Thursday, February 24, 2011

IBM Loses Preliminary Injunction Motion Over Executive's Departure to Hewlett Packard (IBM v. Visentin)

IBM has had some high-profile non-compete disputes the past couple of years, and it has found itself on both the winning and losing sides of those cases.

Just last week, IBM suffered a defeat in a preliminary injunction proceeding which concerned Giovanni Visentin's acceptance of employment with Hewlett Packard. Visentin was employed by IBM in numerous roles over the last several years. From 2007 through the end of his employment at IBM, he was General Manager of IBM's Integrated Technology Services (ITS) business segment. Visentin gave notice of his resignation in January and joined HP to be Senior Vice-President, General Manager, Americas for HP Enterprise Services.

A federal district court in New York denied IBM's motion for a preliminary injunction to enforce the non-compete agreement Visentin signed with IBM. The court found that IBM did not have a protectable interest in certain categories of business information Visentin had access to and which IBM contended were confidential or trade secret material. The court analyzed several of these categories and concluded, in large part, either that the information claimed to be confidential was not specifically identified or was already public knowledge.

The court further found the terms of the non-compete agreement to be overbroad and unenforceable. The primary reason for the overbreadth finding was the scope of the activity restraint. The court held that the agreement prohibited competition in areas where IBM had no presence, such as retail and laptop printer sales.

The opinion is fairly lengthy and detailed, and there is little point to summarizing all of the categories of information IBM asserted protection over and what the testimony was at trial. But there are two really important points to take away from this case, one an observation and one an opinion.

First, HP did exactly what an employer in a competitive hiring position should do. It clearly put a great deal of thought into what types of responsibilities Visentin had at IBM and was careful to ensure there was relatively little overlap with his new job at HP. It also required him not to use or disclose any IBM information in his new position. Combining this with the fact Visentin did not take anything with him after leaving IBM, the judge credited much of the defense testimony.

Second, this reasoning behind this decision is still somewhat shocking. The court noted on many occasions that Visentin was a very senior manager who was not a technological expert and who was not on the front lines dealing with clients. According to the court, he had little knowledge of how deals were priced and what metrics went into client proposals. Visentin's defense, effectively, was that he was too senior to know anything specific.

The way the court's opinion reads, it almost suggests that the higher up in the corporate food chain an employee is, the less likely that employee could potentially harm a legitimate business interest by competing. Taking the opinion to its next logical step, those employees who are much junior to Visentin are more likely to be restrained and have non-competes enforced against them. I don't understand this.

Most courts when dealing with this issue reach a fairly simple conclusion. The executive was provided access to a wide range of confidential business information. Whether he tries to take it with him and use it to the company's detriment is not dispositive. This case is the complete flip-side, buying the defense's (well-crafted) argument that nothing IBM identified as confidential was at risk for disclosure. The case points out the need for employers who are attempting to enforce non-competes to show with precision what threat exists from not having an injunction issued. It also illustrates why employers need to articulate clearly the legitimate interest underlying the covenant. In this case, I think IBM did the latter, but not the former.


Court: United States District Court for the Southern District of New York
Opinion Date: 2/16/11
Cite: IBM Corp. v. Visentin, 2011 U.S. Dist. LEXIS 15342 (S.D.N.Y. Feb. 16, 2011)
Favors: Employee
Law: New York

Monday, February 21, 2011

What Happens If a Company Does Not Enforce Its Non-Compete Agreements?

My colleague, Texas attorney Rob Radcliff, writes an excellent blog that discusses a lot of the same topics I cover here. Earlier this month, Rob discussed the necessity for companies to enforce non-compete agreements in the event of a breach or threatened breach.

Rob is absolutely correct in that an employer's case presentation will be much simpler and more compelling if it can demonstrate that it uniformly enforces non-compete agreements against employees who leave and breach those contractual obligations. Rob's post also got me thinking about the implications of not enforcing those rights as he suggests.

Is an employer's case fatally wounded if an employee discovers evidence of non-enforcement relating to other past employees? I don't think a failure to enforce a non-compete agreement is particularly helpful to another employee. I represent employees about half the time in my cases, and I have come across this issue countless times over the years. There are two primary reasons why this evidence, in my opinion, is of somewhat limited value.

First, every employee is different. A judge will understand a company's decision not to enforce a non-compete obligation if a low performer jumps ship to work for a competitor. In fact, an employer may want that employee working for the competition. Also, most employees have different levels of customer responsibility and access to confidential company information. On many occasions, clients have come to me and told me their employer doesn't enforce non-compete obligations. This may be so, but it's critical to assess who those other employees are and how their responsibilities were different.

Second, every situation is different. An employer may not enforce an agreement with one employee because her agreement contains some contractual defect. For instance, if an employee signed a non-compete agreement well after she started working for a company, there may be an issue as to whether legal consideration supports that contract. That may not be a useful precedent in another case.

Also, if an employee's "breach" is soliciting one client who arguably is not even covered by a non-compete agreement (or who is unprofitable), an employer may decide that it has little chance of success or little need to pursue a case. Non-compete litigation is expensive. I highly doubt a judge will hold it against an employer if that employer testifies that, in prior cases, the cost of litigation was not worth pursuing someone. Additionally, a court may be persuaded by an employer's testimony that it did not want to spend legal fees if firm revenue and income was declining. We saw this in the ANSYS case, discussed below.

A final word on this subject, too. I don't think a collateral inquiry into enforcement in other cases is efficient and a smart use of resources. Non-compete cases are time-sensitive, and judges should not be saddled with analyzing whether another employee's departure should have resulted in a lawsuit. That is a distraction from the main issues in a covenants case: degree of competition, protectable employer interest, breach, and potential harm.

Friday, February 18, 2011

ANSYS Suit Against CDNA Finally Ends With No Fee-Shifting (ANSYS, Inc. v. Computational Dynamics North Am.)

If the name of this case sounds familiar, it is because I have written about it on two other occasions, here and here.

In previous discussions about the ANSYS case, I have written about the district court's denial of a preliminary injunction motion concerning Dr. Doru Caraeni's non-competition agreement and the First Circuit's decision to affirm that ruling.

In the last installment of this case, Computational Dynamics unsuccessfully sought attorneys' fees under the New Hampshire Trade Secrets Act bad-faith fee-shifting provision, related to ANSYS' unsuccessful claim for misappropriation. Discovery in this case was staged, which often happens during trade secrets actions. Shortly before the defendants were about to produce their relevant discovery concerning source code, ANSYS decided to voluntarily dismiss the suit.

Computational Dynamics sought fees for the trade secrets claims of nearly $200,000. The district court had little trouble rejecting the argument that ANSYS pursued its claim in bad faith and denied the fee petition. The genesis of the lawsuit was Dr. Caraeni's decision to leave ANSYS and jump ship to CDNA. Just days before his departure, Dr. Caraeni accessed and downloaded highly secret documents related to a comparison of ANSYS' software to CDNA's.

In light of this, the court found it reasonable for ANSYS to pursue claims for breach of a non-compete agreement and trade secrets misappropriation. CDNA's claim for bad faith hinged on the timing of the dismissal (i.e., right before it was to produce documents ANSYS claimed it needed) and ANSYS' failure to identify any true secrets with specificity.

The court's discussion on the latter point was cryptic. It noted two factors. First, it discussed the "highly complicated and sophisticated" nature of the code underlying the software products. Although not really discussed, the court seemed willing to forgive the plaintiff's lack of specificity (at least by the time it decided to non-suit the case). It seems as though the opposite conclusion would make more sense, since plaintiffs with highly technical secrets should have more knowledge of their value.

Second, the court found ANSYS probably determined the cost of proceeding and pursuing its claims was simply too great. I am not sure how convincing this is either. From my vantage point, the court may have been more troubled if ANSYS decided to non-suit the case right after getting CDNA's techincal data, which would have been suggestive of using litigation solely for taking a peek under a competitor's hood.


Court: United States District Court for the District of New Hampshire
Opinion Date: 2/10/11
Cite: ANSYS, Inc. v. Computational Dynamics North Am., 2011 U.S. Dist. LEXIS 13993 (D.N.H. Feb. 10, 2011)
Favors: Employer
Law: New Hampshire

Thursday, February 17, 2011

Overlawyering and Social Media

I hate social media.

Coming from a blogger, I know this sounds like sacrilege. I have a LinkedIn account that I hardly use. I wouldn't be caught dead on Facebook, and I don't even understand Twitter, except for the fact that it apparently is a huge deal in the NFL. I am not even a texting guy.

But I realize social media is part and parcel of the workplace now, particularly for people in sales - which is where most of the non-compete action is at. I also know that some industries, like recruiting and professional staffing, rely on social media as a key networking strategy.

The social media explosion raises numerous issues, of course, and those have been discussed at length on various of my colleagues blogs. Jay Shepherd, who may be the legal world's most rational commentator, has a great article on an issue that has been gnawing at me for some time.
His article, "Who owns an employee's LinkedIn contacts?", addresses the question of confidentiality and restrictions over social media contacts and embedded contact information like e-mail addresses. His conclusion, effectively, is that employers cannot expect their workers to build networks and business goodwill through social media and then attempt to claim "ownership" over those contacts upon departure.

I am in 100 percent agreement with Jay on this. I represent a lot of employers and draft policies and contracts all the time. Increasingly, we are dealing with social media and trying to figure out exactly what the best balance is between protecting legitimate business assets (emphasis on the word "legitimate") and the evolving world of personal or social networking. Commandeering actual contacts information developed on social networking? Not something I suggest to my clients...

There are a number of things I am suggesting with regard to social media, none of which (I don't think) really hit back at an employee all that hard. What are common steps employers can take to deal with social media concerns? They include: (a) restricting disclosure of company non-public information through social media sites; (b) ensuring that blog articles and posts express only the author's view and not that of the company, its clients or business partners; (c) requiring that upon termination of employment, the employee change her status to reflect that she is no longer employed by or affiliated with the company; and (d) preventing an employee from making disparaging or misleading remarks about a competitor or any third-party through Twitter, Facebook and the like.

But ownership of contact information? Requiring an employee to delete a contact from her LinkedIn account and to transfer "ownership" of that contact's e-mail or cell phone information? Seriously?

There are some who advocate this. The contrary point of view to Jay Shepherd's article is expressed in an post by the firm Danna McKitrick, titled "Who Owns the Salesperson's LinkedIn Account?" There's not much I agree with in this article. The point seems to be that an employer should make sure that agreements require the employee to return all embedded LinkedIn contact information to the employer.

So I don't get this at all because all the employee has to do is find that same contact immediately after departure. How hard can this be? From what little I know about how contacts are made on LinkedIn and Facebook, it seems like those sites are constantly suggesting potential contacts. In fact, they seem to be specifically set up or designed to allow contacts to be made quite easily.

Under the Danna McKitrick approach, does this mean the ex-employee forever relinquishes ownership to such contact information, even if independently acquired? How could that possibly be carried out in practice? I don't really know how you adopt this, and I wouldn't ever recommend to an employer client that they draft agreements in this fashion. For starters, the employer is going to look ridiculous and its employees may wonder just what in the heck they've gotten themselves into.

To be blunt, attorneys who recommend a heavy-handed approach to monitoring social networking are engaging in blatant overlawyering. There is no other way to say this. Not every contract needs to be 15 pages long, and you don't need a policy on every single issue that could arise in the workplace. Pick your battles and be smart about it. If there ever was a dispute about ownership of LinkedIn or other social media contact information, no court is going to understand why an employee cannot keep basic data like cell phone numbers and e-mail addresses, particularly if that information is developed by the employee and freely available through social networking sites.

Wednesday, February 16, 2011

A Quick Statutory Overview

As I wrote last month, Illinois and Massachusetts are both contemplating legislative overhauls to non-competition law, at least as it pertains to those agreements executed in the employment context. I have a lot of catching up to do on this blog, and have a few interesting cases and topics that will be coming in the next week or so.

But for now, since most states have legislatures in session, it seems like a good time to run down which states have statutes that govern non-compete agreements. Here's the current list:

North Carolina
North Dakota*
South Dakota

That's 19 - a little less than half. Keep in mind, too, that some states have specific statutory provisions that exempt certain classes of workers or types of non-competes, but which don't regulate agreements in a comprehensive fashion. One of those would be Illinois, which like many states makes non-compete contracts unenforceable in the broadcast industry and as it pertains to government procurement. Illinois also regulates day-labor staffing firm hiring restrictions.

What class of workers are typically exempt from non-competes? States vary a bit, but we can glean some common themes. Here are professions that may have specific legislation directed towards non-competes:

Physicians (or other Professionals)
Car Salesmen (this is not a misprint, and yes I'm staring right at you, Louisiana...)

Attorneys' rules of professional conduct normally exempt them from non-compete arrangements, as courts hold that a client's right to choose counsel will trump any legitimate interest a law firm may have in preventing competitive activity.

Finally, those three states noted with an asterisk? Those are the three states where non-competes are illegal.

And if you can't figure out the significance of the picture, you had no childhood. That's from Schoolhouse Rock!

Thursday, February 10, 2011

Wisconsin Court Dismisses Claim for Breach of Non-Solicitation Covenant On Grounds of Reasonableness (Share Corp. v. Momar)

Last year I wrote about a dispute between two competitors in the chemical sales industry, Share Corporation and Momar, Inc. This non-compete case is pending in Wisconsin, and last March the federal court hearing the case denied Share Corp.'s motion for a temporary restraining order on the grounds that the client non-solicitation covenants were likely overbroad.

A few weeks ago, the court granted the defendants' Rule 12(b)(6) motion to dismiss those claims, holding effectively that the non-solicitation covenants were unreasonable as a matter of Wisconsin law. The fundamental problem with the non-solicitation covenant was its lack of any backward-looking temporal provision. Put another way, the clause applied to bar client solicitation of any client who the employee may have serviced during the course of his employment. Wisconsin law requires a a backward restriction that would provide, for example, such a restriction to take effect only as to customers the employee serviced during the last year of his or her employment.

The ruling is significant for Wisconsin attorneys and litigants because of the procedural posture of the case. A defendant can and should be aggressive in seeking an early dismissal of a non-compete case where the covenant is facially overbroad, at least in Wisconsin. In other states, the law may not be as inviting for the defense at the initial pleadings stage.

Another word is in order for Wisconsin non-competes. Attorneys have to be really careful in drafting agreements. There are numerous permutations based on Wisconsin case law that must be considered during the drafting process. The dispute in Share Corp. v. Momar, Inc. is but one. Attorneys also must be scrupulous in drafting non-disclosure clauses, as Wisconsin will scrutinize them for reasonableness to a much greater degree than other states.
Court: United States District Court for the Eastern District of Wisconsin
Opinion Date: 1/26/11
Cite: Share Corp. v. Momar, Inc., 2011 U.S. Dist. LEXIS 10782 (E.D. Wis. Jan. 26, 2011)
Favors: Employee
Law: Wisconsin

Wednesday, February 2, 2011

Florida Case Demonstrates Limits of Legitimate Business Interest Test (Southern Wine v. Simpkins)

Florida is known as a highly pro-employer state, largely because of a comprehensive and detailed statute that makes enforcement of non-compete agreements by way of injunction substantially easier than in other jurisdictions.

Like most states, however, Florida's basic test for enforceability revolves around two basic concepts. First, the employer must present evidence of a legitimate business interest supporting the non-compete. Second, the restraint must be reasonably necessary to protect that interest.

Florida's statute contains a non-exhaustive list of potentially assertable business interests. The usual suspects, provision of confidential information and client relationships, are contained in that list. Another interest that many states recognize, specialized training, is also found within Florida's statute.

The case of Southern Wine and Spirits of America v. Simpkins discusses several of these interests in the context of a preliminary injunction hearing. In that case, Simpkins - a high level executive - resigned from Southern Wine and joined a direct competitor in the wholesale beverage distribution business.

Southern Wine's effort to enjoin Simpkins failed, in part due to the court's discussion of the types of interests Southern Wine was trying to protect through the restraint. The court found that Southern Wine was able to establish that Simpkins received confidential business information through his employment with Southern Wine - particularly information about strategy, marketing, and personnel. Importantly, the court found that the utility or usefulness of such information was likely to be stale in 2 to 6 months.

The court rejected Southern Wine's efforts to assert a protectable interest in its vendor relationships - an interest not mentioned in Florida's statute. As with all distributors, Southern Wine's business model depended on strong relationships both with customers (presumably retail outlets that sell alcoholic beverages) and vendors. The court refused to find that Southern Wine could demonstrate a legitimate business interest in its vendor relationships. Based on the case discussion, it does not appear that Simpkins either was instrumental in developing customer relationships or that Southern Wine believed his new employment posed such a threat.

Finally, the court dismissed Southern Wine's effort to show that Simpkins received specialized or extraordinary training as an employee. In Florida, this interest requires an employer to show that the training went "beyond what is usual, regular, common, or customary in the industry in which the employee is employed." Based on this test, it would seem an employer in Florida must present evidence not just of its own training but also what other firms in the industry offer to their employees. This likely would entail testimony from headhunters or expert witnesses, or perhaps other employees that have worked for several different companies.

As a result of the court's lengthy discussion over what Southern Wine was trying to protect, the court declined to issue a preliminary injunction in its favor. The court noted that the confidential information to which Simpkins had access likely was stale already since he had been absent from Southern Wine for over 6 months.


Court: United States District Court for the Southern District of Florida
Opinion Date: 1/14/11
Cite: Southern Wine and Spirits of America, Inc. v. Simpkins, 2011 U.S. Dist. LEXIS 5762 (S.D. Fla. Jan. 14, 2011)
Favors: Employee
Law: Florida