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

As we noted in a blog post in October 2009, in Sunbelt Rentals, Inc. v. Ehlers, 333 Ill.Dec. 791, 915 N.E.2d 862 (Ill. App. Ct. 2009), an Illinois appellate court reexamined and rejected over thirty years of well-established precedent regarding the enforceability of restrictive covenants. Specifically, it rejected the “legitimate business interest” test long applied as a threshold issue by Illinois courts when deciding the enforceability of a restrictive covenant. At the time, we noted that the court either isolated itself from every other Illinois appellate court or took the first step in decreasing the traditional hostility with which Illinois courts treat restrictive covenants.

As of early December 2009, only one other court had cited to the Sunbelt decision. In that decision (which we discussed in an earlier blog post), federal district court judge Robert Gettleman declined to follow Sunbelt, noting that “[t]he Illinois Supreme Court, the United States Court of Appeals for the Seventh Circuit, and this court, however, have not rejected the applications of the legitimate business interest test.”

Since that time, there has been only one other published decision citing Sunbelt. In Rayco Management, Inc. v. Lancaster, No. 09 CH 18611, 2009 WL 6521389 (Cir. Ct. Cook Ct. Dec. 9, 2009), a trial judge in the Circuit Court of Cook County similarly declined to follow Sunbelt, concluding that he was bound by the precedent of the First District Appellate Court which still applies the “legitimate business interest” test.

Approximately nine months after Sunbelt was decided, no appellate court has issued a published decision addressing the holding of that decision and both lower courts that have been presented with a Sunbelt argument have declined to follow that decision absent direction from the appropriate appellate or higher level court. We will continue to monitor this issue, as it has significant ramifications on the enforceability of restrictive covenants in Illinois.
 

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On June 17, 2010, in Ontario v. Quon, the United States Supreme Court decided that the City of Ontario, California could review the non-work-related text messages to and from a City police officer on a City-issued electronic pager. Because the opinion involved a governmental employer and was largely grounded in a 4th Amendment analysis, many private employers have paid Quon little attention. But that would be a mistake, especially for those facing trade secret and non-competition matters. Quickly accessing and collecting so-called “private communications” can play a vital role in amassing the evidence needed to support a restraining order or preliminary injunction. Despite the fact that much of the analysis in Quon would be irrelevant in the private employment context, the Supreme Court expressly held that the review of the officer’s personal text messages on the employer-issued pager “would be ‘regarded as reasonable and normal in the private-employer context.’” (Slip op. at 16). Consequently, knowing what was done and how it was done in Quon may provide even private employers with a roadmap for approaching such issues, and then provide from the highest court in the land legal support for the reasonableness of the employer’s conduct.

Quon’s facts, and the assumptions that the Supreme Court made about them, are worth a brief review. First, the Court noted that the City “reserve[d] the right to monitor and log all network activity including e-mail and Internet use, with or without notice. Users should have no expectation of privacy or confidentiality when using these resources,” but that the policy “did not apply, on its face, to text messaging.” Slip op. at 2. Further, “[a]lthough the Computer Policy did not cover text messages by its explicit terms, the City made clear to employees, including Quon,” through statements at various meetings and in a written memorandum that “[text] messages sent on the pagers ‘are considered e-mail messages. This means that [text] messages would fall under the City’s policy as public information and [would be] eligible for auditing.’” Id. at 3 (bracketed language in original). On the other hand, Quon argued that he could reasonably expect that his text messages would remain private based on the City’s past practice. Each pager issued to officers was allotted a limited number of characters sent or received each month. Id. at 2. According to Quon, the City told him that an audit of his text messages would be unnecessary if he paid the excess charges for any use that exceeded the monthly limit. Id. at 9. Because he paid for those excess charges, id. at 3, Quon argued that he had a reasonable expectation that the City would not review the contents of his text messages.

Rather than resolve this dispute, the Supreme Court assumed for the purpose of its analysis that “Quon had a reasonable expectation of privacy in the text messages sent on the pager provided to him by the City,” slip op. at 12, yet nonetheless found that the City’s review of the personal text messages was appropriate and reasonable for the governmental employer acting without a warrant. Slip op. at 12-13. Important factors supporting the Court’s finding of reasonableness were (i) the City did not search any text-messages sent during off-duty hours; and (ii) the City searched only a sample – i.e., only two months of messages sent by Quon rather than all of the months during which he exceeded his monthly character allotment. The Court concluded that, despite any expectation of privacy, such a search was reasonable for a government employer and would have been “‘regarded as reasonable and normal in the private-employer context.’” (Slip op. at 16).

Central to that conclusion was the concept that the recognition of an employee’s expectation of privacy was not tantamount to conceding that such privacy would remain wholly inviolate:

Even if he could assume some level of privacy would inhere in his messages, it would not have been reasonable for Quon to conclude that his messages were in all circumstances immune from scrutiny. Quon was told that his messages were subject to auditing. As a law enforcement officer, he would or should have known that his actions were likely to come under legal scrutiny, and that this might entail an analysis of his on-the-job communications. Under the circumstances, a reasonable employee would be aware that sound management principles might require the audit of messages to determine whether the pager was being appropriately used. …From [the Ontario Police Department]’s perspective, the fact that Quon likely had only a limited privacy expectation, with boundaries that we need not here explore, lessened the risk that the review would intrude on highly private details of Quon’s life. OPD’s audit of messages on Quon’s employer-provided pager was not nearly as intrusive as a search of his personal e-mail account or pager, or a wiretap on his home phone line, would have been. That the search did reveal intimate details of Quon’s life does not make it unreasonable, for under the circumstances a reasonable employer would not expect that such a review would intrude on such matters. The search was permissible in its scope. (slip op. at 14).

The Court expressly noted that, given the employee’s limited privacy expectation (based on the City’s electronic communication policy, the fact he was told that his text messages might be audited and the fact that his position as a police officer might require an analysis of his on-the-job communications) the government employer would not reasonably to expect that an employee would place highly private details of his life into messages on his employer’s physical device. (slip op. at 14). When the Court later expressly concludes that such a “search would be ‘regarded as reasonable and normal in the private-employer context,’” the Supreme Court can be said to be validating for a private employer that same right reasonably to expect that an employee would avoid placing highly private details of his life into messages on his employer’s physical device when the employee had been advised his employer might audit such communications.

In the wake of decisions like Stengart v. Loving Care [see previous blog post here], where the New Jersey Supreme Court dictated much less latitude for employers, even the brief mentions in Quon that reference private employers are welcome ones.

There are some practical tips for employer communication policies. Such policies should be all inclusive – covering cell phones, e-mail, text messaging, etc. The fact that the written policy in this case did not expressly cover text messages caused some confusion. Also, although the Supreme Court tried to state that it was not opining as to how advances in communication technology may impact an employee’s expectation of privacy, it went on to make several such statement (much to the dismay of Justice Scalia). For example, the Court observed that, on the one hand, the pervasive use of cell phones and text message means that some people may consider them to be “necessary instruments for self-expression, even self-identification” which would strengthen the case for an expectation of privacy; but the Court also noted that “the ubiquity of those devices has made them generally affordable, so one could counter that employees who need cell phones or similar devices for personal matters can purchase and pay for their own.” (slip op. at 11). This later point also provides some practical guidance—perhaps employers should add to their electronic communications policy a statement along the lines of the following: An employee who desires to send or receive personal communications unreviewable under this policy should purchase and use his/her own cell phone/text messaging device and service plan.
 

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In Pharmethod, Inc. v. Caserta, __ F.3d __ (3d Cir. 2010), the Third Circuit vacated and remanded the district court’s entry of a preliminary injunction enforcing a no-compete based on the trial judge’s failure to fully explain his factual and legal conclusions. The case is noteworthy because the Third Circuit provided what amounts to a primer on Pennsylvania non-compete law to help guide the district court on remand. Here is a summary of the Third Circuit’s guidance:

• Restrictive covenants are not favored in Pennsylvania and, due to the inherently unequal bargaining positions of employer and employee, such agreements are closely scrutinized. The court is required to balance the employer’s protectable business interest against the employee’s interest in earning a living in his or her chosen profession, and then balance the result against the public interest.

• In balancing such equities, some Pennsylvania courts are reluctant to enforce restrictive covenants against an employee who was involuntarily terminated.

• In Pennsylvania, post-employment restrictive covenants are enforceable if: (i) they are incident to an employment relationship between the parties; (ii) the restrictions imposed by the covenant are reasonably necessary for the protection of the employer; and (iii) the restrictions imposed are reasonably limited in duration and geographic extent.

• Legitimate business interests that may be protected by a restrictive covenant include protecting trade secrets, confidential information, good will or unique/extraordinary skills. Eliminating competition or gaining an economic advantage do not constitute legitimate business interests.

• Geographic restrictions must also be reasonable. Courts will uphold restrictive covenants with broad geographic limits only where the employee’s duties and customers were equally broad.

• Pennsylvania courts may “blue pencil” restrictive covenants by granting enforcement that is limited to those portions which are reasonably necessary for the protection of the employer. However, Pennsylvania case law favors non-enforcement of gratuitously overbroad restrictive covenants.
 

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Peter A. Steinmeyer and Jake Schmidt recently published an updated and expanded guide to drafting enforceable non-competition agreements in Illinois. The article, which was first published by the Illinois State Bar Association's publication "The Corporate Lawyer," can be downloaded by clicking here. As updated, it addresses the Illinois Appellate Court's Sunbelt Rentals decision and the proposed "Illinois Covenants Not to Compete Act."

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In Roberson et al. v. C.P. Allen Construction Co., Inc., No. 2080537 (Ala. Ct. App. May 7, 2010), we once again encounter a familiar scenario. Despite the existence of a non-competition agreement, a sales employee responsible for many clients goes to work for a direct competitor. In the subsequent litigation, the employee argues that his former employer cannot establish the presence of a protectable interest because all of the clients he dealt with are listed in the yellow pages or are otherwise readily identifiable. While this argument may have carried the day had the parties’ dispute focused solely upon the confidentiality of the employer’s client list, it was not dispositive on the issue of enforceability of the non-compete. As the court observed: “[cases dealing with a non-confidential customer list] hardly stand[] for the proposition that an employer who deals with publicly identifiable customers may never enforce a noncompete agreement.” In this particular case, the employer provided the means for the employee to entertain clients and to develop relationships with those clients. The Court concluded that the employer’s relationships with its customers – relationships that were important to stimulating its business within the concrete-cutting industry – were sufficient to constitute a protectable interest.

The important point to take away from Roberson is not to get bogged down on the issue of whether the identities of particular clients are publicly known. In most such cases, the real issue is not the identity of the client, but rather the employee taking advantage of a relationship built at the company’s expense. Similarly, in the related area of trade secrets, the real issue with a customer list is usually not the names of specific clients – which are usually generally known – but rather the more significant non-public information that is also contained on the list such as contact information for specific individuals, contract expiration dates, pricing/discounting information, etc.

One final note about customer relationships: When analyzing whether an employer has a protectable interest, there is no uniform test as to how different courts will view the significance of customer relationships. For example, Illinois courts require “near permanent” customer relationships in order to establish a protectable interest. Alabama courts – as evidenced by the Roberson case discussed above – do not impose the same “near permanent” requirement. Be sure to check the case law in your jurisdiction.
 

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There has been a serious push to clarify the way Massachusetts regulates noncompetition agreements. Many legislators and those in the high tech industries have voiced concern that the current approach hampers Massachusetts companies from competing with California high tech businesses where noncompetition agreements are not enforceable because they are contrary to public policy. The advocates of this approach feel that the freer movement of employees between competitors would create more innovation and competition. But the issue is not clear cut. There are many that want to enforce noncompetition agreements with no change in approach to protect innovation that the company has created.

A bill that attempts to reach a compromise between these two views has been making its way through the legislature. Recently, the latest version of House No. H4607, is now with the House Committee on Steering and Policy which decides when the bill will be considered by the full House. The following is a summary of the highlights of the bill which amends Chapter 149 of the General Laws by inserting a new section 24L.

While the amendment allows noncompetition agreements, it provides the following:

I. EXCLUSIONS

- Noncompetition agreements made in connection with the sale of a
business, sale of assets of a business, or otherwise outside the employment relationship.
- Agreements by which the employee agrees to not reapply for
employment to the same company after termination.

II. ELEMENTS NECESSARY TO BE VALID AND ENFORCEABLE

- A separate agreement in writing signed by employee and employer.
- Applicable to an employee with average annualized federal gross income
of at least $75,000 plus $1,500 for each full year from the amendment’s effective date.
- If a condition of employment, to the extent feasible, must provide copy
7 days before commencement of employment with notice that it is a condition of employment.
- If entered into after commencement of employment, must be supported
by adequate consideration which cannot be continued employment. 10% or more of current annual pay is presumptively adequate.
- Must protect one of the types of legitimate business interests
listed in the bill.
- Reasonable duration, but in no case more that 1 year from cessation of
employment. Duration of no more than 6 months is presumptively valid. Tolling is allowed under certain circumstances.
- Reasonable geographical scope in relation to interests served. Area
limited to where employee provided service or had influence is presumptively reasonable.
- Limited in scope of proscribed activities. If limited to type of service
that employee is performing at the time presumed reasonable.

III. GENERAL

- The Court can reform an agreement in its discretion to make agreement
valid and enforceable.
- The Court can refuse to enforce the agreement if:
- Against public policy.
- In extraordinary circumstances.
- Necessary to avoid a harsh result.
- Based on common law or equitable factors that would militate
non-enforcement.
- The Court can award attorneys’ fees to the employee or the employer
under certain circumstances outlined in the bill.
- No choice of law allowed that would avoid Massachusetts law if the
employee has been a resident and working in Massachusetts for at least 30 days.

According to prevailing views about the pending legislation, additional changes will certainly be made. We will report on its progress.
 

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On February 4, 2010, the United States District Court for the District of Maryland granted summary judgment to Plaintiff TEKsystems, Inc. (“TEK” or the “Company”), a leading technical staffing and services company, and enjoined its former Director of Strategic Accounts, Jonathan Bolton (“Bolton”), from violating certain restrictive covenants contained in his Employment Agreement.

Pursuant to the Employment Agreement, Bolton was prohibited from competing with the Company within a fifty (50) mile radius of the office in which he worked at the time his employment was terminated, for a period of eighteen (18) months following the termination of his employment. Although Bolton worked in New York City, the Employment Agreement at issue was executed in Maryland and the contract specifically provided that Maryland law would govern all disputes.

Less than two weeks after resigning from TEK, Bolton began working for another IT-staffing company as their Managing Director of New York City. Bolton worked out of his home in Wayne, New Jersey, which is located less than 50 miles from his prior office at TEK. Approximately one month later, TEK issued Bolton a cease and desist letter requesting that he provide written assurances that he would abide by the terms of his Employment Agreement. However, Bolton never provided any response to the Company. Consequently, TEK filed a lawsuit to enforce the restrictive covenant and sought an award of injunctive relief and damages.

In analyzing the restrictive covenant pursuant to Maryland law, the court concluded that it was reasonable in terms of both geographic scope and duration. The court noted that covenants imposing a far broader limitation than 50-miles had previously been upheld by courts in Maryland, especially where, as here, the Company operates on a nationwide and international level. Likewise, the 18-month duration of the restrictive covenant was clearly compliant with the norms governing the temporal scope of restrictive covenants.

The court also found that the covenant not to compete served to protect TEK’s legitimate business interest, as the Company’s success in the IT-staffing industry overwhelmingly depends upon the ability of its employees to make and maintain personal connections with clients, and Bolton was privy to TEK’s client contacts and confidential information. And, while the covenant could create some inconveniences for Bolton by prohibiting him from working in the New York City area for the next 18 months, the Court did not find that such inconveniences rose to the level of undue hardship. Finally, the court considered the public interest at stake and noted that “the public benefits from the enforcement of reasonable restrictive covenants” which serves to “facilitate and protect business growth, especially in technology-related and information based fields.”

Based on these conclusions, the court awarded a permanent injunction barring Bolton from operating in the New York City area for 18 months from the date of the court’s order. Because the court found that there was insufficient evidence showing that any of TEK’s customers had paid any fees to Bolton for his work with his new employer, the court declined to rule on damages, choosing instead to allow the parties to further brief that specific issue.

This case demonstrates that Maryland is a favorable forum for enforcing non-compete agreements, even where there is no proof that an employer has suffered a loss of profits. Thus, Maryland employers who wish to protect their legitimate business interests should not hesitate to utilize and maintain appropriate restrictive covenants, so long as such covenants are reasonable in terms of scope, geographic area and duration, do not unduly restrict an employee from earning a living, and do not limit fair competition.
 

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The trial court factual determinations in Paradise v. Midwest Asphalt Coatings, Inc., No. WD70944 (Mo. Ct. App. Mar. 16, 2010), will sound familiar to many companies. Midwest hired Mr. Paradise as a general manager and head of sales and the parties executed a non-compete agreement. During the seven years of his employment, Mr. Paradise promoted Midwest’s business, built customer relationships and developed good will for the company. He then resigned and opened a similar business.

After resigning, Mr. Paradise sued Midwest, seeking, inter alia, a declaration that his non-compete agreement was invalid. Midwest filed a counterclaim requesting a declaration that the non-compete agreement was valid and also sought an injunction against Mr. Paradise. Then the case got interesting.

After modifying the time restriction contained in the non-compete agreement, the trial court held that the agreement was valid and enforceable as modified. The trial court also specifically held that Midwest had “a protectable interest in its customer contacts and repeat customers” and that Mr. Paradise could use his contacts with customers to Midwest’s disadvantage. (Note: Missouri recognizes two legitimate business interests: trade secrets and customer contacts). So far so good for Midwest. However, despite these findings, the trial court denied Midwest’s injunction request because the company had not established that Mr. Paradise had engaged in an actual customer solicitation in violation of the agreement.

According to the Court of Appeals, the trial court’s holding was based on an incorrect understanding of Missouri law. Specifically, the appellate court held as follows:

[O]nce the trial court exercised its discretion to modify the non-compete agreement to be enforceable and found that Midwest had a protectable interest in its customer contacts and that Mr. Paradise had the opportunity to use those contacts, it was required to grant the injunction. [The trial court’s] finding that Mr. Paradise had not solicited any customers or intentionally violated the terms of the non-compete agreement was irrelevant in deciding whether to grant an injunction. An employer is not required to show actual solicitation or willful violation of the non-compete agreement.

Paradise v. Midwest, slip op. at 4 (emphasis added).

Unfortunately for Midwest, the appellate court’s ruling came too late. The modified time restriction expired prior to the date of that decision and, consequently, the appellate court ruled that it could not order that an injunction be issued at that time. Nevertheless, this case provides an important reminder for those seeking to enforce or invalidate restrictive covenants in Missouri – a threatened violation of a non-compete agreement is sufficient to support the issuance of an injunction; an employer need not wait until the agreement has been violated before seeking relief.
 

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A bill recently introduced in the Illinois House of Representatives, the “Illinois Covenants Not To Compete Act,” would substantially alter the law regarding non-competition agreements in Illinois. In most respects, it would limit the enforceability of no-competes and make them easier for individuals to challenge. However, in certain respects, the bill would make no-competes easier to enforce. The same bill was introduced last year and went nowhere.

In pertinent part, the bill would limit the enforceability of no-competes by providing as follows:

• No-competes would be unenforceable against everyone other than a “key employee” or “key independent contractor” (categories which are actually fairly broadly defined in the bill);

• Mere continued employment would no longer be adequate consideration to support a no-compete; rather, the employer would have to provide “a material advancement or promotion” or “a material bonus or material increase” in salary; and

• There would be rebuttable presumptions that: any restriction exceeding one year is unenforceable; any geographic restriction that extends beyond the region in which the individual provided services is unenforceable; and any restriction on an individual’s ability to perform services other than services of the same type performed for that employer is unenforceable.

The bill would also make it far easier for an individual to challenge a no-compete, because it provides that any individual can bring a declaratory judgment action to challenge the enforceability of his/her no-compete and if the challenge is successful, the employer would have to pay his/her legal fees (but if the individual loses, they would not have to pay the employer’s fees).

In a related vein, the bill would make it riskier for many employers to try to enforce no-competes, because it provides that any “one way” fee shifting provision in a no-compete (i.e., a clause providing that if an employer has to incur attorney’s fees to enforce the agreement, the individual must pay the employer’s fees) shall be construed to provide for “two way” fee shifting (i.e., loser pays, regardless of which side loses).

Notwithstanding the foregoing provisions, in certain respects the bill would actually make no-competes more enforceable because it would make it far easier to establish the existence of a legitimate business interest sufficient to justify a no-compete (a high threshold to clear under current Illinois law) and because it expands the ability of judges to modify restrictions in a no-compete to make them enforceable.

Additionally, the proposed law contains a number of broad exceptions. Specifically, it would not apply to anti-raiding provisions (which bar former employees from recruiting their former colleagues); anti-solicitation clauses (which bar customer solicitations); confidentiality agreements (which protect confidential information); “employee choice” clauses in incentive compensation programs (which require the forfeiture of incentive compensation in the event an individual engages in prohibited conduct); and agreements between corporations, partnerships, limited liability corporations or partnerships, and their shareholders, partners, and members.

As of this writing, the bill has not attracted significant public attention or commentary, but we will monitor its progress in the months to come.
 

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An article recently published in the New York Law Journal explores an employee's duty of loyalty and the permissible steps that employee may take, prior to termination of employment, in preparing to compete with the employer.

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* Co-authored by Kathryn T. McGuigan.

In the recent case of Dowell v. Biosense Webster, Inc., No.B201439, the California Court of Appeal stated in dicta that it doubted the continued viability of the common law trade secret exception to covenants not to compete. The Dowell Court left open the question as to whether or to what extent courts will enforce agreements to protect trade secrets.

On January 29, 2010, in an unpublished opinion, Majestic Marketing, Inc. v. Nay, No. E047085 (Fourth District, Division Two), at least one California Court of Appeal appears to have recognized the viability of the trade secret exception to California Business & Professions Code ¶16600 prohibition of employee non-competition agreements.

The Majestic Marketing employee handbook included a clause which, among other things, identified company trade secrets and prohibited employees from using those trade secrets. Majestic brought suit against two former employees claiming that while they were still employed and after, the employees had misappropriated trade secrets (customer lists), in violation of the clause to form another company. The trial court entered a preliminary injunction prohibiting the defendant employees from using any Majestic customer information and barred them from doing business with about 3,000 Majestic customers for the two-year prohibition period contained in the employee handbook. The employees were also required to return all Majestic information and property. The Court of Appeal affirmed.

The Court agreed with the trial court that Majestic’s customer information was a protectable trade secret as defined under the clause in Majestic’s handbook and stated that “[d]espite California’s broad prohibition against noncompetition agreements, covenants not to compete may be enforced to the extent that enforcement is necessary to protect a company’s trade secrets.”

The Majestic Court decision therefore gives some indication that the trade secret exception may operate where the employer can establish that the information at issue is a trade secret. However, the California Supreme Court has yet to weigh in and for now, the viability of the trade secret exception remains an open issue.
 

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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.
 

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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.
 

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*Co-authored with Jake Schmidt.

As we noted in a blog post in October 2009, in Sunbelt Rentals, Inc. v. Ehlers, 333 Ill.Dec. 791, 915 N.E.2d 862 (Ill. App. Ct. 2009), an Illinois appellate court reexamined and rejected over thirty years of well-established precedent regarding the enforceability of restrictive covenants. Specifically, it rejected the “legitimate business interest” test long applied as a threshold issue by Illinois courts when deciding the enforceability of a restrictive covenant. At the time, we noted that the court either isolated itself from every other Illinois appellate court or took the first step in decreasing the traditional hostility with which Illinois courts treat restrictive covenants.

Although we expect that the reasoning of Sunbelt will be at issue in virtually every lawsuit seeking to enforce or invalidate an Illinois restrictive covenant, to date only one published decision, Aspen Marketing Services, Inc. v. Russell, No. 09 C 2864, 2009 WL 4674061 (N.D. Ill. Dec. 3, 2009), has cited Sunbelt. In that case, federal district court judge Robert Gettleman noted his awareness of Sunbelt and its rejection of the legitimate business interest test, but he applied the test anyway, noting that “[t]he Illinois Supreme Court, the United States Court of Appeals for the Seventh Circuit, and this court, however, have not rejected the applications of the legitimate business interest test.” Judge Gettleman did not otherwise elaborate on his decision to apply the legitimate business interest test.

We will continue to monitor this issue, as it has significant ramifications on the enforceability of restrictive covenants in Illinois.
 

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* Co-authored with Kathryn T. McGuigan.

In Edwards v. Arthur Andersen, LLP, 44 Cal.App. 4th 937 (2008) the California Supreme Court adopted an expansive interpretation of California Business & Professions Code §16600, holding that §16600 prohibits employee non-competition agreements unless the agreement falls within a statutory exception which are non-competition agreements associated with certain business sales transactions, dissolution of partnerships, or termination of a member’s interest in a limited liability company. The Edwards Court specifically rejected the “narrow restraint” exception adopted by the Ninth Circuit and which no California court had endorsed, finding that even limited restraints on post-termination competition are unlawful under California law.

However, the Court was careful to note that its opinion did not invalidate restraints necessary to protect trade secrets, stating that it was not required to address the applicability of the so-called trade secret exception to section 16600 because it was not germane to the claims raised by the employee. Edwards, supra, 44 Cal.4th at 946, fn. 4.

On November 19, 2009, the California Court of Appeal in Dowell v. Biosense Webster, Inc., No. B201439, in refusing to enforce broad and expansive noncompete and nonsolicitation clauses in employment agreements, did not reach the trade secret exception issue either. The Dowell Court stated in dicta that it doubted the continued viability of the common law trade secret exception to covenants not to compete, but was not resolving the issue because the noncompete and nonsolicitation clauses in the agreements before it were not narrowly tailored or carefully limited to the protection of trade secrets, but were so broadly worded as to restrain competition. The Dowell Court left open the question as to whether or to what extent courts will enforce agreements more narrowly tailored to protect trade secrets.

Even if a court does not enforce a nonsolicitation covenant tethered to even a narrow definition of trade secrets, an employer will still have protection under common law and the California Trade Secrets Act if the employee is using trade secret information to solicit. Given the direction that the California courts appear to be headed, however, employers in California should weigh the value of including any nonsolicitation covenant against the risk created by the inclusion of such a covenant, which may violate public policy.
 

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On October 22, 2009, in a case entitled Astro-Med, Inc. v. Nihon Kohden America, Inc. and Kevin Plant, on appeal from the U.S. District Court for the District of Rhode Island, the First Circuit Court of Appeals affirmed a jury verdict granting Astro-Med, Inc. ("Astro-Med") damages of more than $1 million against Nihon Kohden America, Inc. ("Nihon") and employee Kevin Plant ("Plant") for violating non-compete and non-disclosure clauses which Plant signed when he was first employed by Astro-Med in 2002.

Astro-Med and Nihon were competitors in the life sciences equipment market. In 2002, Astro-Med hired Plant as a Product Specialist at its Rhode Island facility. Upon his hire, he signed an Employment Agreement which contained a non-competition clause and a trade secrets clause. The Agreement was governed by the laws of Rhode Island.

After significant training from Astro-Med, Plant transferred to a Sales Representative position at Astro-Med's Florida facility. In 2006, Nihon, a California corporation, hired Plant as a Sales Representative in Florida. Shortly thereafter, Astro-Med sued Plant in federal court in Rhode Island for breach of contract, misappropriation of trade secrets and unfair competition. Astro-Med later added Nihon as a defendant, alleging claims including misappropriation of trade secrets. After losing before the jury, both Nihon and Plant appealed to the First Circuit Court of Appeals.

On appeal, Nihon and Plant alleged nine separate claims of legal error, each of which was rejected by the First Circuit. The Non-Competition clause and the Trade Secrets clause stated that Rhode Island law applied. On appeal, Nihon argued that as a California business, it should not be subjected to the jurisdiction of Rhode Island concerning its hiring of a Florida resident to sell its product in Florida. The Appeals Court disagreed, finding that Rhode Island had jurisdiction. It also found that Astro-Med and Plant entered into the agreement in Rhode Island and that Nihon hired away Plant with full knowledge of the agreement. Because Astro-Med was headquartered in Rhode Island, that was one of the places where the harm occurred.

Specifically with respect to the Non-Competition and the Trades Secrets provisions, defendants raised numerous arguments. The two most interesting are discussed below:

First, Nihon argued that the Non-Competition clause that Plant signed when he was first hired at Astro-Med was unenforceable because after Plant signed it, his duties materially changed. It is true that Plant's job changed at Astro-Med when he transferred to the salesperson job in Florida. Nihon relied on a Massachusetts case (AFC Cable Sys. Inc. v Clisham, 62 F. Supp. 2d 167 (D. Mass. 1999), for the proposition that a change in an employee's job can void a non-competition clause. Massachusetts case law provides that "each time an employee's employment relationship with the employer changes materially such that they have entered into a new employment relationship a restrictive covenant must be signed." Lycos, Inc. v. Jackson, No. 2004-3009, 2004 Mass. Super. LEXIS 348 (Mass. Super. Ct. Aug. 24, 2004). After a substantial discussion of the genesis and intent of the Massachusetts decision which turns on the parties' intent to abandon the non-competition agreement upon the change in duties, the First Circuit held that even if Rhode Island adopted the Massachusetts approach, the facts in the instant case did not support a finding that the parties intended mutual abandonment and rescission of the non-competition provision.

Second, with respect to the Trade Secret Misappropriation claim, relying on Massachusetts common law, Nihon argued that since no evidence was established at trial that either Plant or Nihon ever used any of Astro-Med's confidential information, there can be no violation. However, the First Circuit, which also hears appeals from Massachusetts, said Nihon's reliance on Massachusetts law was misplaced. Rhode Island law applied and the Rhode Island Uniform Trade Secrets Act, R.I. Gen. Laws Sect. 6-4-1, et seq. defines "misappropriation" as including disclosure of a trade secret by one who acquired it while under a duty to maintain its secrecy and the acquisition of a trade secret by one who knew it was obtained from someone who had a duty to keep it secret. Under Rhode Island law, it is not necessary to show that either Plant or Nihon used Astro-Med's trade secrets. The First Circuit noted that disclosure or acquisition is sufficient to prove a misappropriation, subjecting defendants to liability for actual loss and unjust enrichment caused by the misappropriation.

This case illustrates that it is important to check the applicable state law to determine if an individual has violated a restrictive covenant like the Non-Competition or Trades Secrets clauses discussed in this summary. Appellants Nihon and Plant relied on principles from Massachusetts which were different than the applicable law of Rhode Island. The growing Massachusetts case law regarding material changes in employment and the Massachusetts doctrine that misappropriated trade secrets must be used before they can be the subject of an actionable claim, have not been adopted by other states and did not help Nihon and Plant.
 

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A trial court in Chicago recently held that because a restrictive covenant did not contain a provision extending the restricted period during any time of breach, there was no basis to re-write the contract to extend the restricted period. The court also declined to extend the restricted period on any equitable basis.  The lengthy decision is attached in two parts here and here. 

This decision illustrates the importance of including a “tolling” provision in a restrictive covenant. See, e.g., Prairie Eye Center v. Butler, 329 Ill.App.3d 293, 304-305 (Ill. App. 2002) (enforcing a contractual provision extending the period of noncompetition for “a period of time equal to that period beginning when such violation commenced and ending when the activities constituting such violation shall have terminated.”) Otherwise, by the time a party learns of a violation of a restrictive covenant and rushes in to court to seek injunctive relief, much of the restricted period may have already expired.
 

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We previously wrote about the June 26, 2009 Memorandum Decision and Order in which the U.S. District Court for the Southern District of New York denied a preliminary injunction sought by IBM to prevent its former employee David L. Johnson from continuing his employment as Senior Vice President of Strategy at Dell Inc.

When presented with a non-compete agreement by IBM, Johnson, who was then hoping to be promoted at IBM, purposefully signed the agreement on IBM’s signature block rather than his own in order to allow himself more time to consider whether to commit to signing the agreement. The District Court held that IBM could not show a likelihood of success on the merits and denied IBM’s preliminary injunction motion, because IBM’s actions after receiving the agreement incorrectly signed by Johnson indicated that it did not really consider the agreement to be valid. IBM immediately appealed to the Second Circuit Court of Appeals.

While the Second Circuit appeal was pending, IBM sought leave from the District Court to bring a second motion for a preliminary injunction against Johnson.  In a July 30, 2009 Memorandum Decision and Order, the District Court denied such leave to IBM, on the grounds that the proposed motion (a) sought “essentially the same relief that IBM requested in its first motion,” (b) was “based on information that has been in IBM’s possession since well before” the hearing on the first motion, and (c) “might well encroach upon the Second Circuit’s review of IBM’s appeal.” IBM sought a writ of mandamus from the Second Circuit to vacate this July 30 order, and also appealed the order.

All three of IBM’s pending applications were rejected by a Second Circuit Panel in a Summary Order, dated October 22, 2009.  In affirming the June 26, 2009 Order, the Second Circuit found the District Court’s conclusions “well-supported by the court’s finding that Johnson was extremely credible, and that IBM’s designated witness was much less credible chiefly because IBM’s witness lacked familiarity with documents bearing on the controversy.” With respect to the mandamus petition, the Second Circuit agreed with the District Court’s July 30, 2009 Order that the pending appeal “temporarily divested the district court of jurisdiction to consider a second motion arising from the same facts even if IBM asserted a nominally different cause of action.” Finally, with respect to the appeal of the July 30, 2009 Order, the Second Circuit noted that any “conceivable challenge to the appealed-from order would essentially duplicate the arguments we have already rejected with respect to the mandamus petition.”

In this heavily litigated matter, it now appears that IBM may be out of options in its attempt to prevent Johnson from continuing to work for Dell Inc., for which he has been employed since June. However, IBM’s underlying District Court action against Johnson, seeking damages, may continue.
 

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The following article by Peter A. Steinmeyer and Jake Schmidt appeared in Law360 on October 23, 2009. 

In advising against the blind application of legal doctrines, Justice Oliver Wendell Holmes wrote that “[i]t is revolting to have no better reason for a rule of law than that so it was laid down in the time of Henry IV.” O.W. Holmes, The Path of the Law, 10 Harv. L. Rev. 457, 469 (1897). In this spirit, an Illinois appellate court recently reexamined and rejected over thirty years of well-established precedent regarding the enforceability of restrictive covenants. In doing so, the court either isolated itself from every other Illinois appellate court or took the first step in decreasing the traditional hostility with which Illinois courts treat restrictive covenants.

From the mid-1970s until a few weeks ago, Illinois law in this area was clear: employers seeking to enforce a restrictive covenant first had to establish that the covenant was necessary to protect either confidential information or a near permanent customer relationship – the two recognized “legitimate business interests” sufficient to support a restrictive covenant under Illinois law. During the last three decades this rule has been recognized and applied by every appellate court in Illinois.

In late September 2009, the Fourth District Court of Appeal in Sunbelt Rentals, Inc. v. Ehlers, No. 4-09-0290, 2009 WL 3052369, __ Ill. App. 3d __, __ N.E.2d __, (Ill. App. Ct. Sept. 23, 2009), determined that the “legitimate business interest” test was not supported by any decision of the Illinois Supreme Court. Accordingly, the Sunbelt court held that, in determining whether a restrictive covenant is enforceable under Illinois law, “[a court] should evaluate only the time-and-territory restrictions contained therein.” Id. at *8. In doing so, the Fourth District Court of Appeals departed from the clearly established case law of all appellate courts in Illinois (and also previous decisions of the Fourth District).

Barring further action by the Illinois Supreme Court, the Sunbelt court’s rejection of the “legitimate business interest” test will be one of the primary issues argued in all future restrictive covenant cases in Illinois. This circuit split within the Illinois appellate court system is emblematic of the flux nationally regarding the enforceability of restrictive covenants, with states moving in different directions. Practitioners on either side of the issue, whether practicing in Illinois or elsewhere, should review the Sunbelt decision and evaluate the potential applicability of such an argument or similar arguments to their cases.

The Sunbelt Decision

As noted above, for the last thirty-plus years, every Illinois appellate court agreed that a threshold inquiry when evaluating the enforceability of a restrictive covenant is whether it is necessary to protect a “legitimate business interest.” Such an interest “exists where: (1) because of the nature of the business, the customers’ relationships with the employer are near permanent and the employee would not have had contact with the customers absent the employee’s employment; and (2) the employee gained confidential information through his employment that he attempted to use for his own benefit.” Hanchett Paper Co. v. Melchiorre, 341 Ill. App. 3d 345, 351, 792 N.E.2d 395, 400 (Ill. App. Ct. 2003). This has become known as the “legitimate business interest” test.

The Sunbelt court analyzed Illinois Supreme Court case law from 1896 to the present and concluded that “the Supreme Court of Illinois has never embraced the ‘legitimate-business-interest’ test[.]” Id. at *5.

The Sunbelt court also concluded that the “legitimate business interest” test is inconsistent with recent Illinois Supreme Court decisions concerning restrictive covenants – specifically, Mohanty v. St. John Heart Clinic, S.C., 225 Ill. 2d 52, 866 N.E.2d 85 (Ill. 2006). According to the Sunbelt court, the Illinois Supreme Court determined that the restrictive covenants at issue in Mohanty were enforceable solely by analyzing the reasonableness of the time and territory restrictions contained therein. Sunbelt, 2009 WL 3052369, at *6 (noting that “the [Illinois] [S]upreme [C]ourt made no mention of the ‘legitimate-business-interest’ test, despite over three decades of its use by the appellate court.”).

Based on its review of the law in this area and its conclusion that the Illinois Supreme Court has never endorsed the “legitimate business interest” test, the Sunbelt court held as follows:

[Illinois] courts at any level, when presented with the issue of whether a restrictive covenant should be enforced, should evaluate only the time-and-territory restrictions contained therein. If the court determines that they are not unreasonable, then the restrictive covenant should be enforced. Thus, this court need not engage in an additional discussion regarding the application of the “legitimate-business-interest” test because that test constitutes nothing more than a judicial gloss incorrectly applied to this area of law by the appellate court.

Id. at *8.

Are Cases Involving Medical Professionals Different From Other Cases?

Except for one case from 1896 involving an undertaker, Hursen v. Gavin, 162 Ill. 377, 44 N.E.2d 735 (Ill. 1896), all of the Illinois Supreme Court decisions discussed by the Sunbelt court concern the enforceability of restrictive convenants in the medical professional context. Mohanty v. St. John Heart Clinic, S.C., 225 Ill. 2d 52, 866 N.E.2d 85 (Ill. 2006) (group of doctors); Cockerill v. Wilson, 51 Ill. 2d 179, 281 N.E.2d 648 (Ill. 1972) (veterinarian); Canfield v. Spear, 44 Ill. 2d 49, 254 N.E.2d 433 (Ill. 1969) (group of doctors); Bauer v. Sawyer, 8 Ill. 2d 351, 134 N.E.2d 329 (Ill. 1956) (doctor); Ryan v. Hamilton, 205 Ill. 191, 68 N.E.2d 781 (Ill. 1903) (doctor). Other courts that have reviewed these same cases have concluded that the Illinois Supreme Court simply assumes the presence of a legitimate business interest in cases involving medical professionals. For example, the First District Court of Appeal has held that “the Illinois Supreme Court’s consistent enforcement of such covenants in the medical professional field, where the duration and geography scope is reasonable, demonstrates its recognition that a professional medical practice is a protectable business interest.” Retina Services, Ltd. v. Garoon, 182 Ill. App. 3d 851, 856, 538 N.E.2d 651, 653 (Ill. App. Ct. 1989).

Justice Steigmann’s unanimous opinion in Sunbelt does not address whether restrictive covenants in the medical professional context are treated differently. However, in his dissenting opinion in Lifetec (an opinion that reaches the same conclusion as the majority opinion in Sunbelt), Justice Steigmann rejected this notion:

It makes no sense to place a greater burden on employers of salespeople than on employers of physicians when the enforceability of noncompete covenants is at issue. Surely the physician-patient relationship and access to medical care are more societally significant concerns than any concerns related to the relationship between a retailer of medical products and its sales force. I find support in this view in Justice Freeman’s partial concurrence in Mohanty, where he wrote, “a strong case exists for abolishing all physician restrictive covenants as being against public policy. However, I agree that this decision is for the General Assembly to make.”

Lifetec, Inc. v. Edwards, 377 Ill. App. 3d 260, 280, 880 N.E.2d 188, 204 (Ill. App. Ct. 2007) (Steigmann, J. dissenting) (internal citation omitted).

Going forward, whether or not other appellate courts follow Sunbelt may turn on whether those courts agree with Retina Services or Justice Steigmann’s dissenting opinion in Lifetec.

Restrictive Covenant Litigation Post-Sunbelt

Like many attorneys who practice in this area, we often advise clients regarding the enforceability of restrictive covenants. Regardless of whether a client wishes to enforce or invalidate a restrictive covenant, our analysis always starts with the same question: does the client have a legitimate business interest in need of protection? After addressing that question and analyzing the reasonableness of the applicable time and territory restrictions, we advise the client regarding the likelihood that a court would enforce the covenant. The Sunbelt decision, however, has injected significant uncertainty into this analysis. Any company or individual seeking to enforce or invalidate a restrictive covenant in Illinois must now ask additional questions: Is the employer or the employee located within the Fourth District (i.e., central Illinois, including the state capital, Springfield)? If you are seeking to invalidate a covenant, how will you respond to an argument that the court should adopt the holding of Sunbelt? In arguing this point, you will most likely have to address whether or not a legitimate business interest is presumed to exist in the medical professional context, and whether such a presumption is the reason for the Illinois Supreme Court’s silence on this issue. If the court rejects the “legitimate business interest” test, how confident are you staking your entire case on the reasonableness (or unreasonableness) of the time, activity, and territory restrictions contained in the restrictive covenants?

The Sunbelt decision is also instructive for those practicing in other jurisdictions. Whether a restrictive covenant is supported by a legitimate business interest is a threshold inquiry in many jurisdictions. Are such tests and rules subject to a Sunbelt-style attack? Another lesson of Sunbelt is the need to stay on top of the law in this area. For example, there are bills pending in the Massachusetts legislature which would significantly alter the legal rules for restrictive covenants in that state and make the enforcement of such agreements more difficult. In contrast, in the November 2010 general election in Georgia, voters will decide on a proposed amendment to the Georgia Constitution that would make it much easier to enforce restrictive covenants.

The bottom line is that any court that follows Sunbelt is much more likely to enforce a restrictive covenant, because that case eliminates one of the main tools used to invalidate such agreements in Illinois. If other Illinois appellate courts or the Illinois Supreme Court follow this precedent, Illinois will change from a state traditionally somewhat hostile to restrictive covenants to a state that is much more accepting of them.

Copyright © Portfolio Media, Inc. Content may not be shared or redistributed in any fashion without the express permission of Portfolio Media. For inquiries about this article, please contact customerservice@portfoliomedia.com.

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*Co-authored with Alexis M. Downs.

If eventually passed, proposed Georgia House Bill 173 will dramatically alter Georgia restrictive covenant law as we now know it. In short, this proposed legislation purports to significantly ease the employer’s burden when it comes to the enforcement of non-competition, non-solicitation and non-recruitment covenants in Georgia, where such restrictive covenants have been notoriously difficult to draft and enforce. HB 173 will become law only after ratification of a proposed amendment to the Georgia Constitution scheduled to be on the ballot during the November 2010 general election.

As a matter of public policy, the Georgia courts currently refuse to enforce restrictive covenants which do not include strict limitations as to duration, territory, and scope. Whether or not a limitation will be considered reasonable is currently governed by Georgia common law which has evolved over several years on a case by case basis. This has resulted in a piecemeal set of amorphous and relatively stringent rules which make the enforceability of restrictive covenants extremely difficult and quite unpredictable. Furthermore, under the current Georgia law, the courts are forbidden from “blue-penciling” or, in other words, modifying invalid provisions within employee non-compete and non-solicitation agreements. Finally, Georgia courts will automatically invalidate non-solicitation covenants if the employer’s non-compete covenant is in any way invalid, and vice versa.

Taking what could be referred to as an “about-face” from current law, HB 173 states its purpose is to “serve the legitimate purpose of protecting legitimate business interests and creating an environment that is favorable to attracting commercial enterprises to Georgia and keeping existing businesses within the state.” In support of this stated purpose, the proposed legislation significantly softens the oftentimes challenging geographic, temporal, and subject matter limitations currently required by Georgia courts. To this end, the Bill defines several frequently misapplied terms, and offers presumptively valid and relatively liberal time frames for certain types of restrictions. For example, a two year duration is presumed reasonable as to a restraint of a former employee’s ability to compete with an employer within a specific geographic area. A restraint of up to three years is considered reasonable for non-solicitation and non-recruitment agreements. The proposed legislation is also more lenient in regard to scope, eliminating the historical requirement that employers specifically link the scope of prohibited post-employment competition with what are oftentimes unpredictable future duties and responsibilities of the signatory employee. As such, contrary to the current law, the proposed legislation dictates that, “any good faith estimate of the activities, products and services” will suffice so as to define the scope of the proscribed post-employment competition. Also, contrary to a recent Georgia Supreme Court ruling, the proposed legislation dictates that in-term covenants (those which apply during the employment relationship as opposed to after) are not required to include specific limitations as to scope of activity, duration, or geographic territory. Finally, perhaps the most significant proposed change is that the courts will be directed to blue-pencil provisions found to be unenforceable. Thus, if a portion of a restrictive covenant is invalid, the courts will be able to narrow the restriction in question and, as a result, enforce any remaining partial provisions or covenants.

HB 173 was signed by Governor Purdue on April 29, 2009, and will become effective one day following ratification of a proposed amendment to the Georgia Constitution which would give the legislature the power to enact such laws. The need for a constitutional amendment stems from a 1991 decision of the Georgia Supreme Court in which a similar non-competition law was held unconstitutional under Article III of the Constitution of Georgia which reads: "The General Assembly shall not have the power to authorize any contract or agreement which may have the effect of or which is intended to have the effect of defeating or lessening competition …". If the amendment is not ratified in the November 2010 general election, HB 173 will be automatically repealed.
 

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A federal judge in Illinois recently held that a contractual requirement that a professional race car driver pay post-employment royalties to his former employer is unenforceable.

The case arose from a colorful set of facts. Specifically, a young race car driver who the judge described as “not educated or skilled in any profession other than racing,” signed an agreement with his then employer (a racing team) providing that for ten years after he stopped driving for that team, he was to pay royalties to that team of 25% of his future race-related earnings. After he stopped racing for the team, the driver challenged the enforceability of the royalty provision, arguing, among other things, that it was an unenforceable post-employment restraint of trade. In contrast, the team argued that the royalty provision did not constitute an activity restriction and therefore was not a restraint of trade.

Addressing what is apparently a question of first impression under Illinois law, the court held that even though the royalty provision did not expressly restrict the driver’s post-employment activities, because it constituted “a sufficient penalty,” it should be analyzed as though it was a covenant not to compete. The court therefore applied Illinois’ analytical framework for no-competes and concluded that the royalty provision was unenforceable. As a threshold matter, the court held that the team did not establish that it had a legitimate protectable interest sufficient to justify the post-employment restriction (i.e., the protection of “near permanent” customer relationships or trade secrets or other confidential information). Thus, the team’s position could not even make it over the starting line. Alternatively, the court held that even if the team had a legitimate protectable interest, the royalty provision would still be unenforceable because its 10-year term was too long and because it lacked a geographic restriction.
 

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It is well-established Illinois law that “substantial continued employment” is sufficient consideration to support a post-employment restrictive covenant signed by an existing employee. The issue, however, has been what constitutes “substantial continued employment.” Courts have held that continued employment of only seven months is not sufficient consideration, but that continued employment for two years is sufficient.

A federal judge in Chicago recently weighed in on this issue, holding that continued employment for less than one year was not sufficient consideration for a post-employment restrictive covenant. The Court therefore refused to enforce the provision.
 

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The Texas Court of Appeals for the First District reversed and remanded a Harris County (Houston) trial court’s decision refusing to enforce a non-compete provision in a case involving insurance brokers and agents. In Gallagher Health Insurance Services v. Vogelsang, the Court enforced a two year non-compete in a case that is typical of most non-compete cases in the insurance brokerage business; that is, a broker/agent signs an employment agreement with a non-compete, builds up a substantial book of business during their employment with an agency and then leaves with their “book” along with their “team” to compete against their former employer. The Vogelsang decision provides a road map for insurance brokerage firms in drafting non-compete agreements that pass judicial muster in Texas.

Gallagher Health Insurance Services (“GHIS”) entered into an employment agreement with Vogelsang, who was a “Producer” for GHIS following its acquisition of her previous insurance brokerage firm. Vogelsang agreed, in pertinent part, to hold trade secrets and confidential information as proprietary to GHIS and further agreed that, by virtue of her employment, she would be “granted otherwise prohibited access to confidential and proprietary information…which is not known either to its competitor or within the insurance agency and brokerage business generally.” Vogelsang further agreed to a non-compete that prohibited her from soliciting, placing, marketing accepting, aiding, consulting in the renewal, discontinuance or replacement of any insurance “for which [s]he performed any of the foregoing functions during the two year period immediately following [her] termination.”

GHIS sued Vogelsang and her team after they left GHIS to work for a competitor. Vogelsang argued that the non-compete was unenforceable under Texas’ Non-Compete statute, Tex. Bus & Com. Code Ann. § 15.50(a) (Vernon 2002) because: (1) GHIS merely recognized that GHIS would provide access to confidential information and that she would not divulge any future confidential information she might receive, but that the agreement did not promise to actually give her the information; (2) the information was readily available in the public domain, and any client information received by GHIS belonged to the client, and not GHIS; and (3) the covenant not to compete did not satisfy the reasonableness standards under Section 15.50 of the code, as it imposed a greater restraint than necessary to protect the goodwill or other business interest of the employer.

The Court made short shrift of Vogelsang’s arguments. First, the Court followed the Texas Supreme Court’s decisions in Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W. 644, 649 (Tex. 2006) and Hardy v. Mann Frankfort Stein & Lipp Advisors, Inc., 2009 WL 1028051 (Tex. April 17, 2009). In Sheshunoff, the Texas Supreme Court held that, for a covenant not to compete to be ancillary to or part of an otherwise enforceable agreement, the employer must establish that the consideration given by the employer must rise to the employer’s interest in restraining the employee from competing; and that the covenant must be designed to enforce the employee’s consideration or return promise in the otherwise enforceable agreement. In Hardy, the Court held that where the nature of the employment for which an employee is hired required the employer to provide confidential information for the employee to perform their job duties, then a promise to actually provide the confidential information may be implied by the courts.

Importantly, the Court flatly rejected the assertion that key documents in a brokerage business were not worthy of protection (e.g., employee salary information, client specific insurance information, team related income and budgets, at-risk accounts, strategic prospecting, financial results, audit results, production results, etc.) and found that a non-compete “is enforceable not only to protect trade secrets but also to protect proprietary and confidential information.”
Finally, the Court found that the covenant had reasonable time, scope and geographic restraints because Vogelsang worked on 80 accounts in her last two years at GHIS and the agreement precluded her from working on those 80 accounts for two years from the date of her resignation. The Vogelsang Court found that: (1) Texas decisions have allowed use of a customer list as a reasonable means of enforcing a covenant not to compete; (2) two to five years has “repeatedly been held as a reasonable time in a noncompetition agreement.” Vogelsang was free to work in the same industry and to practice her livelihood anywhere in the world. Accordingly, the court reversed and remanded the trial court’s holding that the covenant-not-to-compete provision was unenforceable.
 

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In Atlanta Bread Company International, Inc., v. Lupton-Smith, 285 Ga. 587 (Ga. 2009), the Georgia Supreme Court held that covenants restricting a franchisee’s business activities during the life of the franchise agreement (“in-term” restrictive covenants) are unenforceable if not reasonably limited in time, territorial region, and scope. An “in-term” restrictive covenant is one that limits the employee’s (or franchisee’s) ability to compete during the term of the employment/franchise relationship. The Court also stated that the presence of an invalid “in-term” restrictive covenant in a franchise agreement will have the effect of invalidating any post-term restrictive covenants and noncompetition clauses contained in the agreement.

The restrictive covenant at issue in the Atlanta Bread Co. case stated that during the term of the agreement, the Franchisee could not: “directly or indirectly engage in, or acquire any financial or beneficial interest in, … advise, help, guarantee loans or make loans to, any bakery/deli business whose method of operation is similar to that employed by store units… .” Seeing no meaningful legal distinction between in-term and post-term restrictive covenants, the Court applied the same level of “strict scrutiny” as it does for post-term covenants included within franchise and employment agreements. As such, the Court held that franchisors and employers must include reasonable parameters associated with scope, time and territory even if the restrictive covenant at issue limits unfair competition only during the term of the employment or franchise relationship.

The Court also rejected Atlanta Bread’s attempt to categorize the above clause as a “loyalty provision” rather than a restrictive covenant because, according to the Court, a plain reading of the clause prohibits the franchisee from pursuing business activities without the limitation as to time, territory, and scope. Georgia common law related to the employee’s fiduciary duty and/or duty of loyalty to his/her employer protects the employer from unfair, in-term competition without limit to scope, territory or time even absent a contract between the parties at issue. As such, many Georgia employers may have historically believed that in-term contractual covenants would also not be subject to such restrictions. However, in the wake of the Atlanta Bread decision, franchisors and employers alike should be aware that such “in-term” provisions will be declared invalid by Georgia Courts in the future. Furthermore, because Georgia Courts do not “blue pencil” or modify restrictive covenants if they are otherwise invalid, the presence of an “in-term” provision which is not properly limited in scope, time and territory will automatically forfeit other restrictive covenants such as “post-term” noncompete and customer non-solicitation covenants regardless of the fact that such covenants may otherwise be valid under Georgia law.
 

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In January, Massachusetts State Representative William Brownsberger filed a bill which would seek to void any contract that restricts an employee’s ability to search for and obtain another position with a different employer. While this bill has gained some support, it is unclear whether this will resolve the issues regarding non-compete agreements in Massachusetts. The Small Business Association of New England is working with Representative Brownsberger to draft a compromise bill which would limit who can be covered and the duration for which the agreements can last.

With the pending legislation in Massachusetts to do away with non-compete agreements, both sides are struggling to find the solution to the problem. The question is: How can Massachusetts make itself more attractive to the tech community? Is the answer to do away with non-compete agreements or to simply modify them and restrict their duration and scope?

Supporters of the current Massachusetts laws regarding non-compete agreements argue that such agreements foster competitiveness between companies, prevent confidential information from being shared, and protect business relationships which may be hurt when an employee leaves a company. Many large companies believe that non-competes are essential to attracting employees. Such employers argue that non-competes are voluntary in that they are not required by all companies and employees are not required to sign them although refusing to sign may result in a potential employee not being hired.

Opponents of non-competes believe that such agreements are restricting the growth of the tech industry in Massachusetts because they make it more difficult for employees to move between companies, thereby encouraging employees to take positions with larger companies to the detriment of smaller start-ups. Additionally, opponents argue that employees gain more knowledge and experience as they change positions and move from company to company. Further, opponents believe that the elimination of non-competes will make Massachusetts a competitor with Silicon Valley and will encourage the start-up of tech companies in Massachusetts. 

For now, the question still remains: Will the elimination or modification of non-compete agreements in Massachusetts make the state a better, more attractive location for the tech industry and help to boost the economy or will it diminish competitiveness between companies? Public hearings for Representative Brownsberger’s bill are scheduled for sometime this fall, during which we expect these questions and many others to be addressed. We intend to follow the legislation and report on its progress in this blog.
 

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Florida law, specifically section 542.335, Florida statutes, generally authorizes courts to enforce non-compete and other post-employment restrictive covenants, provided the agreements are in writing and signed by the employees against whom enforcement is sought, are reasonable in time, area, and line of business, and are supported by one or more legitimate business interests supporting the restrictive covenants.

Section 542.335 is fairly detailed. The statute defines what a reasonable time period is (it depends on the nature of the restrictive covenant), it lists several legitimate business interests, and it even addresses potential defenses. For example, it states that the court "[s]hall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought."

Still, section 542.335 leaves several issues unaddressed, leaving the courts to sort them out. Several of those issues are addressed in a 48 page opinion issued recently by the Eleventh Circuit Court of Appeals in Proudfoot Consulting Co. v. Gordon (11th Cir., July 30, 2009). The Eleventh Circuit affirmed the district court's injunction, but reversed the $1.66 million damages award to the former employer.

Here are some key points to take away from the court's decision:

• Where a non-compete covenant does not contain a geographic limitation, the court can supply a reasonable geographic scope. And where, as here, the employee had been assigned to a territory that included all of North American and Europe, this geographic area is reasonable.

• The court expressed doubt that a broad non-compete agreement that prohibits the former employee from working for a competitor, irrespective of which clients he is serving, would be reasonably necessary to protect an employer's interest in the relationships that the former employee developed with its clients.

• The court also expressed doubt that such a broad non-compete agreement would be reasonably necessary to protect client-specific confidential information, if restrictions that prevent the employee from contacting, or working for, those clients would be sufficient to protect that information.

• On the other hand, the court stated that where an employee has access to confidential business information crucial to the success of the employer's business, the employer has a strong interest in enforcing a covenant not to compete, irrespective of whether the employee improperly retains and uses that information in his new employment. But the court noted that it is unclear under Florida case law precisely when confidential information will justify a broad non-compete covenant. Is it sufficient that the employee be in a position at his new employer to use the former employer's confidential information? Or must the former employer meet the higher burden of proving that disclosure of the confidential information by the employee would be inevitable in the employee's new position? The court declined to answer this question, finding that under the facts of this case, where the employee had actually retained some of his former employer's confidential business information, the potential disclosure of that information to his new employer justified the enforcement of the non-compete covenant.

• It is not necessary that the former employer prove that the employee intentionally breached the restrictive covenants at issue in order to receive injunctive relief. The employee's good faith, reasonable belief that he is not in breach of a restrictive covenant is no defense.

• With respect to damages, the fact that the new employer profits from a breach of its employee's non-compete agreement with his former employer is irrelevant absent a finding that the employee directly caused his former employer to lose profits. "Damages for breach of a non-compete are intended to make the prior employer whole, not to punish employees." Furthermore, "disgorgement of profits earned is not a remedy for breach of contract," especially where the new employer is not even a party to the litigation.
 

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Not many lawsuits under the Employee Retirement Income Security Act (“ERISA”) turn on whether an employer legitimately insisted that an employee sign a no-compete agreement in order to receive benefits, but a federal court lawsuit currently pending in Chicago presents that very scenario.

Specifically, in a case brought by a former Bank of America employee against Bank of America and others, Charles Corbisiero alleges that he was lured into continuing to work for Bank of America by a promise of certain allegedly vested bonuses and other benefits, only to be told upon his termination that he could only receive such bonuses and benefits if he signed what Corbisiero describes as “an unconscionable non-compete agreement.” Corbisiero refused to sign, Bank of America refused to pay, and the end result was this rare mix of ERISA and a no-compete.

Bank of America recently moved, successfully, to dismiss Corbisiero’s state law claims (on the grounds that they are preempted by ERISA), but the Court denied Bank of America’s motion to dismiss Corbisiero’s claim that Bank of America is equitably estopped under ERISA from providing the bonuses and benefits at issue.

Although the Court was unwilling to dismiss the equitable estoppel claims at this juncture, it noted in its decision that at the summary judgment stage, Corbisiero will need actual evidence to prove up his allegations.
 

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A high-profile no-compete case currently pending in Chicago may turn on whether merely “preparing to compete” constitutes “engaging in” contractually prohibited business activities. The case was brought by Citadel Investment Group LLC against several former employees who left to help start a rival firm. Citadel alleges, among other things, that the former employees are in breach of their no-competes with Citadel.

The former Citadel employees responded to Citadel’s lawsuit by filing a Motion to Dismiss in which they argue that they are not “engaged in” prohibited activities (and therefore not in violation of their no-competes) because their new entity has yet to actually open for business. Their argument is premised on a line of Illinois cases holding that it is not a breach of fiduciary duty for a current employee to prepare to compete with his or her employer, so long as no actual competitive activities are undertaken. The former Citadel employees argue that if it is not a breach of fiduciary duty for a current employee to prepare to compete, then they, too, ought to be able to prepare to compete without being found to have engaged in wrongful competition.

Stay tuned for Citadel’s response.
 

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A recent decision illustrates the importance for employers of making sure non-competition agreements are correctly executed by employees.

On June 1, 2009, IBM sought a preliminary injunction in the United States District Court, Southern District of New York, enjoining its former Vice-President of Corporate Development, David L. Johnson, from continuing his employment as Senior Vice President of Strategy at Dell Inc.  On that date, doubt was raised as to whether Johnson’s alleged non-competition agreement with IBM had ever been duly executed, and the Court ordered expedited discovery on the issue and another hearing on June 22, 2009.

At the June 22 hearing, the evidence showed that at the time Johnson was first asked to sign the agreement, he was hoping to be promoted, and so in an effort to extend the time during which he could consider whether to enter into the agreement, Johnson purposefully signed the non-competition agreement not on his own signature block, but on the signature block designated for IBM.  Johnson testified that he believed that doing so would prevent the agreement from becoming valid and would allow him more time to consider whether to commit to the IBM non-compete agreement.

As the Court noted, Johnson’s “gambit appears to have worked just as he envisioned.”  Although IBM argued to the Court that the non-competition was valid, on numerous occasions IBM had sought to have Johnson properly sign the agreement, indicating that IBM did not actually consider the incorrectly signed agreement to be valid. Moreover, with respect to Johnson’s incorrectly signed document, IBM had not followed its usual protocols of sending it to an IBM representative for signature or retaining an original copy of the document in its files.

In view of the evidence, the Court found that IBM could not show a likelihood of success on the merits of its breach of contract claim.  The Court also found that the balance of equities favored Johnson, and it denied the preliminary injunctive relief sought by IBM.

A lesson for employers from this decision is that no ambiguity should be accepted as to whether the employee has assented to a restrictive covenant.  Particularly given the public policy of New York and other jurisdictions disfavoring non-competition agreements, when it is time to seek enforcement of such an agreement, the employer must be able to show that the employee unequivocally agreed to its terms.
 

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A recent article in Lawyer USA discusses how litigation over noncompetition and nonsolicitation agreements has been on the rise in recent years. Currently, when employers’ most valuable assets are their people and ideas, and the spread of technology has lead to increased concerns regarding theft of confidential information, employers have dramatically stepped up their use of noncompetition agreements to limit what departing employees can do.

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In recent weeks, we have been following the fascinating case between Massachusetts-based EMC Corp. and Hewlett Packard Co., located in California.  EMC won the first round by stopping a former executive, David Donatelli, who was VP in charge of EMC's Storage Division, from starting his job at HP.  The Massachusetts Court held that to allow Donatelli to work for HP would violate a non-compete agreement he signed at EMC.  The Massachusetts Court enforced the non-compete even though Donatelli had filed an action for declaratory relief in California asking that Court to declare the non-compete unenforceable under California law.  In the Massachusetts action, however, the Judge allowed Donatelli to present additional evidence in a subsequent hearing to demonstrate that his job at HP would have minimal overlap with his former position at EMC.

On May 26, 2009, after hearing additional evidence, the Massachusetts Court modified the preliminary injunction it had issued against Donatelli by allowing him to start working for HP in California.  However, both sides are claiming victory because Donatelli will not be able to take the job he wanted, i.e., Executive VP of StorageWorks, due to the restrictions in the order.  While HP expressed its pleasure with the Court's decision to allow Donatelli to start working at HP as a Senior VP of Enterprise Servers and Networking, EMC stated it was also pleased with the Court's ruling because it upheld "the terms of EMC's key employee agreement."  EMC's statement went on to say that, "The judge entered an order as proposed by EMC that precludes Mr. Donatelli from being engaged in any aspect of HP's business that overlaps or competes with EMC's storage business for a 12-month period."  The case is EMC Corp. v. David A. Donatelli, case number 09-1727-BLS2 in the Suffolk County Superior Court in Massachusetts.

We don't know if the case is over, but for now, it appears that everyone got something of value from the case. The Massachusetts Court issued a narrow order tied to the protectable interest of EMC while at the same time, not depriving Donatelli his opportunity to pursue his livelihood in a competitive business.
 

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Last week, we wrote briefly about EMC v. Donatelli, a case that is being litigated simultaneously in California and Massachusetts. On May 4, the Superior Court in Massachusetts ruled that EMC, a Massachusetts corporation, could obtain injunctive relief preventing Mr. Donatelli, who had been President of one of EMC’s major divisions, from starting a job at HP in California even though California has a statutory prohibition on covenants not to compete. The Court made some important findings in its decision which are summarized below.

Choice of Law - The court relied on the language of the agreement that Donatelli signed to find that Massachusetts law applied. Rejecting Donatelli’s argument that California’s fundamental policy against enforcement of non-competes made it futile for EMC to proceed in Massachusetts, the Massachusetts Court stated it “did not agree that California’s legislative policy, at least in this case, is somehow more ‘fundamental’ than, and therefore trumps, Massachusetts’ common law.”

Equitable Considerations - Donatelli also argued that Massachusetts should defer to California’s strong policy of protecting its workers. The Massachusetts Court rejected this argument as well, finding that Donatelli was not a California resident, and therefore not one of its workers. He was still a Massachusetts resident.  The Court also took Donatelli to task for “escaping” the obligations of the non-compete where the expectations of the parties were that he would be bound by it.

Enforceability of Covenant Under Massachusetts Law - The Court dealt with two issues that are of particular interest to practitioners in Massachusetts. The first is whether there was adequate consideration for the covenant even though it was signed 15 years after Donatelli started working at EMC. In ruling in favor of EMC, the Court found that even though the law in Massachusetts on this issue is somewhat unclear, under the facts of this case, continued employment constituted adequate consideration. However, regarding the breadth of the covenant, the Court allowed Donatelli to supplement the record to demonstrate that the covenant was broader than necessary to protect EMC’s interests.

The ball is now in the California Court. The Massachusetts Court was clear in ruling that California’s law against enforcement of non-competes did not trump Massachusetts’ common law in enforcing them, at least with respect to Massachusetts residents who move to California to escape the obligations of a Massachusetts non-compete. We will continue to follow this case as it no doubt progresses through the courts.
 

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An executive’s resignation and intention to begin work for a competitor of his former employer has resulted in a bicoastal battle of lawsuits over the terms of a noncompete clause in his employment agreement.

On April 27, 2009, David Donatelli resigned his position as president of EMC Corp.’s storage division. That same day, Donatelli filed a lawsuit in California state court asking for a declaratory judgment voiding the noncompete clause in his employment agreement with EMC Corp. Donatelli’s attorneys are no doubt cognizant of California law’s hostility to noncompete clauses and sought to establish jurisdiction where the chances of enforcement of the noncompete are minimal. Donatelli intended to begin working at Hewlett Packard on May 5, 2009.

Placing a close second in the proverbial race to the courthouse, on April 28, 2009, EMC Corp. filed a suit in the Superior Court, Suffolk County, Massachusetts, alleging that Donatelli violated the noncompete in his employment agreement. EMC Corp. quickly moved for preliminary injunctive relief, and on May 4, 2009, Judge Stephen E. Neel issued a temporary injunction preventing Donatelli from starting his new position at Hewlett Packard as planned, pending a full hearing, noting: “Donatelli’s intention to work for HP in California, which has a statutory prohibition on covenants not to compete, does not warrant denial of EMC’s request for injunctive relief.”

It will be interesting to see if the California court renders a decision prior to the hearing in the Massachusetts court, and whether one court will defer to the other.
 

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On April 17, 2009, the Texas Supreme Court removed a hurdle to the enforcement of noncompete agreements and clarified what is required for a valid agreement in the state of Texas.

In Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 2009 WL 1028051 (Tex. 2009), the court addressed the question of whether a noncompete in an at-will employment relationship is enforceable when the employee expressly promises to not disclose confidential information but the employer makes no express return promise to actually provide confidential information. The court held that, as long as the employment for which the employee is hired will reasonably require the company to provide confidential information to the employee for the accomplishment of the contemplated job duties, it is reasonable to imply a promise to make such a disclosure in the covenant not to compete. The court made clear that this holding is contingent upon other requirements of the Texas Covenant Not To Compete Act being satisfied.

This case addresses the lingering question of whether the lack of an affirmative promise by an employer to provide confidential information to an at-will employee voids a noncompete agreement for lack of consideration because the employer could theoretically terminate the employee at any time, without ever providing confidential information. This decision does away with this argument and allows enforcement of the noncompete agreement as long as the employer actually provides confidential information to the employee during employment.

This decision is the second opinion from the Texas Supreme Court in recent years that makes it easier for employers to enforce noncompetes in the state of Texas. It appears that the Texas Supreme Court is signaling to lower courts that future cases should focus more on the reasonableness of the noncompete agreement, and less on hypertechnical legal arguments. Nonetheless, clients using noncompete agreements in the State of Texas should annually review their agreements to ensure they are in compliance with this ever-changing area of law.
 

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States vary widely in their willingness to enforce noncompetition agreements. Some states, such as California, are openly hostile and will not enforce them, while others will do so so, subject to varying degrees of judicial scrutiny.

My home state of Illinois, for example, will enforce a noncompetition agreement, but only after fairly rigorous judicial scrutiny. Notwithstanding such scrutiny, Illinois employers can draft enforceable noncompetition agreements. The attached article that I published in the April 2009 Illinois Bar Journal offers practical guidance on how to do so.
 

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Employers across all sectors of industry rely on narrowly tailored employment agreements to prevent employees from unfairly competing and stealing clients and customers post-employment. Last week, the adult nightclub chain, Penthouse Club, filed a suit seeking a temporary restraining order and other injunctive relief against a former director for violating a noncompete and nondisclosure agreement.

Penthouse claims that after the former director was fired for cause, he became employed at a rival nightclub not far from the Penthouse Club. Such mere employment allegedly directly violated the terms of his noncompete agreement. Penthouse also alleges that he is now using his contacts and intimate knowledge of Penthouse’s customers and employees to bring business to his new employer. As a result of his high-level position, which included access to the club’s VIP room where members pay a $2,500 fee to join and then a $1,000 fee each year, the former director obtained extensive knowledge concerning the real names of members and exotic dancers who worked there. Penthouse is relying on the “inevitable disclosure” theory to assert that it would be inevitable that the former director would use his knowledge of clients and employees to his and his new employer’s competitive advantage.

The agreement that the former director signed in 2004 contained restrictive covenants including a noncompete, nondisclosure, and nonsolicitation provisions. Penthouse is relying on the unique nature of its business, and, in particular, the fact that its exotic dancers and entertainers specifically attract particular customers, in order to establish its legitimate business interests and the competitive disadvantage that the former director’s solicitations could cause to Penthouse.

Penthouse attempted to resolve the dispute informally through a cease and desist letter but ultimately filed suit in federal court in Illinois seeking an injunction and monetary damages in excess of $75,000.
 

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I recently reported on a decision of Florida’s Fourth District Court of Appeal in which the appellate court reversed the issuance of an ex parte temporary injunction because the order failed to specify why it was granted without notice to the other party.

In a recent case, Florida’s Third District Court of Appeal ("DCA") reversed the issuance of a temporary injunction for a similar reason: it failed to specify with reasonable particularity the conduct being enjoined. The case is Angelino v. Santa Barbara Enterprises, LLC, Case No. 3D08-1066 (Fla. 3d DCA, February 18, 2009).

The case involved a business dispute between the appellant, Sabrina Angelino, and Santa Barbara Enterprises, LLC, each of whom owned a fifty percent interest in Starbridge Networks, LLC, which sells telecommunications products and related technical services. Santa Barbara alleged that Angelino and her husband set up two competing companies, SILA Networks, LLC and SILA Networks, C.A., through which they usurped business opportunities that belonged to Starbridge Networks. Santa Barbara also alleged that Angelino interfered with Starbridge Networks' relationships with its customers and suppliers.

In its order, the trial court found that Angelino, through SILA Networks, competed and interfered with Starbridge Networks' business relationships in Venezuela. The trial court therefore enjoined Angelino, both individually and as an employee of SILA Networks LLC, her agents, servants, employees and attorneys from: (a) competing against Starbridge Networks; (b) usurping Starbridge Networks' business opportunities, customers and suppliers; (c) using Starbridge Networks' proprietary information and technology; and (d) interfering with Starbridge Network's relationships with its customers and suppliers, including through the use of derogatory comments about Starbridge Networks, its officers, managers or employees.

The trial court also imposed a constructive trust. The trust encompassed any purchase orders, contracts or other business that Angelino, her agents, servants, employees and attorneys, may have obtained from Starbridge Networks' customers.

The Third DCA reversed both the injunction and the imposition of a constructive trust. Citing the Fifth DCA's decision in Clark v. Allied Assocs., Inc., 477 So. 2d 656, 657 (Fla. 5th DCA 1985), the court noted:

The trial court enjoined Angelino from competing against Starbridge Networks. But there is no mention of any acts that may be considered competitive in nature. The trial court enjoined Angelino from usurping Starbridge Networks' business opportunities, customers, and suppliers. There is no mention, however, of any customers and suppliers with whom Angelino may not compete. The trial court also enjoined Angelino from the use of Starbridge Networks' proprietary information and technology. There is no mention of any specifics upon which Angelino can rely to determine what information and technology he cannot use. This type of vague language is precisely the type that the district court contemplated in Clark, and we cannot uphold to support the entry of a temporary injunction.

The portion of the temporary injunction in which the trial court imposed a constructive trust is likewise overly broad. The trial court failed to mention with sufficient particularity “what purchase orders, contracts, or other business” Angelino is obligated to hold in a constructive trust. Angelino is left in doubt as to what he is required to do to comply with the trial court's directives. This portion of the injunction is thus defective.

The takeaway from this court is clear. When drafting a proposed temporary injunction order, attorneys should use precise language that makes it abundantly clear what the other side can and cannot do. Trial judges in the state court system are extremely busy, and they may not be inclined to tailor language to the specific facts of the case. But that is what is required to avoid the reversal of the injunction on appeal. The Fifth DCA's advice in Clark is worth reciting here:

An injunctive order should never be broader than is necessary to secure the injured party, without injustice to the adversary, relief warranted by the circumstances of the particular case. The order should be adequately particularized, especially where some activities may be permissible and proper. Such an order should be confined within reasonable limitations and phrased in such language that its requirements can be met, without resert to portions of the record or facts outside the ‘four corners' of the injunction itself. One against whom an injunction is directed should not be left in doubt as to what he is required to do.

Clark, 477 So.2d at 477-78.
 

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As the enforcement of non-competition agreements becomes more crucial than ever, some employers are including provisions that require or promise payments to the former employees during the post-employment period of non-competition. If properly crafted, such a payment may act as the additional consideration needed for the promise not to compete and may dissipate the former employee's argument of undue hardship during the non-competition period. Employers promising to make such payments must be prepared to follow through with their promises, as the Eighth Circuit recently held.

On February 25, 2009, the Eighth Circuit upheld a district court's decision to award Roger Bannister, a former Director of Technical and Product Development for Bemis Company, Inc. ("Bemis"), nine months worth of his salary, based on a promise in his non-competition agreement. See Bannister v. Bemis Company, Inc., No. 08-1634 (8th Cir. Feb. 25, 2009).

The Agreement

Bannister had worked at Bemis since 1990 and signed a Confidentiality and Non-Competitive Agreement in 2000 which prevented him from, among things, working for a competitor for 18 months following the termination of his employment. The agreement further provided that in the event that his employment with Bemis terminated, and Bannister "was unable to obtain employment consistent with [his] abilities and education solely because of the [non-competition provisions]" such provisions continued to bind him only as Bemis, in its sole discretion, made payments to him equal to his monthly base salary at the time of his termination. In order to receive such payments, the agreement provided that Bannister needed to provide Bemis with a detailed written account of his "good faith and aggressive effort[s]" to obtain employment and a sworn statement that, although he had made a good faith effort, the non-compete was the sole reason for his unemployment.

Bannister Wished to Work for a Competitor

In early 2004, Bannister informed, Bemis, his then current employer that he wished to be released from his non-compete obligations to accept employment with a competitor, Mondi Packaging ("Mondi"). Bemis refused to provide him with permission to do so. Thereafter, Mondi and Bemis were involved in a litigation arising out of Mondi's hiring of Bemis employees. The case was settled. Pursuant to the settlement, Mondi agreed to a 18 month no-poach of employees subject to noncompetition agreements. In December, Bemis offered Bannister a severance package of $40,000 and a release from the non-compete provisions other than for Mondi. Bannister declined the offer and was terminated in January 2005.

In February, Bannister sought payment pursuant to the agreement because of his unemployment. He told Bemis that he had been told by Mondi that it wished to hire him but could not do so because of his noncompetition agreement. He also sent a job contacts log to Bemis as support for his payment request. Thereafter, Bannister was informed that he was released from his non-competition obligation as to all companies, other than Mondi. Bemis took the position that the former employee could not work for Mondi because of the no-poach agreement between the two companies. Bannister remained unemployed for nine months and sought pay for that period of unemployment

The Court's Decision

The Eight Circuit found that the non-competition agreement was unambiguous and clearly provided the company with discretion as to whether to enforce the noncompetition provisions by paying the monthly salary during the unemployment period. As the company refused to provide a full release from the non-compete (and tried to prevent him from working for Mondi), the company was required to pay when Bannister provided proper documentation. The Court found that the clearly written contract did not provide for a partial release -- only a full one. Thus, the company did not have the option to only offer a partial release from the non-competition agreement and try to enforce the remainder of it. The fact that Mondi and Bemis had separately negotiated a no-poach agreement was on no consequence because it only applied to individuals subject to non-competition agreements and it was in Bemis' discretion whether to enforce the former employee's agreement. Consequently, Bemis was ordered to pay over $80,000 to the former employee.

The Bottom Line

For all employers - whether or not they are within the Eighth Circuit - this case stands as a reminder to only promise what you are prepared to do and make efforts to comply with the terms of the contract. While this case involved a clear agreement, in instances of ambiguity, such questions are decided against the drafter. Thus, employers considering whether to include a provision to pay during a non-compete must keep in mind that if they do so, they will need to follow through on their promises of payment.
 

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When a former employee is in violation of a non-compete agreement, the former employer often files suit not just against the former employee for breach of contract, but also against the new employer for tortious interference. Under Florida law, the elements of a tortious interference claim are as follows:

(1) the existence of a business relationship; (2) knowledge of the relationship on the part of the defendant; (3) an intentional and unjustified interference with the relationship by the
defendant; and (4) damages to the plaintiff as a result of the breach of the relationship.

The Second District Court of Appeals' recent decision in Fiberglass Coatings v. Interstate Chemical, Inc., Case No. 2D-08-1847 (Fla. 2d DCA, February 27, 2009), illustrates an interesting defense to a tortious interference claim.

Fiberglass Coatings, Inc. (FCI) had a non-compete agreement with its salesman Robert Hutchens. Hutchens left FCI to work for a competitor, Polymeric. Hutchens left Polymeric after a short time to work for another competitor of FCI's, Interstate Chemical, Inc. While at Interstate, Hutchens allegedly solicited FCI's customers. FCI filed suit against Interstate for tortious interference. On a motion for summary judgment, Interstate argued that FCI could not meet the causation element of its tortious interference claim because Hutchens was predisposed to breaching his non-compete agreement, as evidenced by Hutchens' employment with Polymeric. The trial court agreed with Interstate, concluding that Interstate did not cause or induce Hutchens to breach his non-compete agreement.

The Second DCA affirmed, citing Florida case law and the Restatement (Second) of Torts:

Causation requires a plaintiff to "prove that the defendant manifested a specific intent to interfere with the business relationship." [Chicago Title Ins. Co. v. Alday-Donalson Title Co. of Fla., Inc. 832 So. 2d 810, 814 (Fla. 2d DCA 2002) (citing Tamiami Trail Tours, Inc. v. Cotton, 463 So. 2d 1126, 1127 (Fla. 1985))]. No liability will attach unless it is established "that the defendant intended to procure a breach of the contract." Id. " 'One does not induce another to commit a breach of contract with a third person under the rule stated in this Section when he merely enters into an agreement with the other with knowledge that the other cannot perform both it and his contract with the third person.' " Martin Petroleum Corp. v. Amerada Hess Corp., 769 So. 2d 1105, 1107 (Fla. 4th DCA 2000) (quoting Restatement (Second) of Torts § 766 cmt. n (1977)). As noted by the Fourth District, Florida follows this section of the Restatement in these circumstances. Id.

Under this prevailing case law, we conclude that the circuit court did not err in granting summary judgment under the "employment" theory of liability set forth in paragraph 29 of the amended complaint. As explained by comment n of the Restatement (Second) of Torts, section 766, Interstate merely entered into an employment agreement with Hutchens knowing that he could not honor his covenant not to compete with FCI and at the same time work for Interstate.

The takeway from this case is that, absent evidence that the new employer induced the former employee to violate his non-compete agreement, merely hiring an employee whom the employer knows to be in violation of a non-compete agreement may not be sufficient to sustain a tortious interference claim under Florida law.

Having said that, it should be noted that the Second DCA did not let Interstate completely off the hook. Because Hutchens had allegedly solicited FCI's customers, the court held that Interstate could be held liable for tortious interference under a "solicitation of customers" theory. In other words, although Interstate may not have crossed the line in hiring Hutchens despite his non-compete agreement, it may have crossed the line by inducing him to solicit FCI's customers in violation of that agreement. The court therefore affirmed in part, and reversed in part, the trial court's summary judgment order.
 

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Under Florida law, where an employment contract expires by its terms and the parties continue to perform as before, an implication arises that they have mutually assented to a new contract containing the same provisions as the old.

But this principle does not apply to non-competes and other restrictive covenants contained in employment contracts, as illustrated by a recent decision by the Third District Court of Appeal, Zupnik v. All Florida Paper, Inc., Case No. 3D08-1371 (Fla. 3d DCA, Dec. 31, 2008).

Zupnik had signed a two-year employment contract with All-Florida. The contract provided that "during the Employment Term and within twelve (12) months from the termination of said term, he or she will not directly or indirectly … compete against ALL FLORIDA, within a fifty (50) mile radius of where ALL FLORIDA then engages in business[.]" The contract further provided that "[a]t the expiration of this two (2) year contract, the employee can exercise an option to remain in ALL FLORIDA’S employ as an at-will employee." But the contract did not contain language specifying that the restrictive covenants would continue beyond the two-year term if Zupnik remained an at-will employee after the two-year term expired.

After the expiration of the initial two-year term, Zupnik remained an All Florida employee for an additional two years, but the relationship was not formalized in a written document. Zupnik then formed his own company intending to serve his long-standing customers. All-Florida sued Zupnik and the trial court entered an injunction enforcing the non-competition covenant. The Third DCA reversed. Citing its decision in Sanz v. R.T. Aerospace Corp., 650 So. 2d 1057 (Fla. 3d DCA 1995), the court held that "post-termination restrictions expire upon the termination of an agreement for a specific term, even if an employee remains an at-will employee after the term of the written agreement expires."

For employers, the Zupnik case highlights the importance of drafting non-competes and other restrictive covenants carefully. Where an employment contract is for a specified term (e.g., two years), employers should include language in the contract which provides that the restrictive covenants contained in the contract continue beyond the specified term if the employee remains an at-will employee after the term has expired.
 

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A Florida trial court should not have entered a temporary injunction enforcing a non-compete agreement against a former employee on an ex parte basis, i.e., without notice to the employee, according to Florida’s Fourth District Court of Appeals in a recent decision, Bookall v. Sunbelt Rentals, Case No. 08-26291 (Fla. 4th DCA, December 3, 2008).
 
The employer, a company that rents construction equipment, employed the former employee until February 7, 2008, under a written agreement containing a non-compete and non-solicitation provision. Shortly after the employee resigned, he began to work at a competing company. Upon discovering this, the employer sent the former employee a letter advising him of the breach of the agreement. The former employee’s counsel responded that the employee understood and would comply with his obligations under the agreement.

Upon learning that the former employee continued to work for the competitor, the employer filed a verified complaint with supporting affidavits and an ex parte emergency motion for temporary injunction. The motion sought a temporary injunction against the former employee and the competitor based on the noncompete and non-solicitation provisions of the employment agreement. The duty judge assigned to the case entered the temporary injunction.

In its opinion, the Fourth DCA noted that under the Florida Rules of Civil Procedure, a temporary injunction "may be granted without written or oral notice to the adverse party only if: (A) it appears from the specific facts shown by affidavit or verified pleading that immediate and irreparable injury, loss, or damage will result to the movant before the adverse party can be heard in opposition; and (B) the movant's attorney certifies in writing any efforts that have been made to give notice and the reasons why notice should not be required." Furthermore, "[e]very temporary injunction granted without notice . . . shall define the injury, state findings by the court why the injury may be irreparable, and give the reasons why the order was granted without notice if notice was not given." See Fla. R. Civ. P. 1.610(a).

According to the Fourth DCA, the injunction suffered from a "fatal defect": it failed to give the reasons why the order was granted without notice. The court noted that "[t]his deficiency could have been cured if the employer articulated in its complaint or motion reasons why notice should be dispensed with....Unfortunately for the employer, neither the complaint nor the motion cured the deficiency in this case."

One lesson from the Bookall decision is clear: follow the civil procedure rules carefully. The rules are just that - rules - not guidelines or suggestions. The employer's and the court's failure to articulate why the order was granted without notice required a reversal of the injunction order under a plain reading of Rule 1.610(a).

One might surmise that there was no good reason why notice was not given to the former employee. After all, the opinion notes that the former employee was represented by counsel. How hard is it to fax, email and/or call opposing counsel before a hearing, even on an emergency motion?

But perhaps the former employee's counsel was on vacation or otherwise unavailable to receive notice of the hearing. In that case, an ex parte injunction may have been appropriate, and the employer's and the court's failure to state why the order was granted without notice a mere oversight.

However, even where an ex parte injunction is appropriate, employers and their counsel should be aware that it may be short-lived. Under Fla. R. Civ. P. 1.610(d), "[a] party against whom a temporary injunction has been granted may move to dissolve or modify it at any time. If a party moves to dissolve or modify, the motion shall be heard within 5 days after the movant applies for a hearing on the motion." Thus, if a court enters a temporary injunction on an ex parte basis, the employer's counsel should clear his calendar for the next week. The employee is entitled to a file a motion to dissolve and obtain an expedited hearing, and he may stand a good chance of getting the injunction modified or dissolved entirely once he tells his side of the story.
 

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