Thursday, October 11, 2018

The Janitor Non-Compete, This Time for Real

The janitor hypothetical is one of the most timeless aspects of non-compete cases. That is, when illustrating how broad a non-compete is, courts and lawyers alike often resort to a sometimes absurd hypothetical. It often contains some variation of "this non-compete is so broad it would restrict [insert poor sap stuck in litigation] from being a janitor." Feigned outrage and chuckles then ensue.

Only this time, no absurd hypothetical. Enter the combatants. On one side is C&W Facility Services, which provides maintenance services to commercial property owners. On the other side is UG2, a competitor. In the middle sits poor Sonia Mercado, a non-exempt "janitorial supervisor" making $18 per hour at C&W.

C&W is faced with a contract renewal to provide maintenance services at some outfit called Lonza Biologics, a life sciences company. Apparently, Lonza put the maintenance contract out to bid and lost it to UG2. Mercado worked for C&W on-site at Lonza. From her Declaration (unrebutted), she describes her job like this:

"As a supervisor, my job responsibilities differed from clearness only in that I helped to train new staff in how to clean. Otherwise, I was a cleaner. My English is better than some of the other cleaners, and I believe this is why I was made a supervisor."

She continues, again without rebuttal:

"I cleaned in the Carpet World. The Carpet World cleaners, including myself, did vacuuming, cleaning rugs, dusting, emptying trash cans/recycle bins, and periodically washing windows. We had a small room with cleaning supplies." She went so far as to attach a goddamned picture of the room with cleaning supplies."

After C&W loses the services contract to UG2, it presents Mercado with a two-year non-compete agreement. The upshot of the agreement is that Mercado, under the agreement, could not provide services at Lonza for another maintenance company. Mind you, by this time, C&W has lost the agreement and Mercado had no involvement in that process whatsoever.

The circumstances under which Mercado signed the restrictive covenant are questionable. From her affidavit, Mercado says that C&W informed Mercado and others that they would be placed at a new facility (Lindt chocolate...overrated, by the way). Apparently, C&W felt that UG2 would have trouble handling the job and told Mercado that she would be back at Lonza in no time. Weird, but plausible.

Mercado then signs the restrictive covenant along with a bonus agreement, most of which she ultimately returns. She ends up back at Lonza working for UG2, which should have surprised no one.

C&W then takes the inexplicable step of suing Mercado to enforce the agreement. The Verified Complaint is the typical sort of canned pleading we've come to hate, playing up what a total fucking disaster it would be for the company's confidential information to be lost. Mercado had no access to any such information, but the point seems to have been lost on C&W. In fact, the so-called protectable interest allegations, to me, do not pass the smell test. If believed, Mercado's responsibilities as a janitorial supervisor are on par with Lonza's head of operations.

The district court then enters an order of injunctive relief, enforcing the non-compete for four months (not two years) and ordering C&W to pay Mercado a portion of the bonus she returned to C&W. In effect, the court told C&W its non-compete was overbroad, required some modified form of "garden leave," and then struck as unreasonable the fee-shifting clause. The ruling preserved some semblance of sanity, though the court made a grave error. It should have denied the injunction outright.

The overarching problem is the court's complete lack of engagement with the protectable interest requirement. In other words, what was C&W hoping to achieve by preventing a custodian from working for another service provider after C&W already had lost the service contract? The court never says, beyond some unconvincing reference to training costs.

This is a problem in non-compete cases. Judges must be engaged with the facts to understand the rationale behind enforcing the restriction. Too often, plaintiffs get a free pass because they lodge vague generalities about threatened injury that sound just fine on paper, but fall apart in practice. It is unclear where C&W possibly could go from here. This case won't get any better. It's likely to get far worse.

A final word. It seems pretty clear to me that C&W is using Mercado as a pawn in much larger tactical battle with UG2. C&W could care less about her - that much is clear from the mere filing of the suit. Companies that use ex-employees in this way, as well as the "lawyers" representing them, do grave damage to the labor market and the use of human capital. This particular dispute sucks, and it's a total waste of time. C&W doesn't care. No one at UG2 is likely losing sleep. But I guarantee you Mercado cares.

I know people like her. I see them at night when I am working late. I make a point to get to know them and let them know they're appreciated. They work hard, for not much money, and people take them for granted. When my father was a school superintendent, he knew each custodial worker in my high school. He knew them by name. He gave them little things, an old TV comes to mind, knowing how much they'd appreciate it. That always has stuck with me.

Ultimately, it is C&W that will suffer the consequences of this inane and utterly pathetic lawsuit. It will be used as exhibit A for non-compete abuse. It ought to be used as a justification by some future client of C&W to not hire C&W at all.



Wednesday, August 22, 2018

Legislative Reform, Non-Compete Agreements, and the Contracts Clause

With increasing frequency, we see state legislatures wade into the hot topic of non-compete reform. Over the past several years, we've seen the States enact laws that govern employee non-compete arrangements in myriad ways.

Below is just a sampling:

  • Illinois enacted the Freedom to Work Act, which banned non-competes for employees below a salary threshold;
  • New Mexico and California established laws that restrict the use of choice-of-law and choice-of-forum clauses;
  • Idaho repealed a statutory rule that created a rebuttable presumption of irreparable harm for certain employees who were subject to non-compete clauses;
  • Colorado limited remedies for certain physician non-compete arrangements;
  • Hawaii banned non-competes for technology workers; and
  • Massachusetts totally revamped its entire law on non-competes at the end of July.
One inevitable feature of these legislative reforms is the prospective application of the new law. For instance, California's amendment to its Labor Code specifically provides that the bar on foreign choice-of-law/choice-of-forum clauses do not apply to any contract entered into before January 1, 2017. The new Massachusetts non-compete bill is basically the same, as it only impacts contracts signed on or after October 1, 2018.

This "prospective application only" obviously requires lawyers to evaluate potentially two different sets of non-compete law, depending on the breadth of the legislative reform. But why do have to worry about this at all? I have had several clients, for instance, who live in California but have Illinois choice-of-law and -forum clauses perplexed at why the legislative reform would just target new contracts, instead of existing ones.\

The answer lies in the U.S. Constitution's Contracts Clause (Art. I, § 10, cl. 1), which provides that no State shall pass any law impairing the obligation of contracts.

Relatively simple language has spawned an impairment test that is anything but easy to apply, however. Not all laws that affect pre-existing contracts violate the Contracts Clause. Instead, courts must look first at whether the state law has "operated a substantial impairment of a contractual relationship." To answer that question, courts consider the extent to which a law undermines a contractual bargain, interferes with a party's reasonable expectations, and prevents a party from safeguarding its rights. Assuming a party can demonstrate this substantial impairment, courts then ask whether the state law is drawn in a reasonable way to advance a significant and legitimate public purpose.

The recent rash of non-compete reform, both big and small, raises the question of just how far States could go to alter contractual rights retroactively if they so choose. For instance, Alabama enacted its Restrictive Covenants Act effective January 1, 2016, but nothing in the Act says anything about prospective application. Indeed, the language of the Act suggests it applies to everything.

Alabama actually serves as a good starting point for analysis. The new law changed some stuff, but perhaps not in a way that impaired existing non-competes in a constitutional sense. For instance, it now lists presumptive periods of reasonableness, but it does not say for instance that a three-year non-compete is void against public policy. Alabama also puts the burden on an employee to prove that a covenant will impose an undue hardship on her, a deviation from prior law that is somewhat significant. But the statute still allows for presentation of the defense (as distinguished from Florida law, which does not).

On the other side of the equation, Hawaii's law banning non-competes for technology workers would constitute the sort of substantial impairment that the Contracts Clause prohibits. So too, Massachusetts now bans non-competes unless they meet a rash of substantive and procedural requirements (including garden-leave pay). No doubt, that law could not be given retroactive application.

But we can imagine tougher calls. Laws that address choice-of-law and choice-of-forum clauses do not necessarily impact contractual rights, but could place a burden on obtaining a contractual remedy. A law that allocates burdens of proof similarly would not constitute a substantial impairment. By the same token, a law that shortened the statute of limitations for enforcement or even for asserting damages claims still would preserve the underlying right. But those that establish a maximum non-compete period, categorically, likely would be unconstitutional because they would invalidate a whole class of agreements.

Prospective application of the law is sort of a bedrock principle of statutory construction. The Contracts Clause was supposed to harden that into a rigid mandate. Like much of constitutional law, the contours of the clause are now a bit fuzzy. Non-compete law, in most states, suffers from the same problem.

Wednesday, August 1, 2018

Ninth Circuit Expands Reach of Section 16600 in Golden II

Three years ago, I wrote a lengthy blog post on the case of Golden v. California Emergency Physicians, a Ninth Circuit case that I felt was a bit of an oddity. It addressed California's well-known statute, Section 16600 of the Business and Professions Code, which generally bars non-compete agreements.

The problem in Golden I was that the provisions at issue weren't really non-compete covenants at all, and so the application of Section 16600 was a little confusing. Though I punt to my 2015 post for a factual run-down of Golden I, summarized briefly the case involved this scenario. Am emergency physician had an employment dispute with a staffing company. As part of a settlement, the company required him to agree not to work at any facility where the company had a staffing contract. It further provided that if the company later acquired a staffing contract at another facility, it could and would terminate the physician.

So how does this implicate Section 16600? Golden I didn't necessarily address that question and remanded for fact-finding about how this covenant impacted Dr. Golden. I wrote three years ago that I didn't understand the fact-finding rationale at all. I still don't. But the Ninth Circuit now has addressed the application of Section 16600 and what the district court did on remand.

To start with, the Ninth Circuit says Section 16600 covers all contractual provisions that impose "a restraint of a substantial character." That means, the provision cannot "significantly or materially" impede a person's lawful profession, trade, or business. According to the California decisions summarized in Golden II, restraints that meet this definition include:

  1. Restrictions on working for a competitor;
  2. Restrictions on soliciting customers;
  3. Clauses that impose a monetary penalty for engaging in competitive conduct.
What won't meet the definition? A limited provision allowing for a company to recoup training program costs when an employee leaves.

The no-employment clauses at issue in Golden I and Golden II don't fit neatly into any of these boxes. Instead, they make clear that Dr. Golden won't work where CEP is contracted to provide services, now or in the future. The Ninth Circuit concluded that a clause pertaining only to Dr. Golden's employment at CEP wasn't problematic and was so limited that it didn't meet the "significantly or materially" impeding test it created.

The other provisions in the draft settlement agreement, however, were void under Section 16600. Those prohibited his current and future employment at CEP-contracted facilities. The court's analysis suggested that it was focused more on results and less on methodology. For instance, it emphasized CEP's expansive reach into California medical facilities. But it also downplayed Dr. Golden's admissions concerning his medical specialties, which suggested that the restraint in practice might not be that onerous.

To be sure, it's hard to make much of this case. I suspect that it's so factually goofy that any other case that deals with obliquely limited clauses having some peripheral impact on employment will easily be able to navigate around the court's rationale. About all the case may do for practitioners is reinforce the reach of Section 16600 and solidify that true covenants against competition are almost certain to fail, even if those covenants are very specific and narrow. 

Monday, July 16, 2018

Back from Hiatus (Part II): State Law Updates

Last week, I discussed three examples of Illinois courts analyzing similar non-compete issues in very different ways, a post that amply illustrates how difficult it is for lawyers to predict outcomes for clients. It also reminded me of a famous Abraham Lincoln quote: "Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser - in fees, expenses, and waste of time. As a peacemaker the lawyer has a superior opportunity of being a good man. There will still be business enough."

But to be sure, many people ignore Lincoln and litigate anyway - often with profoundly silly reasons motivating them.

So because we have litigation, we have legal developments and I therefore have a blog that continues to chug along. And you continue to read, meaning I must update you with some new rulings over the past several months.

California:

The infamous, long-running case involving ex-Korn/Ferry International executive David Nosal may have reached its end, with the Supreme Court declining a cert petition and the District Court now having finally decided on the scope of Nosal's restitution to KFI. United States v. Nosal is the most notable case under the Computer Fraud and Abuse Act, which generally criminalizes unauthorized access to protected computers. Nosal had its roots as a garden-variety trade secret case, but it was a criminal prosecution and tested the CFAA's limits.

Ultimately, Nosal secured some victories along the way. But still he will serve a year in prison and pay restitution to KFI. As to the scope of restitution, KFI sought about $1,000,000 in legal fees incurred to assist the Department of Justice investigation. After the Ninth Circuit weighed in KFI, will have to settle for less: $164,000. Still a heavy price to pay for Nosal, who probably deserved a civil suit but definitely does not deserve to spend a year in prison.

Connecticut:

The case of Datto, Inc. v. Falk discussed whether a forfeiture-for-competition clause was reasonable and enforceable. A minority of jurisdictions apply the same, or at least a similar, non-compete standard to these clauses, which (as one might expect) enable an employer to clawback certain benefits if an employee leaves to compete.

Forfeiture clauses range in scope, frequently calling for the forfeiture of unvested stock options but sometimes also calling for the employee to pay back income earned from the exercise of a grant within a certain period before the end of employment. Datto involved a dispute as to whether the cancellation of certain stock options were void because Falk (an ex-Chief Revenue Officer) accepted a position with a competitor.

The court was bound to apply Delaware law on the question of reasonableness, and that law in my view is somewhat confusing. Precedent, in effect, equated true non-competes with forfeiture clauses, finding they accomplished the same results. That's not necessarily true. A forfeiture clause may incent future performance, while a non-compete unquestionably tries to protect a separate economic interest beyond employee loyalty.

Datto illustrates the confusion in its analysis, though the district court judge admittedly was bound by controlling law. He noted, for instance, that the forfeiture clause was reasonable because "[t]his is not a case of an employee who is barred altogether from working for the competition anywhere in the world."

In my opinion, courts ought to use varying levels of scrutiny when examining restraints, similar to the current First Amendment jurisprudence. Specifically, I think that for employment-based non-competes, courts should use the strict scrutiny test (which by and large, they say they do), and for sale-of-business non-competes, they should examine them under a rational basis inquiry.

For mid-tier restrictions, like franchise non-competes and forfeiture clauses like that in Datto, I would use intermediate scrutiny. That test would require courts to determine whether the restrictive means used (e.g., the scope of the event triggering the forfeiture) are substantially related to the interest the restraint is designed to protect. This test, though it may not be perfect, would at least provide courts with a flexible, coherent way to analyze less problematic covenants that lack adhesive properties.

New York:

The New York Court of Appeals answered a significant question of damages related to trade secrets claims in the case of E.J. Brooks v. Cambridge Security Seals. The Court held that a plaintiff's damages cannot be measured by the costs the defendant avoided due to unlawful activity.

If a principal goal of trade secret law is to encourage innovation, then a cost-avoidance theory of damages seems to be a logical means to further that goal. Stated another way, if the misappropriation shortens a product-development cycle and enables X to bring a product to market more efficiently, then X is unjustly enriched by not incurring research-and-development expenses.

In the Court's view, cost-avoidance is inconsistent with a compensatory theory of damages. And under New York law, only the plaintiff's losses count. Cost-avoidance theory resembles unjust enrichment, but because New York has not adopted some variation of the Uniform Trade Secrets Act -- which specifically allows for unjust enrichment-type damages -- the theory is not viable.

The holding, predictably, spurred a long and persuasive dissent. It summarized the pragmatism and utility of cost-avoidance damages, noting that they are "generally much simpler than, and less subject to challenge than, lost-profit damages, which makes them an attractive alternative for plaintiffs who are willing to forego a potentially larger recovery in favor of a smaller, more certain one." (The assumption of a "smaller" recovery reasonably invokes the principle that a developer does not spend X to recover X. Normally, a rational economic actor would spend X to recover some multiple of X.)

A link to E.J. Brooks is available here. I emphasize again that I view this as a distinctly New York rule of law, and not one likely to be adopted across jurisdictions that have embraced a more flexible approach to damages.

South Carolina:

In Hartsock v. Goodyear Dunlop Tires North America, Ltd., the Supreme Court of South Carolina recognized an evidentiary privilege for trade secrets, but held the privilege was "qualified." That means it is different than, say, an attorney-client privilege or one barring self-incrimination. By "qualified," the Court held that a party seeking the disclosure of trade-secret material must show a "substantial need" for it that is relevant to the specific issues involved in the litigation. If a proponent makes that showing, the trade-secret holder still can gain the benefit of a protective order over the compelled disclosure.

The decision is, to be certain, a weird one. This is not really a privilege rule, but rather a rule of discovery that calls upon courts to make a balancing decision. If anything, this rule will create confusion where none should exist.

Texas:

Everything is bigger in Texas, including damages and attorneys' fee judgments. In the long-running case of Quantlab Technologies v. Godlevsky, a federal district court awarded the plaintiff its attorneys' fees in a trade secrets suit for what the court called defense behavior that was "so acrimonious, vexatious, and indefensible that...[it] exceeds any that this judge has seen in his nineteen years on the bench." The case involved stolen technology in the high-frequency trading industry, and the court at various times had sanctioned the defendants for destroying or failing to preserve evidence.

The price for that behavior was a fee judgment of $3,220,205 against each individual defendant.

The plaintiff didn't fare so well in GE Betz v. Moffitt-Johnston. There, the Fifth Circuit held that under Texas law, a company failed prove than ex-employee breached a customer non-solicitation covenant. The employee succeeded despite "highly suspicious" computer activity, including the mass download of data to an external device. But the company couldn't prove that any contacts with customers amounted to solicitation of business, rendering the contract claim unsupportable.

The Fifth Circuit did, however, vacate a large fee award for the ex-employee. Texas law allows an employee sued on a non-compete violation to obtain fees if the employer knows the agreement is overbroad and sues to enforce the agreement to an extent greater than necessary to protect the employer's interests. That's a hard standard to meet, absent some damaging admission or a truly terrible agreement. And the employee here didn't do so. 

Tuesday, July 10, 2018

Back from Hiatus (Part I): Illinois Case Law Update

I've been uncharacteristically quiet about the subject of restrictive covenants, consumed (somewhat mercifully) by other cases in other areas of the law.

But the flow of non-compete decisions does not stop for those who venture astray, and so it appears I have some catchin' up to do.

I'll start with my home State (for now) of Illinois, where we have high taxes and a high output of non-compete cases. The federal district courts in Illinois churn out a lot of interesting non-compete cases. Those decisions, too, tend to be influential. For instance, most Illinois courts have decided to break from appellate case law on the employee at-will consideration rule that has generated some buzz (and some appellate work for yours truly).

Non-Competition Covenants and Motions to Dismiss

One example of this independence from the federal bench is the case of Medix Staffing Solutions Inc. v. Dumrauf. Judge Sara Ellis granted a motion to dismiss a non-compete claim that Medix brought again a former Director of Business Operations. The decision was notable - and fairly bold - since Illinois courts have suggested that enforceability and overbreadth questions generally are unsuitable for motions to dismiss. True, you see these teed up more often at summary judgment or even through preliminary injunction rulings. But infrequently, the propriety of a motion to dismiss in the context of non-competes appears in the case law.

The court in Dumrauf found that the employer's non-compete was extreme and facially unenforceable when it barred the employee from working within 50 miles of any Medix office for any business that competed with Medix or that offered a product or service in competition with Medix. Of central concern to the court was the non-compete's prohibition on Dumrauf's work in any capacity for a competing enterprise. The case demonstrates the importance of drafting non-competition agreements with a reasonable scope limitation that is roughly commensurate with the type of job the employee performed at the company (or perhaps one that, if not comparable, would threaten the same type of legitimate business interest).

Judge Ellis lastly declined to modify, or blue-pencil, the non-compete, as is typical of most (but not all) Illinois courts. The deciding factor is usually how close the employer came to being reasonable. But here, the non-compete failed terribly so Judge Ellis said no to rewriting it.

Non-Solicitation Covenants and Motions for Summary Judgment

The employer didn't fare a whole lot better in Call One, Inc. v. Anzine, but the case does show that blue-penciling is not always a pipe dream.

The non-solicitation covenant in Anzine had all the hallmarks of a crapshow. It was (a) not limited to the employee's particular accounts, and (b) included something called "prospective" customers, which unhelpfully covered accounts the company solicited or "had plans to solicit."

Judge Matthew Kennelly found the covenant unenforceable, noting along the way that Illinois precedents in the non-compete field are of "less than usual value." This could mean either that the cases are too fact-specific to be helpful in a subsequent case, or that Illinois state appellate courts are not helpful as a general proposition. Or both.

But Judge Kennelly looked to a reformation clause in the underlying agreement, which contemplated that a court could make an invalid clause valid. Many changes skim over that clause for reasons that are obvious. As a result, he fixed some (but in my opinion not all) of the problems in the non-solicitation clause, such that Anzine was still barred from soliciting company customers (and active prospects as of the date she was terminated) and customers for which she had sales responsibility.

One other observation on this case. Anzine sent a couple of work spreadsheets to her personal email account, but Judge Kennelly found that no jury could find that this rose to the level of "misappropriation" of a trade secret. The self-emailing phenomenon is not new, but in and of itself it is no panacea for a trade secrets claim. Here, Anzine appeared to have plausible reasons for what she did, and the e-mailing didn't occur under suspicious circumstances (like, for instance, a forwarding of documents after notice and before departure). The court's discussion of this is worth a read for practitioners who've dealt with this set of facts before.

Non-Competition Covenants, Non-Solicitation Covenants, and Motions to Dismiss (Redux)

And on the opposite end of the spectrum (somewhat), we have American Transport Group v. Power. There, the court denied the defendant's motion to dismiss a restrictive covenants claim even when problems with those covenants were clearly apparent. The theme running through this case was nearly the opposite of Dumrauf, as Judge Virginia Kendall repeatedly noted that the employer must have the opportunity to develop the record on the question of reasonableness.

The non-compete precluded a freight broker's salesman from working for any competitor for three months, regardless of geographic location. I have a lot to say about the freight brokerage business, but that's beyond the scope of this. It is true, however, that geography seems to matter very little for sales people who work the phones contacting shippers (that is, customers) and arranging carriers. So I wasn't terribly bothered by the three-month clause or the lack of a geographical limit, as much as I am bothered by the use of non-competes in this industry entirely.

The non-solicitation clause though was a problem, and I think Judge Kendall should have found it unenforceable. It barred Power, for one year, from soliciting or diverting any customer or carrier of his employer. The court provided little analysis here, but I am uncertain how ATG ever could restrict the employee's use of a carrier (in effect, a supplier) when freight brokers all deal with the same carriers. Seems gratuitous.

***

So what lessons did we learn today? Judges reach different holdings on similar facts. Companies still have a lot to learn when drafting agreements. Lawyers will keep getting business because this stuff ain't going away. And your author can't take a month off again, because the cases keep piling up.

Tuesday, May 29, 2018

Justice Thomas and Questions About Severability

A lot can be said about Justice Clarence Thomas. Some of it bad, but much of it quite good. For those who assert he is one of the worst Supreme Court justices of all time, take that for what it is good. Toxic political commentary and sheer uninformed drivel.

The best of Justice Thomas comes out in the now-familiar lone-wolf opinion, whether concurring or dissenting. His unique views span a wide range of the legal landscape, from the Eighth Amendment to the collateral-order doctrine to qualified immunity. Whether you agree with those views or not, they spark discussion and offer an idiosyncratic viewpoint that often makes a great deal of sense.

He expressed another one of these views again last week in Murphy v. NCCA on the issue of severability, which comes up in the Court's constitutional jurisprudence from time to time.

Put simply, the severability doctrine arises when the Court strikes at least part of a statute as unconstitutional. The question then becomes whether the Court should "sever and excise" the offending parts while saving the remainder.

Justice Thomas would like to reexamine that doctrine and has doubts that it is an appropriate part of constitutional analysis for two reasons: (1) it does not follow statutory interpretation principles, because by definition it requires courts to determine what a legislature would have done had the unconstitutional parts of the statute never been enacted at all; and (2) it requires courts to render an advisory opinion on issues the parties aren't fighting over.

***

You may be asking: what the hell does this have to do with non-compete agreements, which is after all sort of the point of this blog.

The connection, however loose or attenuated, is that non-compete law has its own severability principle and it's not all that dissimilar from what Justice Thomas discussed.

In Illinois, the general rule on contract severability is this: a court may enforce the valid parts of an agreement "in favor of a party who did not engage in serious misconduct if the performance as to which the agreement is unenforceable is not an essential part of the agreed exchange." That framework generally parrots the Restatement (Second) of Contracts, Section 184. And to further clarify the rule, whether an unenforceable term is an "essential part" of the contract depends on the relative importance of the term in light of the entire agreement between the parties.

The black-letter formulation of this rule thus invokes some of the concerns Justice Thomas outlined in his Murphy concurrence. Assume the following very realistic hypothetical scenario:


  • Employee signs agreement containing broad non-compete clause and narrow non-solicitation of customers clause.
  • Employer focuses its case on customer solicitation, but appears to agree that employee can work for competitor despite the nominal presence of the non-compete in the contract.
  • Employer is generally successful in showing actual solicitation and that the circumstances render the non-solicitation enforceable.
  • Employee proves that the facts make the non-compete gratuitously overbroad.
In such a circumstance, what do we make of the severability rule? It is clear in my hypothetical that part of the agreement is unenforceable, but does that doom the non-solicitation covenant? Under Illinois law, the employee may have a winning argument if circumstances show that the non-compete was integral to the overall contract formation. For instance, she could show the following:

  • Employer insisted that it be included, despite the employee's objections to the broader non-compete.
  • The contract recitals suggest all provisions of the agreement work in unison, are all needed to protect confidential information, or are each integral to the contract.
  • The Employer threatened to enforce the non-compete in an early cease-and-desist letter.
At least if we apply Justice Thomas' reasoning, the severability principle may be a big distraction if the employer isn't attempting to enforce it in court. In other words, the defendant would be addressing a counterfactual: yes, your Honor, but if Employer did try to enforce it, it would lose. Depending on the facts, though, Justice Thomas' stated concerns over an advisory opinion may be overstated. 

The prevailing law on severability then diverges a bit from Justice Thomas' analysis and focuses less on whether the employer would have entered into the agreement with the employee if it had known the non-compete wouldn't have been enforceable and instead more on whether the offending non-compete covenant was an essential part of contract formation. On this score, the analysis does not seem to raise the judicial power concerns Justice Thomas discusses in Murphy and rather focuses on the circumstances at signing. 

The arguments for and against severability are not easy to resolve. Justice Thomas' opinion, though, clarifies in a very straightforward way the tension surrounding them.

Monday, April 9, 2018

Sinclair Broadcast and Its (Alleged) Non-Compete Agreement

Until about a week ago, few of us had ever heard of Sinclair Broadcast Group. That is, until this video went viral.

The video shows local news anchors in a bizarre montage reading precisely the same script about news outlets pushing "irresponsible" stories to push fake news without appropriate fact-checking. Predictably, this generated a response among more prominent news outlets, some of whom took their local broadcast colleagues to task for not standing up to a corporate mandate.

Earlier this week, Bloomberg News reported that there may be a reason why those local anchors did not stand up and quit their jobs. The cost of doing so appears to be fairly steep. Bloomberg News reported that Sinclair employees sign contracts with 6-month non-compete clauses and liquidated damages clauses that call for repayment of up to 40 percent of annual compensation for quitting outside of a notice period.

The Bloomberg News article cites one example where Sinclair attempted to enforce a liquidated damages clause against a Florida news anchor who quit in disgust over some Sinclair tactics. The amount sought was quite low, however. Still, for some seasoned on-air talent, a repayment clause could be enough to deter an employee from quitting on principle.

The non-compete issue is an interesting one as well, though. Many states, including Illinois, prohibit non-compete arrangements in the broadcast industry. Sinclair is trying to buy the Tribune Media group, which means it would own Chicago's revered WGN.

Its apparent use of non-competes would run into a problem with WGN's on-air talent under the Broadcast Industry Free Market Act. That statute prohibits the use of non-compete agreements for television, radio, and cable station talent. It does not apply to sales or management employees. And if Sinclair were to violate the Act, it would be liable for both damages and attorneys' fees.

A number of other states, including New York and Massachusetts, also bar broadcast industry non-competes. California does so too by virtue of its general law banning restrictive covenants in employment.

Tuesday, April 3, 2018

Trump and the Terrible, Horrible, No Good, Very Bad NDA

Leaks from the Oval Office are nothing new.

But the media attention on leaks from this Oval Office has generated considerable buzz for a couple of reasons. First, President Donald Trump is, to put it mildly, unconventional and just plain odd. So anything leaked is grist for the media mill and sure to generate giggles. Second, both Trump himself and his minions flip out at any perceived slight that ends up in the media, no matter how peripheral it is to a substantive policy issue. This is kind of like the Streisand Effect. If they just  would move on to something that matters, few people would talk about the leak.

Normally, the remedy to dispense with a leaker in the executive branch is to dismiss the leaker. No surprise there. It happens. A lot. And let's be clear, leaking isn't a good thing. You don't have to like Trump to bash leaks. We can, and should agree, that they're bad regardless of political affiliation.

That, though, doesn't mean that we can just sanction whatever consequence comes of the leaks. And it certainly doesn't mean we can endorse punishment of people who've left and dished on the doings in the Oval Office.

On that score, Trump is doing something unprecedented. We know he is the first non-politician/non-military officer to run the Executive Branch. And we know that he loves confidentiality agreements from his time working in the private sector and just plain "working" in private.

So we really shouldn't be all that surprised that Trump has deployed a truly private-sector tool, the nondisclosure agreement (NDA), within the White House to stem leaks, no matter how trivial or silly they are in the grand scheme of things.

***

I commented a week ago or so on LinkedIn that Trump's NDA for staffers was obviously unenforceable. I stand by that wholeheartedly. The Trump trolls were out, flooding my comments and email with nonsensical, grammatically challenged screed on topics that have no relationship whatsoever to the point I was trying to make. I guess that, too, was predictable.

A few other would-be apologists, probably too lazy to do their own work, demanded that I provide points and authorities for my conclusions. Apparently, common sense and that thing called the First Amendment were insufficient pillars for my post. Though I hate to indulge laziness or plain ignorance, I think the point is worth discussing in more depth.

***

Let's revisit the basics of what apparently has occurred with the White House staff, much of which comes from an article in The Washington Post, a famous Trump target.

The Post obtained a preliminary draft of the NDA, which in all likelihood differs somewhat from the final version the White House demanded staffers to sign. What do we know about it? A few things:

  1. The scope of the NDA is not limited to "classified" information (more on this below). Instead, it captures "confidential information" defined as "nonpublic information I learn of or gain access to in the course of my official duties in the service of the United States Government on White House staff,” including “communications...with members of the press" and "with employees of federal, state, and local governments."
  2. The preliminary liquidated damages figure for a breach of the NDA was $10,000,000 per violation.
  3. An enforcement clause, which appears designed to create standing, states: “I understand that the United States Government or, upon completion of the term(s) of Mr. Donald J. Trump, an authorized representative of Mr. Trump, may seek any remedy available to enforce this Agreement including, but not limited to, application for a court order prohibiting disclosure of information in breach of this Agreement.”
  4. The non-disclosure restriction appears to last in perpetuity.
***

I want to leave aside the problems with each of the four numbered points above just for a second. We need to step back and understand an overriding principle at work. People who work for the government serve the public. The information they obtain, with some limited exceptions, belongs to the public. And of course, they have First Amendment rights that those employees in the private sector do not enjoy.

Courts haven't really confronted public-sector employee NDAs before, but they have developed some principles that apply to the White House's agreement. Two are crucial to understand the legal question Trump's newest NDA raises. First, restrictions on the speech of governmental employees must protect a substantial government interest unrelated to the suppression of free speech. And second, the restriction must be narrowly drawn to restrict no more speech than is necessary to protect the asserted substantial government interest.

***

I want to return to a preliminary point I made before.

Leaks are bad.

With Trump, I kind of like them in the way I like a beer when I get home. But speaking objectively for a second, we can assume the government can dismiss an employee who discloses information, either to confidential sources or brazenly with his or her name attached to the disclosure.

This is part of a balance that courts must strike in evaluating speech and restrictions on public-sector employees. We know from case law that not all regulation of speech is the same. The government can regulate what its employees say far beyond what it could regulate of the general public. No debate there.

This solves the question of whether Trump could fire, say, Kellyanne Conway, for spilling to a source at the Post. (Hypothetically, of course...). She would have no Section 1983 claim for violation of her First Amendment rights.

***

The problem with Trump's NDA, though, is well beyond that non-controversial point about existing leakers. Trump is trying to coerce perpetual silence from current and former staffers through agreements that do run afoul of the First Amendment.

In some states, non-disclosure agreements must contain a reasonable time limit and also be reasonable in scope. A perpetual NDA in these jurisdictions is likely void on its face.

***

Now let's look at the scope of information protected by the NDA. It captures nonpublic governmental information. There is no set of limiting factors that illustrate what this may be. But it goes well beyond classified or even confidential information.

Some case authority illustrates why this scope is patently unreasonable and an infringement on the First Amendment.

The most apt line of cases involves CIA pre-publication clearance contracts. Put simply, these are agreements that CIA agents sign and that allow the CIA to censor or screen classified material before an agent seeks to publish material about CIA activities in articles or books. Regulations define "classified" material  as information about military plans, foreign governments, or the (now familiar) intelligence "sources and methods."

Pre-publication agreements, and the government's efforts to censor classified material, have been upheld as a reasonable means to protect a substantial governmental interest. But the key to upholding these agreements is the presence of a particular, ascertainable standard that limits governmental discretion to censor in the first instance.

If the standards were too flimsy, then the censorship scheme would fall apart and violate the First Amendment. 

***

When viewing the pre-publication clearance agreement line of cases against the current NDA, it's pretty obvious Trump's White House has gone way too far. The NDA, it appears, prohibits the disclosure of confidential information, not classified materials, along the lines of what a business may try to enforce in the private sector. No reasonable lawyer could claim that "nonpublic information" learned in a governmental job is akin to classified materials like foreign intelligence sources.

The NDA fails to satisfy the "narrowly drawn" test, for it captures random chatter in the White House among staffers. It would prohibit the disclosure of an ex-staffer's impressions of Trump's response to a phone call with a foreign dignitary. And it would also bar a former employee from telling the media that Trump ignored a warning not to say something on a phone call with Vladimir Putin. Even if all of this is "nonpublic" information, it is the ultimately information the public has a right to and should be able to see.

No substantial governmental interest would support such a sweeping NDA.

***

The NDA of course suffers other problems, too. The liquidated damages clause is an unenforceable penalty designed to coerce compliance with the terms rather than predict likely loss. Indeed, it's not clear what financial harm could inure to the federal government if one ex-staffer published a book outlining the dysfunction within the Cabinet.

Any party enforcing a liquidated damages clause must show that the selected amount was reasonable at the time of contracting and contains some relation to damages likely to result. The enforcing party then also must show actual damages would be uncertain and difficult to prove. In some cases, NDA liquidated damages clauses have been upheld as reasonable. From what I've seen, the amount selected still has some evidentiary basis that enables a court to find it was a sound predictor of harm.

Of course, I have not found any case that upholds a liquidated damages amount approaching what Trump seeks in the NDA. But aside from the fact that it's unprecedented, there's a much bigger question at play. Who exactly is damaged? Trump is not a private citizen anymore. He holds an office as part of the public trust. If a staffer revealed damaging information about Trump's conduct in the White House, then this damages Trump only in one sense: the way the public perceives him. And it's not in a sense that is remediable the way Trump thinks.

Put another way, if the public learns accurate information that affects their perception of the President, then the disclosure actually confers a benefit on the federal government. It damages nothing about the institution itself.

Note again the distinction with the CIA pre-publication clearance agreement cases. Disclosure of nuclear strategies or intelligence sources can objectively damage the country regardless of who is in power. But disclosure of the President's behavior in the White House does not suggest the same kind of damage. 

***

This gets to a final problem. Who exactly would enforce this NDA? The draft seems to give either the government or Trump the option. But again, this makes little sense. Trump personally does not have standing to sue an ex-employee for disclosing "nonpublic" information about his tenure in the White House. If a staffer leaks classified material, then that is a crime. But the idea of an enforcement action by Trump against someone he perceives as a disloyal leaker is not only unprecedented, but it completely ignores his status as a public servant.

***

My advice to ex-Administration employees remains the same. Speak freely as long as you don't dish classified information. And by all means, do not worry about what you signed. 

Monday, April 2, 2018

The Supreme Court of Illinois Is Not Interested in the Non-Compete Consideration Rule

For the third time, the Supreme Court of Illinois has declined to hear a petition for leave to appeal that confronts the question of continued employment as consideration for a non-compete agreement.

For at least the past few years, practitioners have operated under the assumption, perhaps wrongly, that Illinois courts established a bright-line two-year rule under which continued employment may serve as consideration for an employee restrictive covenant agreement. This is the so-called Fifield rule, stemming from a 2013 First District Appellate Court case that appeared to set forth a bright line. The Supreme Court declined to hear an appeal in Fifield, so the lack of interest in follow-on cases is not surprising.

This past week, the Court declined a petition for leave to appeal in the case of Automated Industrial Machinery, Inc. v. Christofilis, 2017 IL App (2d) 160301-U. This was my case, and I represented Tom Christofilis at trial and on appeal. Early on in the litigation, the circuit court had granted our motion to dismiss a breach of contract claim given that Christofilis' former employer, AIM, had required him to sign an afterthought non-compete that lasted only for 5 months before he resigned. The court noted that it was not relying at all on Fifield, rightly stating that not a single case in Illinois endorsed consideration of just 5 months' continued employment.

Illinois' consideration rule has come under criticism from some, who apparently are dissatisfied that courts have tread a middle ground between the absolutist positions. Those positions state either that continued employment is not valid contract consideration for a non-compete, or that it is. Very few states require some sort of meaningful period of employment, and Illinois' "substantial period of time" rule is perhaps the most well-developed line of cases that forges a pragmatic path.

Though I say the cases are well-developed, they could certainly be clearer. I think Fifield is misunderstood because sometimes easy cases make for bad law. In retrospect, the two-year pronouncement was both unnecessary to the case's disposition and simply a product of loose opinion writing. I hate to say that and don't mean to indict the appellate court, but it's simply true.

In the bigger picture, the notion of continued employment as adequate consideration at all for a restraint of trade is just weird. It is ephemeral and in many cases illusory. It fails to account for the adhesive nature of the arrangement and the fact that the employee receives nothing at all comparable to what he or she is giving up. As lawyers, we're stuck with this silly, non-sensical paradigm of analyzing contract consideration that makes very little sense to clients and seems directly at odds with the disfavored nature of non-competes in the first instance.

Legislating this issue will prove difficult. But there's another way. If a court ever took a fresh look (and based on Fifield and Christofilis, I don't see that as imminent), it may want to ask just why continued employment is a permissible form of consideration in the first instance. Or how it comports with the adequacy rule that requires some decent fit between the restraint and the benefit conferred on the party restrained. Inertia is not often a good reason for justifying a legal rule, even if lawyers and judges assume that it is.

Tuesday, March 6, 2018

"Solicit," in a Non-Solicit, May Not Mean First to Solicit

Clear?

Didn't think so.

Much ink has been spilled over the term "solicit," since it's obviously a flash-point in non-compete litigation. That is, not all non-competes are true non-competes. Some restrict customer, or employee, solicitation. This is especially true for salespersons, who often have more limited restrictive covenant agreements concerned only with client contact.

For 20 years, I've dealt with clients who come to me with some variation of this question: What if the customer calls me first?

In other words, is that a "solicitation" that violates a restrictive covenant?

(Short digression.

The first layer of analysis is to look at the contract itself. Many non-solicitation covenants actually are broader, despite their customer-centric focus. They may prohibit an ex-employee from working with or accepting business from a group of clients. If that's the case, then an employee who wants to work with former customers needs to shift her focus away from the breach question to either contract formation or reasonableness.

Now back to the main point of this post.)

The meaning of "solicit" is pretty fact-specific. If a client contacts the employee about a project or ongoing work, then the employee likely hasn't solicited anything and may be free to work with the client on competitive business. But what if the client's initial contact is preliminary, vague, and just a precursor to eventual work? What if the discussions, in other words, contemplate that something else will happen?

There are a fair number of cases that give some color to the type of conduct that qualifies as "solicitation." But I haven't seen one quite like Quality Transportation Services, Inc. v. Mark Thompson Trucking, Inc., 2017 IL App (3d) 160761, which effectively answers my rhetorical questions.

The court there found that the client's initial contact was not dispositive of the solicitation question, and that the court needed to evaluate other circumstances. In particular, the factual question concerned the "large gaps of time that followed [the client's] initial phone call." Since the restrained party--it was a corporation, not an employee--appears to have made "multiple and arguably separate contacts" with the client, the "solicitation" question was not clear-cut. The case is definitely worth a read for anyone who wants to deconstruct the meaning of solicitation and get a sense of how courts look at customer contact.

A copy of the opinion is available here.

So what to draw from this. Employees bound by a true non-solicitation covenant, and who claim they didn't initiate client contact, need to keep detailed records of text messages, e-mails, and phone calls received. Those also should describe the nature of the conversation and whether the contact was preliminary or concrete enough to protect further communications as incidental follow-ups, and not renewed efforts to win business.

Remember: when an employer has a non-solicitation covenant, it has no real means of assessing who called whom. These clauses are ripe for litigation because the movement of business itself will trigger a reasonable assumption that the employee made first contact, not the client. But that isn't always the case. Proving that, however, is often really, really hard.