Monday, March 30, 2015

What's Driving Wisconsin Senate Bill 69?

Wisconsin long has been a red-flag state for employers. For many years, attorneys have struggled with how to enforce non-compete agreements against Wisconsin employees. This past year, the Supreme Court of Wisconsin has considered whether continued employment constitutes sufficient consideration for an at-will employee's non-compete, joining a growing number of states that are reevaluating this important issue.

Wisconsin Senate Bill 69 is somewhat out of left field and comes at a time when the state's highest court is reviewing the consideration question. A summary and text of the proposed law is linked here.

The proposed law appears to draw from a number different legislative enactments and proposals to make Wisconsin far more friendly to enforcement. The law is not as long as Florida's over-lawyered statute, but it's still pretty wordy.

A couple of key, notable provisions of the law include:


  1. Continued employment would constitute sufficient consideration for a non-compete, which would resolve (at least going forward) the Runzheimer case currently pending before the Supreme Court. If this is the sole basis for consideration, the employee must receive a "rate of pay and benefits that is equal to or greater" than that which pre-dated the non-compete. Generous.
  2. A court must modify an overbroad restraint and "grant only such relief as is reasonably necessary to protect" an asserted legitimate business interest. This would shift Wisconsin from a state that will not modify covenants to one that must modify them. Major shift in policy.
  3. When assessing reasonableness, a court must consider "evidence of common practice with respect to the duration, scope, and nature of restraints in the specific industry of the person seeking enforcement" of the non-compete. Alternatively known as the "Expert Witness Full Employment Act of 2015," this should add another layer of complexity and cost to what should be a fast-paced, efficient procedure. The mandatory nature of the rule is particularly striking and without precedent.
  4. A court must presume that a non-compete of 6 months or less is reasonable, while one 2 years or longer is unreasonable. This is a sensible rule that seems to follow a popular trend.
  5. In considering whether to enforce a restrictive covenant, a court cannot consider individualized economic or other hardship that may result from enforcement "unless that person shows that exceptional personal circumstances exist." In other words, the section is meaningless.
  6. A court cannot narrowly construe a non-compete against the party who drafts it, and "shall construe a restrictive covenant in favor of providing reasonable protection to all legitimate business interests" established by the party seeking enforcement. The narrow construction rule is a perfectly sensible device that requires an employer to provide clear guidance and avoid the uncertainty associated with dense, vague language - hallmarks of non-compete disputes.
  7. Courts must enforce attorneys' fees clauses, and "may award costs and attorneys' fees to the prevailing party" in the absence of a contractual restriction. The statute does not provide any guidance here, so a court has unvarnished discretion to rule. This could help deter truly meritless suits.
The statute contains other nits, but these seven changes stood out as stark and marked departures from existing law. Senator Paul Farrow, a Republican leader in the State Senate and a small business owner, introduced the bill. 

Friday, March 6, 2015

Minnesota's Justification Rule Shield Employer Liability on Non-Compete Claims

The economics of non-competes often don't work.

Injunctive relief is expensive and sometimes yields a hollow remedy if customers start to bolt regardless. As for damages, many employees aren't collectible.

This is where the new employer comes in. If there is real customer attrition linked to a non-compete violation, the new employer becomes the target simply because the old employer perceives it as able to satisfy a damages judgment.

The theory of liability hinges on the tort of "interference" with contract rights - encouraging the non-compete breach, in other words. For companies trying to enforce the non-compete and collect damages, it's essential to consider how to prove interference.

Most states apply the tort the same way, but crucial differences can arise.

The principal difference involves "justification" - that is, a party's ability to interfere with a contract to further its own business enterprise. In that respect, one question that frequently comes up is whether counsel's advice that a non-compete is unenforceable can rise to the level of legal justification absolving the tort. If so, the new employer may not face liability even if the employee breaches the contract and must pay damages.

This was the question before the Supreme Court of Minnesota in Sysdyne Corp. v. Rousslang, decided this past Thursday.

The Court found that the justification defenses encompasses the honest reliance on advice of counsel. In Rousslang, the Court applied the defense to the fact-pattern described above: the advice that an employee's non-competition covenant was unenforceable.

The Court's opinion provides what appears to be a safe harbor for new employers. The ruling is demonstrably unsound because it extends the concept of justification beyond the honest furtherance of one's own contractual right. A new company does not have a "right" to employ a particular individual. It may want to and may feel that person would be a valuable asset. However, this interest should not provide a third-party a pathway to interference, because it then would eviscerate the tort claim entirely (even outside the non-compete context). A party always will be able to claim a business interest in something.

The advice-of-counsel defense effectively undercuts any viable damages remedy, leaving the enforcing party with potentially a hollow judgment. The Court in Rousslang did not articulate what kind of inquiry a new employer must make, defaulting only in the broadest sense to a "reasonable inquiry" standard to be applied under the facts of each case.

So what kind of facts would the new employer establish as part of the advice-of-counsel/justification defense? Here are some:
  1. Testimony concerning how the company retained counsel and the experience of counsel.
  2. Evidence that it sent counsel the agreement for review.
  3. A description of the facts the company gave counsel (such as the employee's experience, exposure to customers, training, access to confidential information).
  4. The opinion itself, whether verbally or in writing.
  5. Billing records and e-mail correspondence.
All of this puts counsel in an awkward spot, of course, as her advice may be on trial (at least to show it was reasonable, not necessarily that it was correct). Getting past that awkwardness, an attorney really has no malpractice exposure as long as she follows some basic protocols like understanding the facts, reviewing the agreement, and communicating the basis for advice to the employer.

And on the flip side, it will be awfully difficult for the old employer to prove that counsel administered advice flippantly. One key fact could undermine the advice-of-counsel defense: is the new employer asking the employee to sign a similar non-compete? Relatedly, does the company use non-competes for similarly situated employees? If so, then it's going to be awfully difficult to claim the justification defense because there's no objective honesty in the advice.

To me, this collateral inquiry into what an attorney did in terms of advising a client is no way to run a non-compete case. It adds a layer of transaction costs into what otherwise should be a fairly straightforward case about breach and the protectible interest supporting the covenant. It brings into play the specter of expert witnesses opining on whether the new employer's attorney did what a reasonable lawyer should have.

Other courts disagree with the Minnesota approach and do not allow the advice-of-counsel defense to a tort claim. The Rousslang decision is below.


Wednesday, March 4, 2015

Central District of Illinois Explains Its Disagreement With Fifield Consideration Rule

At this rate, I should have about 20 blog posts this year concerning Illinois' controversial Fifield rule.

As I have explained in numerous posts, Illinois appears to have a unique rule concerning the type of consideration needed to enforce an employee non-compete agreement. And, once again, it's critical to point out that this unique rule applies only when: (a) the employee is at-will, and (b) the sole consideration provided in exchange for the non-compete restriction is the job itself.

The Appellate Court of Illinois in two separate cases (called Fifield v. Premier Dealer Services and Prairie Rheumatology Assocs., S.C. v. Francis) appeared to establish a bright-line test for determining the adequacy of this consideration. Those cases hold that two years of continued employment is necessary. And if the employee never gets to this two-year threshold, then the contract fails for inadequate consideration. (Recall, that courts almost never examine the adequacy of consideration in traditional contract disputes, but they do when restraints of trade are involved.)

Much of the controversy concerning the rule first announced Fifield stems from three truisms:

  1. The prior case law seemed to suggest that the "continued employment" rule was limited to a fact pattern where the employee signed the agreement after starting the job, not in connection with taking the job.
  2. The two-year rule is arbitrary and sounds like something more suited to a legislative enactment.
  3. The rule does not differentiate between voluntary and involuntary terminations, in effect giving an employee a two-year option in which to void his own contract.
I wrote last year that Francis seemed to provide momentum for this consideration rule and that attorneys better not discount Fifield as an aberration. And I have written on several occasions (including a few weeks ago) that federal courts have split in their understanding of how the Supreme Court of Illinois would interpret the Fifield rule.

Those decisions all come from the Northern District of Illinois, which hears a fairly high volume of competition disputes under diversity jurisdiction. (I also have been involved in one unreported case where a court in the Northern District declined to apply Fifield, finding that the Supreme Court of Illinois would not apply the rule.)

To my knowledge, the case of Cumulus Radio Corp. v. Olson is the first reported federal case outside the Northern District of Illinois where a judge has had the opportunity to weigh in on, and apply, the Fifield consideration rule. In that case, Judge McDade from the Central District of Illinois decided not to follow Fifield and Francis and found persuasive the reasoning of some of his colleagues in the Northern District of Illinois.

Judge McDade's conclusion embraces much of my prior criticism of the rule (though, I am slightly offended he didn't cite my blog):

"...the Court does not believe that the Illinois Supreme Court would adopt the bright-line test announced in Fifield. Such a rule is overprotective of employees, and risks making post-employment restrictive covenants illusory for employers subject completely to the whimsy of the employee as to the length of his employment. A case-by-case, fact-specific determination, on the other hand, can ensure that employees and employers alike are protected from the risks inherent in basing consideration on something as potentially fleeting as at-will employment."

In this very brief italicized passage, there is a lot of grist for the mill. Judge McDade notes and criticizes the option nature of the Fifield rule, the lack of a distinction in who ends the relationship, and the problems with basing consideration on employment itself. To that end, employers still should consider using something far more tangible and substantial than employment as non-compete consideration.

Judge McDade also analyzed the first truism that I outlined above - the weak case law support that seems to have motivated Fifield. His discussion notes that the impetus for the rule was Judge Posner's oft-cited opinion in Curtis 1000, Inc. v. Suess, where he noted employers could trick employees into signing onerous covenants only to terminate them and gain the benefit of a serious restraint. The illusory nature of "employment as consideration" justifies, therefore, a serious look when the employer is the one ending the relationship. Again, this is part of the original problem I had with the intellectual foundation of Fifield - in that there wasn't one.

Although the Supreme Court of Illinois originally declined to take up Fifield, we now are at serious risk of forum shopping and (worse) the piling on of flimsy Computer Fraud and Abuse Act claims just so an employer can get into federal court. The next time a party petitions for leave to appeal on a Fifield issue, the Court must take the case.

A copy of the Cumulus Radio decision is embedded below.


Friday, February 20, 2015

Obama Administration's Cybersecurity Proposal Would Broaden CFAA

The Obama Administration has been active in addressing concerns related to cybersecurity and trade secrets theft. In 2013, the Administration rolled its strategy to mitigate trade secrets theft - the first of its kind executive-level white paper that specifically identified trade secrets protection as part of a national economic security strategy.

In January of this year, the Administration went further than I anticipated by endorsing amendments to the somewhat controversial Computer Fraud and Abuse Act. As readers of the blog know, the CFAA can be a jurisdictional hook to bring trade secrets claims into federal court. It is broader than trade secrets law in some respects (it protects unauthorized access of any information contained in a protected computer, not just trade secret information) and much narrower in others (it contains a $5,000 damage or loss requirement).

Part of the controversy surrounding the CFAA has involved statutory language that bars someone from accessing a computer in a manner that "exceeds authorized access." That language has given courts fits, with circuit courts applying different interpretations to the statutory language. The controversy crystallized in United States v. Nosal, a federal prosecution of a Korn-Ferry executive recruiter that brought to the fore the various CFAA interpretations of "exceeds authorized access." My take on Nosal and a summary of circuit court treatment of the issue is found in this post.

The Administration's proposed set of amendments to the CFAA cuts against the Nosal approach and resolves a question where there's a split of authority: whether "exceeds authorized access" includes the misuse of information even if access to it was technically permitted. Example: copying data from a work computer to a personal thumb-drive for use at a new job.

The amendment would define "exceeds authorized access" to mean "to access a computer with authorization and to use such access to obtain or alter information: (a) that the accesser is not entitled to obtain or alter; or (b) for a purpose that the accuser knows is not authorized by the computer owner." Part (b) is the Nosal amendment and would resolve the circuit split in favor of what the employer-friendly jurisdictions, like the Seventh and Eleventh Circuits, endorse.

The impact of this proposed amendment is uncertain. On the one hand, if adopted, it almost surely would mandate corporate counsel to draft a computer usage policy so that a court would have some objective indication of what the computer owner authorizes.

On the other, it criminalizes a range of activity well below trade secrets theft, since there is no requirement that the information accessed be a trade secret or even lesser-protected "confidential" information. As long as the company can establish a value in excess of $5,000, the CFAA would apply. And on that score, the CFAA contains nothing to limit how a computer owner can establish that particular information is worth $5,000.

For a comprehensive take on the Administration's proposal, see Professor Orin Kerr's January 14 article in the Washington Post.

Friday, February 13, 2015

Fifield and the Northern District: A Stormy Marriage

The much-maligned Illinois decision of Fifield v. Premier Dealer Services, Inc. got a big jolt of life when another appellate district reaffirmed its essential holding: when an at-will employee signs a non-compete, continued employment can serve as adequate consideration for the agreement only if that employment continues for at least two years.

Before the Third District appellate court spoke in Prairie Rheumatology Assocs., S.C. v. Francis, there was a pretty legitimate debate brewing about whether Fifield was a one-off outlier that attorneys could take the chance of discounting. Francis gave Fifield credibility, as it is an awfully tall order for attorneys to criticize two separate appellate court rulings from different districts and argue Fifield did not represent the law of the state.

The Northern District of Illinois, though, apparently does not feel Francis did much to establish Illinois law on the adequacy of consideration for restrictive covenants.

Another federal court has declined to follow the Fifield-Francis two-year rule. Judge Shah's opinion in Bankers Life & Cas. Co. v. Miller, 2015 U.S. Dist. LEXIS 14337 (N.D. Ill. Feb. 6, 2015), found that the "the Illinois Supreme Court would ...reject a rigid approach to determining whether a restrictive covenant was supported by adequate consideration; it would not adopt a bright-line rule requiring continued employment for at least two years in all cases."

The reasoning for the court's analysis, in which it barely even cited Fifield, does not really mention that the Fifield-Francis rule applies in a limited factual circumstance: when the only consideration for an at-will employee's non-compete is continued employment itself. If the employee received a signing bonus, a contractual severance right, or stock options, then Fifield-Francis does not apply.

But in a great many cases - probably a majority - the rule will apply, because employers don't want to pay employees more than they have to, either in bonus, incentives, or equity. I am a little dubious of the proposition that "access to confidential information" or "training" qualifies as consideration, because employers probably will have a hard time showing they wouldn't have provided the employee these aspects of employment even without the non-compete. Further, it's somewhat illusory and intangible, hard to articulate really.

Judge Shah's opinion doesn't really address what else the employer may have offered the employees in Bankers Life, and perhaps the company threw in enough allegations to move beyond Fifield-Francis. But his opinion is the first to rely on the overall "totality of the circumstances" test that Illinois courts use to analyze a restrictive covenant's reasonableness. That rule does not, by its plain terms, implicate consideration at all.

Judge Shah appears to have looked at the logic underlying that test to conclude that courts would take a more holistic approach at assessing what consideration is adequate to support a restrictive covenant, depending on the employee and probably the terms of the covenant itself.

Or he may have read my dissenting opinion in Fifield and been persuaded.

Monday, February 9, 2015

Legislative Update: Washington Lawmaker Seeks to Ban Non-Competes

I missed my Friday post, meaning I only made it four weeks into the year before I abandoned my New Year's resolution to write and publish every Friday.

However, I took my daughter to Disney's "Frozen on Ice" on Thursday and needed a day to recover mentally. Although Frozen has officially taken over my life, it was worth it. The joy on that kid's face for two hours straight is something I won't forget. Nor will I forget the $12 icee in the Anna/Elsa tribute mug that she coaxed into me buying her. (See picture to the right. Dad drank most of it, thankfully.)

***

I wrote a few weeks back that we're seeing new legislation in Washington state on medical practice non-competes, a frequent and controversial subset of restrictive covenant disputes. We got new activity out of Washington this past week on the non-compete front, and this time the legislation is more sweeping.

Five legislators have introduced House Bill 1926, which would prohibit all non-compete agreements except those incidental to the sale of a business or dissociation from a partnership or limited liability company. The proposed law would apply only to covenants enacted after the passage date.

The language of HB 1926 is identical in all respects to Section 16600 of the California Business and Professions Code, which is the well-known bar to employee non-compete and non-solicitation agreements. Courts have interpreted Section 16600 to apply to non-solicitation covenants, which are in effect just as sweeping for salespersons whose contacts are their stock in trade.

This is what both HB 1926 and Section 16600 provide:

"...every contract by which a person is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."

Incidentally, Montana also has a statute in place with the same language as the California code. However, the few Montana courts which have looked at and interpreted the statutory bar have concluded it does not extend to non-solicitation covenants, creating a clear conflict with the way California interprets the statute. The proposed Washington bill does not carve out any type of activity restraint, so if passed, it would be up to the courts to decide whether to follow the California interpretation or go the Montana route.

My personal opinion is that the language could be much clearer, and it certainly should be given the proliferation of lesser restrictive activity covenants. In that regard, Montana courts probably have the better interpretation of this statutory text, but the arguments are compelling for both sides.


Friday, January 30, 2015

No-Hire Provisions Are, For Some Reason, Drafting Nightmares

In the course of reviewing, say 5,000 restrictive covenants (the job can be a wee bit tedious at times), one drafting problem continually amazes me.

Restrictions imposed on employees from hiring away fellow employees appear to vex and confound those who draft contracts.

I've never quite understood this, but it's true. While it seems easy enough to draft non-compete restraints, for some reasons the same doesn't hold true for no-hire covenants.

Here's how I draft no-hire covenants in my model employment contract:

The Employee agrees that during the Restricted Period he will not solicit, hire, or induce a Restricted Employee to leave his or her employment with the Company to join a person or entity that provides similar products or services as the Company offers to others at the time of the Employee's departure.

I then define the terms "Restricted Period" as the duration of employment plus a reasonable post-termination period (say, a year). I define "Restricted Employee" as someone with management, sales, or product development responsibility (or as the client otherwise may choose in the proper case).

The bold-faced clause above is really important, or the covenant protects activity that is innocuous or could not lead to competitive harm. This is the piece I often see missing.

Below is a real beauty from a dispute I am negotiating right now for an employee (I am taking editorial liberties by deleting or revising the unnecessary legal jargon and the misspellings of commonly used words):

During Employee's employment and for two years after the end of employment, Employee shall not accept employment of any employee of Employer.

Worded terribly, this restriction only could apply in a very narrow fact-pattern. But it is not tethered to any competing work, so it's both underinclusive and overinclusive - a real achievement, if you ask me.

Reading, as I sometimes am apt to do, through recent non-compete decisions, I stumbled upon Base One Techs., Inc. v. Ali, 2015 U.S. Dist. LEXIS 5821 (D.D.C. Jan. 20, 2015). The district court dismissed a no-hire claim against two employees who the employer accused of soliciting each other to quit. (Pause to consider how to prove damages or even liability on that one.) The court confronted a covenant similar to the example I just gave, and it read (again, modified for my readers' ease):

Employee agrees not to solicit, contact, represent or offer to represent the Company's Full-Time Employees or Independent Contractors, whether or not such solicitation, contact, or offer was initiated, prompted, or in any other way developed by the Employee...

(?)

People draft agreements like this. They really do. The court was unimpressed and found that a vague and ambiguous restrictive covenant was, on its face, unenforceable. The court's particular concern was that the contract never said what conduct the employee could not solicit: "Is the employee prohibited from contacting another employee about health insurance? From soliciting another employee to attend a political fundraiser." When a court asks rhetorical questions in an opinion, that usually is a bad sign.

I believe that when attorneys start drafting contracts, every good and normal human instinct they have disappears. They are flummoxed by how to convey a relatively simple thought. They cram 75 words into one sentence. They liberally use subordinate clauses. They feel the need to use a series of three verbs for the exact same thing ("...solicit, entice, or take away..." or my favorite "...give, devise, and bequeath."

A judge once told me that a restrictive covenant should be understandable to a mildly intelligent 7th grader. I cannot say it any better than that.

Friday, January 23, 2015

New Legislation and a Sentencing for Trade Secrets Theft

The new year always means a spate of legislative activity. Proposed new laws related to trade secrets misappropriation and non-compete agreements do not generate many headlines, but they are fairly common. Two states in particular are considering revising their laws concerning enforcement of non-compete agreements.

Washington

First up is Washington. Earlier this month, several legislators in Washington state introduced a bill to restrict the use of non-compete agreements that bar physicians from practicing medicine. The twin bills (one for osteopathic medicine and surgery; the other for physicians) would make non-competes void and unenforceable. The lone carve-out is that the law would allow an action to enforce a contractual provision for damages due to termination of a contract, as long as the enforcing party establishes the reasonableness of damages by clear and convincing evidence. It's not clear from the draft bill whether "termination" means a termination before the end of a set contract term, or whether it's termination of the relationship altogether. It must mean the former if non-competes would be void under the proposed law.

Physician non-competes raise, perhaps more than any other profession, issues of public policy impact, particularly if a rural area would experience a shortage of available care as a result of non-compete enforcement. The Washington bill cites the American Medical Association Code of Medical Ethics as a policy rationale for the proposed change in the law. The pertinent code provision discourages use of non-competes.

Many state courts, such as Illinois, have not found the AMA Code to raise sufficient public policy concerns to invalidate physician non-competes across the board. It is, therefore, more of a legislative judgment, rather than one for courts to balance. Other states, like Texas, attempt to strike a balance by enabling a physician to buy his or her way out of a restrictive covenant at a fair price. Texas' statute also cites to the AMA Code.

The text of the Washington house bill is available here.

Massachusetts

Next up - shocker - is Massachusetts. I, for one, hope that this state just does something so I can stop following what is going on.

Massachusetts has considered enacting the Uniform Trade Secrets Act for something like a decade, which is remarkable considering it's a uniform statute. Decide, already! The details of that debate are not that interesting.

Of more importance is whether the state will reform its laws concerning enforcement of non-compete agreements. A number of legislators have introduced bills to ban non-compete agreements, and Russell Beck's fine summary is available here. For those interested in why reform of non-competes in Massachusetts is of interest, Orly Lobel's terrific book Talent Wants to Be Free discusses this at some length.

***

On the trade secrets front, criminal prosecutions continue to garner headlines.

Another one comes from Chicago where Judge Norgle handed down a tough sentence on two former employees of Citadel LLC, a high-frequency trading (HFT) outfit. As illustrated in Michael Lewis' book Flash Boys, HFT firms engage in algorithmic equities trading, a sort of shadowy corner of the markets that increasingly garners attention in the Wall Street Journal for a variety of reasons.

Citadel's victim impact statement to Judge Norgle indicated that it had spent over $2 million in costs investigating the employees' theft of trade secrets and assisting the U.S. Attorneys' office. Interestingly, Citadel had non-compete agreements with both employees and apparently paid (or contracted to pay) them during the non-compete terms. The defendants, prosecuted in part under the Economic Espionage Act, received three-year prison terms and an order to pay over $750,000 in restitution.

The allegations of trade secrets theft generally centered on the employees' repeated downloading of trading strategies and source code from Citadel's servers onto personal storage devices. Given the value of this data to Citadel's HFT platform, and the security measures it used (detailed at length in the indictment), it is not difficult to see how this conduct rose of the level of trade secrets misappropriation.

Friday, January 16, 2015

Non-Compete Disputes and the Mootness Rule on Appeal

One of the reasons non-compete cases generate a lot of appeals is that the law is tense. By that, I mean that non-compete cases present a unique tension between freedom of contract and freedom to compete. And because public policy underlies many non-compete cases, appellate courts often scrutinize trial court rulings more carefully than garden-variety contract disputes or tort judgments.

But taking a non-compete case on appeal presents a unique legal issue: mootness. Most non-compete cases concern an agreement of relatively short duration, say one year or maybe two. Even if litigation is expedited, the non-compete period may run its course if there is an appeal.

How courts treat the issue of mootness on appeal is one of the more interesting procedural questions that non-compete lawyers face. Here are the three possible treatments:

1. Expiration of the covenant renders the appeal moot. Some courts treat expiration of the covenant on appeal as mooting any issue pertaining to injunctive relief. Remember: mootness only affects the injunction request. A damage claim can subsist for years after the defendant is free to work unencumbered. Texas is an example of a jurisdiction that seems to have a fairly strong mootness rule, as reflected in the recent case of Argo Group US, Inc. v. Levinson, 2015 Tex. App. LEXIS 250 (Tex. Ct. App. Jan. 14, 2015).

2. Expiration of the covenant does not impact an appeal. Other courts take the opposite approach, finding in essence that the appeal may not be moot. The doctrine is called "equitable tolling." A line of Ohio cases suggests an appeal from a denial of injunctive relief may not be moot even if the term of the post-termination covenant has run. But as the case of Tradesman Int'l, Inc. v. Black, 724 F.3d 1004 (7th Cir. 2013), illustrates, this doctrine relies heavily on the factual and procedural posture of the case. Generally, a plaintiff must move promptly for injunctive relief to secure the benefit of the equitable tolling doctrine. If it does so, and an appellate court finds the trial court incorrectly denied the injunction, the employer still can gain the benefit of its bargain through a new term of injunctive relief that nominally extends past the expiration date. The Tradesman case dealt with the opposite fact pattern. The employer there did nothing to pursue preliminary injunctive relief and then, after the covenants expired, sought to impose a permanent injunction - effectively restarting the non-compete period against its ex-employees. As the Seventh Circuit's opinion discusses, this type of litigation conduct will not allow a plaintiff to pursue an injunction.

3. Expiration is a function of what the non-compete says. The final approach that some courts have taken is to push the expiration or mootness issue back onto the contract itself. Courts in Illinois seem to have endorsed this approach, though the case law has enough fluidity in it to make it sound like there still are no hard-and-fast rules on mootness. The notable cases are Prairie Eye Center, Ltd. v. Butler, 329 Ill. App. 3d 293 (4th Dist. 2002), and Stenstrom Petroleum Svcs. Group, Inc. v. Mesch, 375 Ill. App. 3d 1077 (2d Dist. 2007). Both look at mootness in the context of whether the parties agreed upon an extender clause within the non-compete itself. As a result, it is fairly common to see sophisticated Illinois-based agreements with robust remedies sections incorporating the holdings in Prairie Eye Center and Stenstrom Petroleum.

***

I generally don't have much of a problem with options 2 or 3. Option 1 brings squarely into play the law of unintended consequences. In those jurisdictions that endorse a rigid mootness rule, the law encourages employers to adopt longer covenants so as to give them a fair chance of litigating the case, while at the same time preserving appeal rights.

In this respect, a rule that appears employee-friendly at first actually may not be. Employers will tend to compensate for the common law and "bargain" for longer post-termination covenants, knowing the mootness rule reduces the value of litigating a short non-compete in the first place.

Friday, January 9, 2015

10 Checklist Items for Every Employee Who Leaves to Compete

The dawn of the new year is always a good time to return to basics.

When consulting with individual employees, it amazes me how frequently I run through the same basic departure protocol. By now, this seems intuitive to me. But I realize that for clients it is anything but.

I can't overstate the importance of carrying out a good, clean departure, even if the end of the employment relationship is fraught with hard feelings. Most employee competition lawsuits that go sideways have at their core a common thread: a sloppy, hastily-planned exit. The general perception that an employee violated some basic business ethic on the way out the door can convert an otherwise weak plaintiff's case into one that is able at least to persist through discovery and perhaps trial. That, in and of itself, may be a net loss to an employee who is usually less able to fund a legal defense.

The following list describes ten crucial departure steps employees must take to reduce risk in the event of a competition suit. This is by no means exclusive, and I don't present this in order of importance.

10. Get your agreements in order. I believe well over half of employees now have signed something that potentially affects post-termination conduct. In many cases, the pertinent document could be just a form non-disclosure agreement, which would pose no true restriction on taking a new job. But increasingly, employees sign more extensive non-compete or non-solicitation agreements. For a recent article discussing the proliferation of non-competes, see the linked AP story from January 3 ("Scrutiny on Worker Non-Compete Deals" by Ray Henry). Employees must obtain all relevant agreements, including those they believe to be outdated. It's also important for those employees with restricted stock or stock options to obtain any award agreements, as they frequently contain restrictions or forfeiture-for-competition clauses. An attorney cannot advise a client who is unprepared. Unsigned agreements and similar agreements that co-workers once had is only marginally helpful.

9. Prepare your resignation letter. At some point, an employee who makes the choice to leave and compete should prepare a resignation letter. Even if this seems like a mere formality, a resignation letter could be an exhibit at a trial. And a carefully crafted letter will give the court evidence that the employee was, indeed, careful. A judge can perceive this as a window into an employee's mindset before litigation begins. There are three general rules for drafting a resignation letter: (a) keep it short but articulate; (b) be respectful and thankful for the opportunity; and (c) if you state a reason for departure, be clear but deferential. An employee should have counsel review any resignation letter before delivering it.

8. Return all business documents. My experience is that about 2 out of every 3 employees keeps some non-public information when leaving, even if inadvertently. In many cases, retaining confidential documents is the factual foundation for an employer's case that otherwise might founder from the start. When an employee thinks about leaving, she should make sure to gather all documents (yes, including those at your "home office") and even create an inventory of what she returns. To take it further, employees should make sure those documents are organized and not returned in a scatter-shot fashion. This will show a court that the employee was trying to act respectfully and in good faith during the departure process.

7. Inventory electronically stored information. Closely related to point 8, employees often mar an otherwise clean departure by failing to account for electronic information. This presents a particularly acute problem for the increasing number of employees who work from home. Typically, digital information resides on a personal laptop hard-drive, an external thumb drive, a cloud storage platform, or in personal e-mail that continues to be accessible past resignation. During any competent exit interview, a manager or human resources professional will ask whether the employee has deleted or returned electronic information. A common question employees have is how to "return" electronic information. My pat advice usually is to have the employee disclose all facts about where the electronic information sits and ask the company specifically how to handle any deletion or return of documents. As long as the employee does this, any technical difficulties should be easy to work through.

6. Assess terms of new job offer and proposed employment agreement. Employees frequently become enamored with the idea of a new and better job opportunity. So much so, in fact, that they often forget about what they will have to sign when starting. This is relevant for the obvious purpose that the new job may require a non-compete. But it's doubly relevant because the new hire documents can help frame a lawsuit or the response to a cease-and-desist letter. It is vitally important that the offer letter contain language that respects the enforceable agreements of competitors, ensures that the company is hiring the employee for her general skills and knowledge (and not any proprietary information of competitors), and that failure to abide by these rules will result in termination. If the employee must sign a new agreement, those same admonitions should appear in the agreement as well. Many lawsuits sputter out of the gate if a judge sees that the new employer has no need to compete unfairly and in fact prohibits it.

5. Accommodate exit interview requests. Leaving a job is not easy. Personal emotion becomes wrapped up with professional obligation. And on this score, it's relatively easy for employees to want to bail out on proper protocol, because sitting down to notify a manager that they're leaving is not the easiest thing for the average person to do. However, it is essential to go through the painful exit interview process. For one, it may be contractually required, depending of course on what the employee's agreement or corporate handbook says. Secondarily, it always looks bad if an employee refuses to sit for an exit meeting. That can at least raise the inference the employee intends on hiding unfairly competitive conduct. On the flip side, if the employee is candid during the interview process, she may gain helpful facts to use in defending a subsequent action. The most important fact is participation itself; if the employee goes through the process and participates in good faith, this moots a potential employer line of attack at trial. More dramatically, I have represented clients who have participated in exit interviews and been told by managers that their new job would not be a non-compete violation. I have even seen follow-up e-mail communications that confirm these discussions, only to have the employer reverse course down the road. Another common fact that arises because of an exit interview is the employer's lack of diligence with gathering business documents. Those sorts of facts are game-changers. And they only arise because the employee participated in an exit interview.

4. Establish the new employer's expectations. As part of the hiring process, the employee must have a clear understanding of her anticipated job responsibilities. This is essential so the employee can determine whether the new employer expects her to abide by the restrictive covenants or whether it has another goal in mind. Too often, I have seen employees who are asked to "thread the needle" once they start. They then face the Hobson's choice of violating a post-termination covenant or ignoring an assignment.The employee must be on the same page with management regarding the day-to-day expectations, and in particular how to address the difficult, close issues (such as servicing a common client or working with clients who arguably fall within the territorial scope of a non-compete).

3. Work loyally to the end. I normally tell my employee clients to make their last month at work their best. This is relatively hard to do, but it is nothing more than common sense. An employee who neglects clients, shows up late, and ignores office meetings is likely to be viewed as untrustworthy. It also may cause an employer to file suit, or at least threaten suit, when it otherwise wouldn't have. Employees are often surprised at how much goodwill they can buy just by acting like a grown-up. A lot of employees simply don't.

2. Hire counsel early. Finding a knowledgeable, trustworthy attorney is no easy task. An employee is best served by hiring a lawyer early, during the phase of a job search where a move becomes real. This frequently occurs when an employee has a hot lead on a job. It never hurts to get a legal assessment before that, but counsel needs some understanding of the new position to advise the employee fully on her exposure. Waiting to seek counsel until after the employer sues means the attorney can't help shape the "job transition" facts, many of which I've outlined above. He or she is stuck with a departure that the employee may have planned hastily.

1. Expect the unexpected. It continues to amaze me how badly employees can predict what will happen upon departure. The accuracy of their predictions seems to be inversely correlated to their confidence. The bottom line is you rarely can predict whether an employer will sue. Nor can you count on a manager "going to bat" for you. And sometimes employers act irrationally, seemingly oblivious to the fact that customers may react poorly to being thrust into a lawsuit. Competition suits take on a life of their own (at least for a while), and they often are clouded by poor judgment.

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Those readers who find this post informative may want to check out a related post I wrote on May 31, 2013 titled The Employee's First Client Meeting.