Thursday, July 21, 2011

There Is No End to Creative "Non-Compete" Arguments (Lindskov v. Lindskov)

As a disclaimer, I am not commenting on this case because it breaks any new ground legally. However, it does demonstrate the ends to which litigants will go to try and stop what they claim is a competitive injury.

From the State of South Dakota (home to the Badlands, Custer State Park and - of course - Wall Drug) comes a family dispute in the business of selling farm implement equipment. Two cousins, Dennis and Les Lindskov, were apparently very successful sellers of New Holland farm equipment and obtained dealerships in Isabel and Mobridge. After an apparent falling out (and after New Holland refused to allow them to "split" the dealerships), Dennis bought out Les.

Problem. Dennis did not secure a non-compete at the time of closing. The closest the sale documents came to a restrictive covenant was a mutual non-disparagement clause, which generally makes a contractual obligation out of the common law of defamation or commercial disparagement.

After Dennis bought out Les, Les started a new business with his son selling the same New Holland equipment in the same areas of Isabel and Mobridge. Dennis filed suit, claiming that the non-disparagement clause prohibited such competition. Not surprisingly, the courts disagreed and refused to interpret the covenant against disparagement as a broad non-compete.

Suits like this tend to arise during a bitter divorce or (as here) an acrimonious family business break-up. Their intent is often not to prevail, but to cause the defendant to become distracted or have his or her reputation harmed with suppliers and customers. Courts need to ferret out strike suits that facially lack merit, particularly when sophisticated parties engage counsel and come to a negotiated resolution. Unfortunately, the court system is not quick or efficient in most cases, and a party can prolong a meritless suit for quite a while. That may have the intended effect of litigation. Not to win necessarily, but to inflict some competitive pain through the lawsuit's mere filing.


Court: Supreme Court of South Dakota
Opinion Date: 7/6/11
Cite: Lindskov v. Lindskov, 800 N.W.2d 715 (S.D. 2011)
Favors: Not applicable
Law: South Dakota

Thursday, July 7, 2011

Supreme Court of Texas Revamps Non-Compete Test...Again (Marsh USA v. Cook)

The Supreme Court of Texas continued a trend we've seen in 2011 - substantial change by states to substantive non-compete law. Earlier this year, Georgia reformed its state law by enacting a new statute designed to allow for easier enforcement of non-compete contracts, particularly in the employment context.

Recently, Colorado has made it easier for employers to enforce non-compete agreements against at-will employees. And Illinois will have its Supreme Court decide, finally, the appropriate test for determining the enforceability of a non-compete agreement in the employment context.

While state supreme court opinions on non-compete issues are few and far between each year, that's not the case in Texas. Over the past several years, the Supreme Court of Texas has made several significant rulings and has chipped away at a 1994 decision that was perceived, correctly so, as creating a difficult enforcement landscape.

The latest ruling in Marsh USA v. Cook returns Texas back to the fold in determining the enforceability of a covenant under the "reasonableness" standard. Prior to this time, courts struggled over a technical, confusing inquiry concerning "ancillarity." Put simply, the Supreme Court of Texas had grafted onto its statute the requirement that promises made by an employer to an employee must "give rise" to a legitimate interest in restraining competition. Essentially, this meant that the employer had to promise to provide an employee with confidential business information. Otherwise, no promise made by the employer bore any rational nexus to enforcing the non-compete.

The Cook decision eliminates this judicially created rule and interprets Texas' Covenants Not to Compete Act according to the letter. As long as there is another agreement supporting the non-compete, trial courts must proceed to a reasonableness analysis. In Cook, the other agreement was providing stock options to a key employee - not providing him confidential information. The lower courts had held that this was not the type of consideration (money) that "gives rise to" an interest in preventing competition. Basically, the lower courts said an employer could not buy a non-compete. The Supreme Court of Texas found that an employer's interest in building goodwill and incenting employees' performance was a legitimate interest worthy of protection.

The interesting part of this ruling is Justice Willett's concurring opinion, which basically makes one important point as it relates to the Court's holding: it is not enough to mouth goodwill. An employer has to demonstrate it through a clear record. The Court makes the valid point that any type of employment incentive - a raise, a bonus, a promotion, or "a better parking space" - can motivate an employee to strengthen client relationships and contribute towards goodwill.

The concurring opinion also contains a very scholarly and interesting discussion of non-compete law in the knowledge-based economy. It reads like a summary of law review articles and provides many compelling arguments for strong judicial oversight of employment contracts in the 21st century. There are some great quotes in this opinion for lawyers to use.


Court: Supreme Court of Texas
Opinion Date: 6/24/11
Cite: Marsh USA Inc v. Cook, 2011 Tex. LEXIS 465 (Tex. June 24, 2011)
Favors: Employer
Law: Texas