurisdictions’ rules regarding enforceability. They stand on a different footing than most other contracts, in that their enforcement is typically susceptible to a court’s equitable powers, and may not always be enforced as written, if at all. States differ on whether their courts will deny enforcement of a restrictive covenant deemed overbroad as written by the parties or instead modify it to meet the particular state’s standards of enforceability. In those states where such modification is authorized, a court may strike out (or “blue pencil”) certain terms of the covenant and, in a few states, even insert or modify provisions as deemed necessary to validate the covenant (known as “equitable reformation”).

Recent Court Decisions Involving Blue-Penciling

New York courts had traditionally been receptive to blue-penciling an overbroad restrictive covenant. However, in a recent case, the Court of Appeals (New York State’s highest court) emphasized that under New York law, restrictive covenants will not be blue-penciled if there is “coercive use of dominant bargaining power” to achieve their formation.[1]

In Brown & Brown, the Court of Appeals remarked that because the employee was unemployed at the time that she signed the covenant, there were questions over whether that “caused her to feel pressure to sign the agreement rather than risk being unemployed.”[2] The Court of Appeals further noted that a “case-specific analysis” is necessary to determine these surrounding circumstances and found factual issues precluding summary judgment there.

In January 2016, Brown & Brown was applied when a New York Supreme Court, in Aqualife Inc. v. Leibzon, found such unequal bargaining power in the creation of an overbroad restrictive covenant and refused to blue-pencil it, granting instead defendants’ motion to dismiss.[3]

New York is not alone in its judicial philosophy regarding the blue-pencil doctrine. In late October 2015, an Illinois Appellate Court refused to judicially modify overbroad restrictive covenants because the court deemed their deficiencies “too great to permit modification.”[4] Even though that agreement contained a clause allowing for judicial modification, the court refused to do so, explaining that “[i]n determining whether modification is appropriate, the fairness of the restraints contained in the contract is a key consideration.”[5]

At least one other state has taken a dim view lately of a non-compete agreement in which the parties agreed to allow a court to modify any provision deemed overbroad. In Beverage Sys. of the Carolinas, LLC v. Associated Bev. Repair, LLC, the Supreme Court of North Carolina recently refused to modify an overbroad agreement, notwithstanding the agreement containing a clause empowering the court to rewrite the offending provisions.[6] The court determined that such a clause was in violation of the state’s “strict blue-pencil” doctrine, which only allowed for provisions to be stricken and did not allow for any equitable reformation.[7]

While there appears to be a growing hesitancy among courts to blue-pencil or equitably reform agreements that may be overbroad, some recent decisions show that there is still a place for the practice. In Turnell v. CentiMark Corp., the U.S. Court of Appeals for the Seventh Circuit recently applied Pennsylvania law to modify an overly broad agreement.[8] Similar to New York law, the Seventh Circuit initially noted that where “the restrictions are so ‘gratuitous[ly]’ overbroad that they ‘indicate[] an intent to oppress the employee and/or to foster a monopoly,’ a court of equity may refuse to enforce the covenant at all.”[9] But generally, “absent bad faith, Pennsylvania courts do attempt to blue-pencil covenants before refusing enforcement altogether.”[10]

What Employers Should Do Now

  1. As has always been the case, look at the provisions within your restrictive covenants to ensure that they are tied to protecting a legitimate business interest and that their scope is narrowly tailored such that they would not be viewed as oppressive or overreaching.
  2. Consider the interaction between the forum selection clause, the choice-of-law provision, and the covenant itself in terms of what state law might apply to any potential blue-penciling or equitable reformation.
  3. In states that allow for equitable reformation, make sure that the agreement itself indicates that it can be modified by a court.

A version of this article originally appeared in the Take 5 newsletter “Restrictive Covenants: Do Yours Meet a Changing Landscape?

[1] Brown & Brown Inc. v. Johnson, 25 N.Y.3d 364, 371 (2015).

[2] Id. at 372.

[3] Aqualife Inc. v. Leibzon, 2016 N.Y. Misc. LEXIS 6, 2016 NY Slip Op 50002(U), 1, 50 Misc. 3d 1206(A) (N.Y. Sup. Ct. Jan. 5, 2016).

[4] AssuredPartners Inc. v. Schmitt, 2015 IL App. (1st) 141863 (Ill. App. 2015).

[5] Id. at ¶ 51.

[6] Beverage Sys. of the Carolinas, LLC v. Associated Bev. Repair, LLC, 2016 N.C. LEXIS 177, *6 (N.C. Mar. 18, 2016).

[7] Id. at *17.

[8] Turnell v. CentiMark Corp., 796 F. 3d 656, 664 (7th Cir. 2015).

[9] Id. at 663 (citations omitted).

[10] Id.

Barry A. Guryan
Barry A. Guryan

In a recent case decided by the Massachusetts Superior Court’s Business Litigation Session (which typically handles restrictive covenant cases), Gillette lost its attempt to obtain a broad injunction against a former in-house counsel who became the General Counsel at a competitor, Shavelogic.  In THE GILLETTE COMPANY v. CRAIG PROVOST, ET AL., Civil Action No. 15-0149 BLS 2 (Dec. 22, 2015), the Court found Gillette unlikely to succeed on its claims that  the General Counsel, who left Gillette ten years earlier and joined Shavelogic six years ago, must have inevitably disclosed Gillette’s trade secrets to Shavelogic and that he otherwise breached his fiduciary duty to Gillette.

The former employee had a non-compete with Gillette which is unusual since non-competes are not enforceable against lawyers in Massachusetts.  The Court did not rely on this, but noted that the non-compete had long expired.

Gillette’s claims focused on the lawyer’s ethical duty not to represent his new “client,” Shavelogic, in matters “substantially related” to those on which he worked at Gillette, specifically on technology relating to the development of a wet shaver.  Gillette also argued that due to the nature of the General Counsel’s responsibilities, he would inevitably draw upon and disclose to his new employer confidential information that he obtained during his tenure at Gillette.

On the facts presented, the Court determined there was insufficient evidence presented that the General Counsel had given any advice on any work relating to the Gillette patents or even that he worked on any of those patents at Gillette.   The Court further noted that many of the patents and the 10-year old technology were outdated and already publicly available. The Court also refused to apply the legal theory of “inevitable disclosure of trade secrets” (i.e., that the General Counsel would inevitably disclose Gillette’s trade secrets in his new position), stating that “Massachusetts courts have not embraced the doctrine of inevitable disclosure, since it has the potential for severely curtailing one’s employment opportunities.”

This case is a noteworthy reminder that “time is of the essence” in restrictive covenant and trade secret litigation.  Gillette brought this action about 10 years after the former in-house counsel had left Gillette and over three years after he became Shavelogic’s General Counsel.  In addition to other flaws with Gillette’s request for injunctive relief, this delay in acting was fatal.

Jackson C. Jackson
Zachary C. Jackson

The United States District Court for the Northern District of Indiana (Hammond Division) recently ruled on cross motions for summary judgment in the case of E.T. Products, LLC v. D.E. Miller Holdings, Inc. (Case No. 2:13cv424-PPS).  The dispute in that case stemmed from the acquisition of a portion of a company.  Essentially, the purchaser claimed that the seller was violating the restrictive covenant prohibiting him from soliciting the purchaser’s customers, and the seller countered that the purchaser violated the general release in the purchase agreement.  In ruling on the parties’ cross motions for summary judgment, the Court determined that while the restrictive covenant at issue was reasonable, there was simply not evidence that the seller had violated it. 

The Court also found that the purchaser’s claim had not violated the general release because that release excluded claims based on the restrictive covenant.  The Court concluded its opinion by pointing out how emotions had needlessly driven the parties into and through litigation: 

“My summary judgment determinations are that neither E.T. nor the Millers prevail on their opposing claims against one another.  What should have been a positive transition in the lives of Mr. Miller and Mr. Blakemore devolved instead into a needless expenditure of resources on dubious legal claims that spawned two years of fruitless litigation.  After all the time, trouble, angst, anger and expense, both sides will go home without a victory.” 

As a result, this case serves as a reminder of how emotions can affect restrictive covenant disputes.

Peter A. Steinmeyer

In Bridgeview Bank Group v. Meyer, the Illinois Appellate Court recently affirmed the denial of a temporary restraining order (“TRO”) against an individual who joined a competitor and then, among other things, allegedly violated contractual non-solicitation and confidentiality obligations.

As a threshold matter, the Appellate Court was troubled by what it described as Bridgeview’s “leisurely approach” to seeking injunctive relief.  The Appellate Court noted that Bridgeview filed the lawsuit three months after Meyer joined a competitor, waited two more weeks to file a motion for a TRO, and then did not notice its motion for a TRO as an emergency motion —  instead waiting to present the motion on the trial court’s regular motion call.  The Appellate Court emphasized that Bridgeview did not offer any explanation for its slowness to act and explained that “[i]f, as Bridgeview now contends, Meyer’s possession of the contact list, standing alone, is an obvious breach of his confidentiality agreement, we can conceive of no reason why Bridgeview would take such a leisurely approach to protecting that information.”

Although the Appellate Court explained that Bridgeview’s delay, standing alone, did not warrant denial of the TRO, “it was a relevant consideration.”

But that delay in acting was just one of many noted problems with Bridgeview’s case.  Starting with Bridgeview’s complaint, the Appellate Court explained it was lacking necessary detail:

there are virtually no well-pled facts in Bridgeview’s complaint regarding information Meyer allegedly took with him or customers he solicited after he left.  Rather, the complaint is replete with nonspecific and conclusory allegations.  For example, Bridgeview alleged that it had developed ‘unique marketing strategies, processes and information’ without ever describing, even generally, the nature of those strategies, processes or information or what made them ‘unique’ in the banking industry.

The Appellate Court further wrote that “[m]onths after it terminated Meyer, Bridgeview should have been able to identify specific customers it had lost and with which Meyer interacted during his tenure, if there were any.”  The Appellate Court added that “Bridgeview’s failure to identify in its complaint even one customer or describe with any specificity the confidential information used or disclosed is inexplicable and, hence, insufficient.”

The Appellate Court then turned to whether the additional materials submitted by Bridgeview at the TRO hearing were sufficient.  Here, the Appellate Court held that e-mails and attachments that were not referenced in Bridgeview’s verified complaint and which were not supported by any affidavits were merely “unverified allegations of wrongdoing” which “the trial court could properly have refused to consider.”

Nevertheless, because the trial court did consider these, so, too, did the Appellate Court.  The primary focus of the trial court was on a so-called “customer list.”  The Appellate Court held that “while certain information on the list may be ‘confidential’ in the sense that it was unknown outside the bank, Bridgeview made no preliminary showing that the information was of any particular value to Meyer or his current employer.”  Moreover, the Appellate Court explained that “while, under appropriate circumstances, a customer list can qualify as a trade secret, there is no per se rule affording it such status.”  Here, Bridgeview “made no showing that it had a protectable interest in its SBA customer base.  Other than a newsletter describing its ‘loyal’ customers, Bridgeview provided no evidence as to the resources devoted to acquiring and retaining customers or the longevity of their relationships with the bank.”

As for alleged violations of Meyer’s confidentiality agreement, the Appellate Court held that the only evidence presented involved a past violation; there was no “indication that the threat of Meyer’s use or disclosure of confidential information was ongoing.”

Ultimately, the Appellate Court concluded that Bridgeview failed to establish either a likelihood of success on the merits or that it would suffer irreparable harm in the absence of a TRO.

Practitioners can take several lessons from this case.  First, when it comes to requests for injunctive relief, time is of the essence.  Second, when drafting a complaint, even though a plaintiff must take care not to unwittingly publish trade secrets or other confidential information, enough detail must be provided to establish the necessary elements for injunctive relief.  Finally, to justify the powerful remedy of an injunction, the requesting party must be able to demonstrate imminent harm, and its claims must be supported by competent evidence.

Zachary C. Jackson
Zachary C. Jackson

At the end of January, the United States District Court for the District of Connecticut issued a decision in the matter of Roth Staffing Companies, L.P. v. Thomas Brown, OEM ProStaffing, Inc., OEM of CT, Inc., and David Fernandez (Case No. 3:13cv216).  Much of that opinion is devoted to analyzing the parties’ arguments about whether piercing the corporate veil was appropriate under the circumstances.  However, the opinion also addressed the plaintiff’s motion for summary judgment on its breach of contract claim against former employee Thomas Brown.  The Court previously issued a preliminary injunction holding that Brown’s restrictive covenants (noncompete, nonsolicit, and nondisclosure) were reasonable and enforceable.  In its summary judgment opinion, the Court observed that, despite taking more extensive discovery since the preliminary injunction was issued, Brown had not introduced any additional evidence to support a contrary conclusion.  Then, since Brown admitted that: a) he had retained in his memory information relating to his working relationships with clients that was not known throughout the staffing services industry; b) that he was working for his subsequent employer in a competitive role within the restricted territory; and c) that he had in fact successfully solicited at least two of the plaintiff’s clients on behalf of his new employer, the Court determined that Brown’s restrictive covenants were enforceable and had been violated and granted the plaintiff’s motion for summary judgment on liability.

As a result, parties losing a preliminary injunction hearing must be careful to develop and present sufficient new evidence to overcome the initial presumption of likelihood of success.  With complete discovery, that should be easier to accomplish.

 

Readers of this blog know that long settled understandings regarding what constitutes adequate consideration for a restrictive covenant in Illinois were turned upside down when the First District Appellate Court in Illinois held in Fifield v. Premier Dealer Services Inc., 2013 IL App. (1st) 120327 that, absent other consideration, two years of employment are required for a restrictive covenant to be supported by adequate consideration, regardless of whether the covenant was signed at the outset of employment or after, and regardless of whether the employee quit or was fired.

The Illinois Supreme Court declined to hear Fifield, but at least three federal district court judges in Illinois have refused to apply Fifield.

Just recently, another federal district court judge in Illinois also refused to apply Fifield.  This time it was Judge Robert M. Dow, Jr., who held in Traffic Tech, Inc. v. Kreiter, Case No. 14-CV-7528 (N.D. Ill. Dec. 18, 2015), that the “Illinois Supreme Court is not likely to adopt a two-year, bright line rule in assessing whether an employee was employed for a ‘substantial period of time’ so as to establish adequate consideration to support a post-employment restrictive covenant.”   The essence of Judge Dow’s ruling is that Fifield is a mis-reading of Illinois law, and that “Illinois law does not require a strict application of the two-year rule in assessing the enforceability of a non-solicitation clause (or any similar restrictive covenant).”

Because the case was before him on a motion to dismiss, Judge Dow did not ultimately rule on whether the defendant had received adequate consideration.

Given the split between the Illinois appellate court and at least four Illinois federal district court judges over the merits of Fifield, this will remain a hot issue for Illinois employers.   Unless and until the Illinois Supreme Court weighs in, Illinois employers hoping to enforce a restrictive covenant within two years after the signing date should be prepared to distinguish Fifield factually or legally.