Monday, December 31, 2012

2012: Year-End Review and Top 10 List

And so concludes my fourth full year of writing

I've now written over 400 articles on this site. I strive to provide fresh, interesting commentary on a range of practical, legal, and economic issues relating to non-compete and trade secrets law.

What was new to this site in 2012? Three major changes.

First, while I had intended at the start of the year to provide everyone with a weekly "Reading List", I discovered Twitter along the way. I had long avoided Twitter, for fear that the last thing my life needed was one more informational tool. Boy, was I wrong about Twitter. This is where I am increasingly getting the best content, and I encourage my viewers to follow me on Twitter to see what I am reading and who I'm following.

Second, I have started embedding files into certain posts, so that my readers can read and downloand important opinions or filings (such as the U.S. v. EBay, Inc. Complaint). I have a couple of bar journal (i.e., "old" media" publications) coming out in 2013 and look forward to sharing those files on this site as well.

Third, I waded into the world of legal podcasting with Non-Compete Radio. All of those podcasts are available on iTunes and can be accessed here as well. More on podcasting in the next few weeks...

My year-end column is my favorite because it gives me an opportunity to look at what I've read and written about for the past 52 weeks and figure out what this year really was like in my corner of the legal universe.

So here are my Top 10 Developments for 2012:

10. New Hampshire Enacts "Notice Period" for Non-Competes. Effective July of 2012, New Hampshire state law now requires employers to give two weeks prior notice when an employer asks an employee to sign a non-compete or non-solicit agreement. The law is full of potential loopholes. My earlier post on this legislation is found here.

9. Texas Courts Largely Silent in 2012. The most active state supreme court on non-compete law over the past several years has been Texas. It has completely redefined the concept of acceptable consideration, an issue that befuddled courts and lawyers for a number of years. But 2012 was notable in one respect: not much happened. While I have written often about developments under Texas' Covenants Not to Compete Act, I only had one Texas-related post this year. I am predicting 2013 to be a lot different.

8. New Jersey Enacts Uniform Trade Secrets Act. At the beginning of 2012, New Jersey became the latest state to adopt a version of the UTSA. The Act is only slightly different than what most states have enacted, and it provides a broader set of remedies for employers looking to combat trade secret theft. At this point, only Texas, Massachusetts, and New York have yet to enact the UTSA. My earlier post on this legislation is found here.

7. Sergei Aleynikov's Wild Journey Continues. Many of us in the blogging community have written extensively about the travails of one Sergei Aleynikov, the ex-Goldman Sachs trader who misappropriated GS's trading source code before departing for Teza Technologies. Aleynikov's legal journey has taken him to: the Illinois Appellate Court, a conviction in New York federal court under the Economic Espionage Act, a reversal by the Second Circuit, subsequent state law criminal charges (for which he's pled not guilty), and a federal civil case in New Jersey against Goldman Sachs in which he has sought indemnification for all of his legal fees - which he just might win. Oh, and in the meantime, he's almost single-handedly responsible for getting Congress to pass the Theft of Trade Secrets Clarification Act that will effectively prevent another result like that in his Second Circuit case from occurring in the future.

6. Illinois Appellate Courts Active in Wake of Reliable Fire. I have written throughout the year about what has occurred in my home state - Illinois - since the Supreme Court's important decision last Fall in Reliable Fire Equipment v. Arredondo. Unfortunately, the results have been mixed at best. The judgments from our appellate court have been published as "non-binding" orders and seem to have conflated and confused what Reliable Fire really meant. This lack of clarity does not serve clients or lawyers well at all.

5. The Loparex Disaster. This is Aleynikov-lite. His joyride through the legal system may be somewhat of an aberration (and for that reason, his ranking on my year-end list is lower). But the nightmare litigation of Loparex, LLC v. MPI Release Technologies, LLC is a stark reminder of a trade secrets suit gone horribly wrong. The suit started in federal district court in Illinois, where Loparex took a dismissal when the court (Judge Lefkow) told Loparex it was not identifying its trade secrets correctly. Loparex then refiled in Indiana federal district court and lost the suit on the merits, along with a bad-faith sanctions award against it and its lawyer to the tune of nearly $500,000. The basis for the award: failure to even identify a misappropriated trade secret, and the complete lack of damages. And along the way, the suit made a detour to the Supreme Court of Indiana, which reversed a decades-old line of cases discussing Indiana's Blacklisting statute. Ultimately, that pro-plaintiff ruling did not impact the defendants' ability to obtain fees given the frivolous nature of the suit.

4. DuPont's Judgment Against Kolon Industries. In one the most important trade secrets cases to go to jury verdict in recent memory, E.I. DuPont prevailed in its claim against Kolon Industries to the tune of over $1 billion in compensatory and punitive damages and a 30-year permanent injunction. The technology related to DuPont's trade secrets - 149 of them - related to the manufacture of Kevlar. My colleague, John Marsh, has written extensively about this case on his blog.

3. The Computer Fraud and Abuse Act Circuit Split Deepens. We had two important decisions this year under my least favorite statute, the Computer Fraud and Abuse Act. In U.S. v. Nosal, the Ninth Circuit limited a CFAA claim premised on an employee who "exceeds authorized access" of a protected computer to "access", not "use." And in the Fourth Circuit, the court followed Nosal and took a narrow view of the CFAA, widening an already deep circuit split. In that case, WEC Carolina Energy Solutions v. Miller, the plaintiff has filed a cert petition in the U.S. Supreme Court to resolve the split among the circuits. Will the Court take the case? It might, and this will be an interesting case to follow in 2013.

2. The Ohio Supreme Court Decides Two Important Competition Cases. The Ohio Supreme Court's decisions in American Chemical Society v. Leadscope and Acordia of Ohio v. Fishel were vitally important. In Leadscope, the Court held that malicious litigation can support a common law unfair competition claim. In the process, it upheld a $26.5 million verdict in favor of Leadscope, another result demonstrating that the court (mis)use of legal process can redound very badly to plaintiffs who underestimate how aggressive of a defense their adversaries will muster. In Fishel, the Court reversed itself and held that non-compete contracts are automatically assignable in the course of statutory mergers. The Court had held in an earlier opinion in the same case that the plain language of covenants concerning assignability would control over statutory law.

1. Supreme Court Rules on Scope of Arbitration Clauses. And in the year's most talked-about non-compete case, the Supreme Court of the United States reversed a decision of the Oklahoma Supreme Court and held that an arbitrator, not a state court, must determine the enforceability of a non-compete agreement if the underlying contract contains an arbitration clause. The case leaves open the possibility that an employee can still petition a court to determine that the underlying arbitration clause is invalid. My discussion of Nitro-Lift Techs. v. Howard is found here.

So that's 2012 for ya'. Thanks again to all my readers for the great feedback and to my fellow blogging colleagues.

I'll be back in a few days to start Year 5!

Friday, December 28, 2012

The Year In Illinois Non-Competes Fittingly Concludes With Another Rule 23 Order

A few months ago, I wrote a post about a problem that I perceive with the way our appellate court of Illinois has been handling non-compete cases.

In short, the court can issue non-precedential Rule 23 orders, which constitute judgments rather than opinions. And they're not to be cited as precedent in future cases.

I have no problem with the concept of Rule 23 orders. They're meant to reduce the court's burden to crank out opinions that can later be cited back to them by lawyers as precedential and binding within an appellate district.

But in truth, they should be limited to two classes of cases: (1) review of criminal convictions; and (2) review of civil cases where there is a highly deferential standard of review. For instance, appellate review over a jury verdict under a manifest weight of the evidence standard is an ideal case for a limited, non-precedential opinion. Cases like that almost never announce some rule that future courts will point to as precedential.

But the non-compete cases that have come before the Appellate Court do not fall within these categories and address important issues of law, or interpretations of law, in the wake of the Supreme Court's Reliable Fire case late last year. My September post describes some of these rulings.

And so, with 2012 coming to a close, it seems only appropriate that our appellate court has done it again - issuing a Rule 23 order on a fairly significant question in a non-compete case.

The case of Saddlers Row, LLC v. Dainton (opinion contained below) arose out of a fairly common set of facts. The employee had a two-year, 75-mile general non-compete agreement, which he breached by going to work for a direct competitor a mere seven miles from his prior place of work. The employer acknowledged that customer relationships, not trade secrets, were the protectable interest. But the evidence showed that most of its customers were located within 40 miles of the employer's place of business - and that 75 miles stretched further than was necessary to protect the vast majority of its customer base.

The circuit court refused to impose an order of preliminary injunctive relief, finding the 75-mile scope overbroad. It then refused to blue-pencil the agreement and pare back the geographic scope by 25 or so miles.

The appellate court agreed that the geographic scope was unreasonable, but held that the circuit court abused its discretion by refusing to modify the covenant to make it enforceable.

The court looked at two critical factors in determining that circuit court should have modified the covenant:

1. The covenant's geographic scope, while overbroad, was close to reasonable. Since most of the employer's customers were within 40 miles or so of its place of business, a 75-mile restriction was hardly a major overreach. In fact, since the employer had customers out of state (apparently, very few), any line-drawing would be arbitrary. Put another way, the employer clearly made a good-faith effort at trying to draw a reasonable restriction.

2. The employee directly competed in close proximity to the employer. The court emphasized that this was not a case where the employee tried, in good faith, to compete in an area outside the employer's sweet spot, such that any competition would be minimal. This was an "in-your-face" breach. And because equitable considerations are paramount in any blue-penciling analysis, the appellate court deemed it important that the employee knew he was in blatant breach of the covenant.

The decision is obviously pro-employer, and it's rare to find cases like this where an appellate court finds that a refusal to blue-pencil is an abuse of the trial court's discretion. Off-hand, I can't think of many in Illinois like this. This demonstrates why the case should never have been a Rule 23 order. The court emphasized very specific considerations that come into play when determining whether blue-penciling is appropriate.

Of further interest is the court's omission of any analysis concerning why a customer non-solicitation covenant wasn't the proper type of contract to use in this case. When an employer is not trying to protect trade secrets, its need for a general non-compete is diminished. And in Saddlers Row, the employer admitted it wasn't trying to protect trade secrets. Its interest was in securing customers, and the more appropriate fit for that type of protectable interest would appear to be a common non-solicitation covenant. But this was not even discussed.

Saddlers Row v. Dainton

Wednesday, December 26, 2012

Quick Analysis and a Copy of the Second Circuit's Opinion in MacDermid, Inc. v. Dieter

For those interested in today's Second Circuit opinion in MacDermid, Inc. v. Dieter, I have embedded the file below.

Though not a non-compete case, the decision is a boon for U.S. employers looking to police trade secret theft activity that occurs outside the country. The suit was based on Connecticut's trade secret statute, not the federal Computer Fraud and Abuse Act. But the suit reads like a CFAA claim.

In short, MacDermid claimed Dieter improperly forwarded confidential business information just before her termination of employment. The conduct occurred in Canada. But MacDermid maintained its data on servers in Connecticut. Dieter's defense to jurisdiction - that she did nothing in the United States - did not carry the day, according the Second Circuit.

Read the Chicago Tribune's article for a summary of the case, and then the short Second Circuit opinion below.

MacDermid v. Deiter - Second Circuit Opinion

Type of Nonsolicitation Clause May Influence Proper Venue

In the past, I have assiduously avoided discussion of venue and jurisdiction disputes. These arise with alarming frequency in non-compete litigation. By and large, they are dull and uninteresting topics that only lawyers can warm up to.

One issue, though, does warrant some mention on this blog. And (as the title of this post indicates) it has do with the interplay between the type of non-solicitation covenant at issue and the considerations courts give to determining proper venue.

Start with this premise: non-solicitation covenants come in two shapes and sizes. First, some covenants prohibit only true customer "solicitation" by an employee. Second, others prohibit an employee from not only soliciting certain customers but also from working with them. The distinction lies in who initiates the contact - the customer or the employee. In the latter class, a broader range of competition is off-limits.

So let's discuss how this can factor into a venue dispute. Take, for example, a case out of Nebraska - Farm Credit Svcs. of America v. Opp, 2012 U.S. Dist. LEXIS 171818 (D. Neb. Dec. 4, 2012). It yields a common fact pattern:

1. Agreement contains a mandatory choice-of-law and forum selection clause of Nebraska, where the plaintiff maintains its corporate nerve center.

2. Employee works in South Dakota and deals with customers only in South Dakota.

3. Employee contends that customers will say they sought him out - not the other way around.

4. Those witnesses will be inconvenienced by having to travel to Nebraska to testify.

The argument has some appeal. But only if the non-solicitation covenant is of the first kind I described above - one that only limits "solicitation."

Why is that the case? Because customer testimony likely is very relevant to determine how the initial contact with the ex-employee started. Those customers are often decisive in resolving the critical fact question - who solicited whom? Courts will discount the employee's testimony, but they're more likely to credit what a non-party has to say on the stand.

The problem in the Nebraska case is that the agreement was broader - the second kind I described above. The non-solicitation covenant prohibited both active and passive solicitation. Customer testimony was, in the court's mind, irrelevant. If the ex-employee sold to those customers, it matters not at all who initiated the contact.

Back to venue clauses a second. There are two types - consent to jurisdiction and consent to venue. In a consent-to-jurisdiction clause, a selected venue is permissible, but not mandatory. In a true forum selection clause, however, an employee waives any challenge to venue based on his or her incovenience.

But the analysis does not end there. Federal courts have the power to transfer a case out of the mandatory venue if third-party witnesses will be inconvenienced. In non-compete cases, this would include customers who are at the heart of the dispute. And when the clause is drafted in such a way that precludes any work with certain customers, then a federal court is much less likely to view their testimony as relevant in the case. A broader non-solicitation clause, in effect, means that an employee will have a far more difficult time claiming third-parties will be inconvenienced by the agreed-upon forum. 

Friday, December 21, 2012

Non-Compete Suits and TROs - Part 3

In the last installment of my series on temporary restraining orders (TROs), I will discuss some practical problems and considerations for parties who argue these motions in court.

I will address this both from the perspective of the moving party (usually the employer) and the responding party (usually the employee). One caveat first. The first, most important consideration is to understand local practice.

From my perspective, it is harder to obtain a TRO in federal court than it is in state court. But practice varies widely among jurisdictions - and even within jurisdictions among judges. Preliminarily, any attorney needs to understand what it is judges want and expect at a TRO hearing.

Practical Problems and Considerations - The Moving Party's Perspective

Start with the premise that judges aren't inclined to grant many TROs. By definition, the relief is extraordinary. It will cause problems with the court's docket. And it may require the court to do a lot of work in a short amount of time.

So any party moving for a TRO better tie up every single loose end. In my experience, TROs are often poorly put together, likely because of the haste in getting something on file. But taking shortcuts and failing to cover the necessary areas is the surest (and easiest) way for a court to deny the motion.

I have come up with five key considerations that a moving party must keep in mind, irrespective of the particular merits of any case.

(1) Describe the immediate harm. This sounds obvious. But many TROs fail to address this. In a non-compete case, for instance, a moving party should attempt to show that customer solicitation efforts are occurring as of the filing (not that they once occurred) and that valuable customer relationships are at risk. If data has been taken or compromised, the moving party must show what type of harm could occur absent a court order. Conclusions are not enough. Specificity rules.

(2) Identify compelling facts in affidavits. TROs that overemphasize conclusions and speculation are destined to fail. Sworn declarations should identify customers solicited, orders lost, data taken, or other specific acts of unfair competition. If a moving party doesn't have at least some hard evidence to point to, then the motion won't carry the day.

(3) Keep it short. A party seeking a TRO will have a judge's attention - but not for very long. A TRO brief does not have to cite every case or come in just at the word limit (it's a limit, not a goal). A concise brief highlighting sworn declaration testimony, touching upon the key TRO elements, is much better than a sprawling 200-page filing that a judge will only glance at and quickly discount.

(4) Tell a story. This is my advice for just about any motion or brief. But on a TRO, you have a narrow window to make a quick, powerful impression. A strong introduction demonstrating ongoing harm and the need for an immediate order is critical. Even more important is a story describing why the non-compete is reasonable and enforceable. Because a court likely won't be considering anything but a movant's submission, it is important not to get bogged down into unnecessary details.

(5) Be prepared with a bond. It is essential for a moving party to know that it may have to post a bond to get a restraining order. Federal Rule 65(c) discusses the requirement of posting security. Courts must consider the amount of a bond when granting any type of preliminary injunction or TRO. If the court is inclined to grant the motion, it may ask counsel for the moving party what its position is on security. It is not enough simply to ask for a waiver. Counsel must be prepared to acknowledge some amount has to be posted and give a rationale for what that amount is.

Practical Problems and Considerations - The Responding Party's Perspective

A party responding to a TRO is both in the driver's seat and somewhat stuck. On the one hand, most TRO motions are denied - so that's naturally a plus-fact. However, the responding party often is caught flat-footed and has little opportunity to tell his or her side of the story.

Practical tips? There are many. Here's five:

(1) Identify procedural problems. As TROs are almost always slapped together, it is inevitable that a moving party will make mistakes. It's incumbent upon a defendant to know the TRO rules and standards, and describe for the court why the plaintiff failed to meet its burden. For instance, in Illinois state courts, our pleading rules require a moving party to show specific facts concerning irreparable injury. Conclusions won't suffice. I have defeated TROs when plaintiffs make undeveloped or conclusory arguments concerning this critical TRO element.

(2) Focus on what is being requested. Often times, a court may agree that a TRO - in comcept - is warranted. But the plaintiff may overplay its hand and ask for too much relief. For instance, a draft order submitted may sweep too broadly or not describe with specificity the conduct to be enjoined. A responding party should always seek to narrow the TRO the plaintiff seeks, or describe why the scope of the relief is too broad or vague to be enforced. This often dooms a TRO seeking some relief concerning use of trade secrets.

(3) Point to delay, lack of an emergency. Courts will require a moving party to act quickly if it wants a TRO. But sometimes a plaintiff will wait too long; even a week's delay in acting can spell the end of a TRO motion. A defendant is well-advised to point to evidentiary holes or facts demonstrating that the plaintiff was aware of the challenged conduct and sat on its rights for an unreasonable period of time.

(4) Submit a concise response - if you can. Difficult as it may seem, a responding party should try to submit a response brief, with or without affidavits. Again, brevity is very important because a judge won't have time to review a lengthy submission. And, also, it may give the court a better idea of the defendant's story before any hearing. In federal court, it is common for courts to give the responding party a few days to submit a brief before conducting any sort of a hearing. In state court, this is less common.

(5) Consider an agreed order. It's never fun conceding. But a defendant can do well by averting a TRO hearing altogether. It can propose an agreed injunction order that gives a plaintiff some relief, but not all of what it's asking for. A plaintiff has a natural incentive to consider this, given the reluctance with which courts grant TROs. Common ways to resolve a TRO in a non-compete case include an agreement not to solicit a narrow (as opposed to broad) group of customers, to return documents or information, and not to work in a defined role at a competitor pending an injunction hearing.

Thursday, December 20, 2012

Non-Compete Suits and TROs - Part 2

Last Saturday, I discussed a difficult procedural issue concerning TROs - appellate rights.

Today, I want to discuss a more practical problem clients face when deciding whether to move for a TRO in a non-compete case: what are the benefits and drawbacks of seeking an immediate restraining order?


I think there are three potential benefits to moving for a TRO, but like anything else, they're subject to some qualification.

First, pursuing a TRO often times leads to an agreed order that may be less than what the client wants, but still gives some measure of relief before an evidentiary hearing on a preliminary injunction motion. Look at it this way: if you don't move for a TRO, you're not getting anything until the injunction hearing - which could be 2 months down the road. And if you take something less than what you're asking for to resolve the motion, you're still getting more than you would without seeking the TRO in the first place.

Second, a TRO motion gives the plaintiff the ability to frame the dispute for a judge right away. My experience is that judges - despite their heavy dockets - remember cases that are before them on TROs and preliminary injunctions. They immediately dive into the merits, which doesn't happen in the vast majority of cases. By seeking a TRO, the plaintiff is able to tell a story and get it right before a judge, who is more likely to remember the case as opposed to those that just sit around or are a regular staple of his or her docket. In a strong case, this can be very beneficial for future disputes or contested motions.

Third, the client often benefits from a TRO motion, even if it's not entirely successful. The lawyer must communicate that TROs are difficult to obtain, and that a loss is really not a huge setback. Even unsuccessful TROs can force an immediate settlement discussion or a concession, and the very pursuit of it may achieve some measure of relief. The defendant, for instance, may prevail and defend the TRO successfully, but decide that - to minimize risk - he or she is going to stop soliciting the accounts protected by the covenant.


Despite these benefits, TROs suffer from some drawbacks, too. Again, I'll stick with three.

First, a loss can embolden a defendant into thinking he or she has a strong defense. The standards for determining a TRO are much different than at final judgment, but if a judge expresses skepticism at a TRO hearing about the covenant's enforceability, then a defendant may feel as if the cost of litigation is justified for achieving a favorable result.

Second, the compressed timeframe in which an attorney must file and present a TRO motion often leads to sloppy or incomplete work. Unless a client is prepared to provide the evidence and testimony required to support a TRO, an attorney could be hamstrung and ill-prepared to demonstrate for the court the immediate need for a TRO. In my experience, these poor evidentiary presentations doom most TRO motions.

Third, the compressed timeframe can be detrimental even if the motion is successful. Some clients are ill-prepared to go to an injunction hearing in 14 days. Since a TRO is temporary, the grant of a motion speeds up the case; the court must conduct a hearing to determine whether to convert the TRO into a preliminary injunction. And if the defense insists on a quick hearing date (that is, it doesn't consent to an extension), the plaintiff must be prepared with its witnesses and supporting evidence. In some cases, this won't be an issue. But for a client that hasn't prepared sufficient affidavits or conducted a strong factual investigation, this short turnaround time could be fatal to the success of an injunction motion.

Saturday, December 15, 2012

Non-Compete Suits and TROs - Part 1

Companies that face competition from ex-employees often want a temporary restraining order. As readers of this blog know, there is a significant difference between a temporary restraining order and its big brother - the preliminary injunction. This past week, I had a lengthy TRO hearing on behalf of a client in federal district court in Minnesota. TRO practice and procedure differs widely from federal to state court, and even within certain courts - depending on what judge one draws.

This is the first in a three-part series about TROs in the context of non-compete disputes. Today's post reflects on a confusing issue of timing under Federal Rule 65: what does it mean, under the law, for an order to be "temporary" and for how long can courts issue TROs? Part II will focus on the benefits and drawbacks of seeking a TRO, as opposed to a preliminary injunction. And Part III will discuss some practical considerations when presenting and arguing TROs.

(Because it is the end of the year - a notoriously frenetic time for law firms - and because I have an infant who I'd rather spend time with right now, it is unknown when Parts II and III will appear. But let's just say within the next seven days...)

So onto timing. A "temporary" restraining order can only be...temporary.

The confusion for many parties in terms of a TRO's duration stems from the two types of TROs that courts see: those with notice and those without notice (called ex parte TROs). A TRO sought without notice clearly can extend no longer than 14 days under the terms of Federal Rule 65, and courts are highly skeptical of parties who seek such relief without letting the defendant know of the proceeding. In essence, courts will require parties to make an additional showing of why giving the defendant notice is either impractical or itself poses a threat of irreparable harm.

But the issue of TRO duration is less obvious when a party seeks a TRO with notice. Federal Rule 65 (and most state court rules of procedure) do not specifically address this. The 14-day duration limit is expressed in terms of a TRO sought without notice. There is simply no corollary in Rule 65 addressing duration limits for a TRO sought with notice.

So how long can a noticed TRO last? 14 days? Longer, at the court's discretion? The answer has to do with appeal rights. Under the federal rules, a grant or denial of a TRO is not appealable. This differs from the practice of some state courts - Illinois, for instance - which have specific rules of appellate procedure that allow for an appeal of a TRO ruling.

But just looking at Federal Rule 65, if a TRO is not appealable, then it has to be time-limited - whether the petition is filed with or without notice. Interpreting the rule otherwise, a court could simply foreclose an appeal right by calling a preliminary injunction a TRO. Remember: TROs issued with notice resemble preliminary injunctions. Notice concerns are gone. A party may respond with affidavits, exhibits, and even an answer denying material allegations. At that point, a court - depending on what exactly is presented - will have at worst a broad sketch of what an actual preliminary injunction hearing will look like.

So the answer is 14 days in either case. This issue is not the subject of much reported case law for two reasons. First, TROs aren't appealable in federal court so there is almost no circuit law on the subject. Second, parties often agree on how long a TRO should last - even if it's past 14 days. There is a natural incentive for parties to agree so they can adequately prepare for a preliminary injunction hearing.

Thursday, December 6, 2012

Pennsylvania Court Rejects Sherman Act Challenge to Non-Solicitation Agreement

A while back, I posted on EBay's current dispute with the Department of Justice over a no-poaching agreement it had with Intuit concerning the companies' tacit understanding not to poach management level employees. The Justice Department sued under the Sherman Act, claiming the agreement was a violation federal antitrust law.

A recent decision out of Pennsylvania demonstrates that such an argument is difficult for a court to accept.

The agreement at issue was between a staffing company, Select Medical, and its client, Consol Energy. The agreement contained a fairly common no-poaching clause that precluded Consol from hiring Select's employees during the term of the staffing agreement and for a trailing period of 18 months.

Though the Amended Complaint was less than clear, it appears the plaintiff - Molinari - was employed by Select Medical and impacted by the no-poaching clause when he sought to work at Consol in a safety coordinator position through another staffing company.

Molinari claimed that the Select Medical/Consol agreement was illegal under the Sherman Act because it produced anticompetitive effects within the following relevant market:

"...labor and services for sale to any employer who provides, or who may provide, services to Consol, directly or indirectly."

And that ended up being fatal to Molinari's attempt to claim a Sherman Act violation.

Molinari couldn't define the relevant market in a way that allowed him to state a plausible antitrust claim. In essence, Molinari made two mistakes:

(1) he never alleged what his skills were and how they were impacted by the agreement; and

(2) he claimed the market was a single entity - those who may work or provide "services to Consol."

Under federal law, a plaintiff must show that an agreement produces anticompetitive effects "within the relevant product and geographic markets." Molinari may have been right that the Select Medical/Consol agreement produced such effects as it pertained to his ability to work at Consol.

But he couldn't - indeed, didnt try to - demonstrate that the agreement precluded him from applying his general skills and knowledge elsewhere, even to companies that may provide energy services like Consol. Instead, he defined the relevant services market in a narrow, unrealistic way that didn't match up with the allegations of his complaint.

He also couldn't - again, didn't try to - allege that the Select Medical/Consol agreement precluded companies from hiring safety coordinators generally, or that the agreement made it unreasonably difficult for companies to find and retain such workers.

Molinari v. Consol Energy - Opinion

Saturday, December 1, 2012

Georgia Case Demonstrates Importance of Addressing Choice of Venue and Law Clauses

Readers know from prior posts that Georgia is one of the "red-flag" states when it comes to non-compete disputes.

Non-compete contracts entered into before the ratification of a constitutional amendment in 2011 are governed by the common law, and that body of law remains exceedingly treacherous for companies enforcing covenants.

A recent Georgia appellate case illustrates why procedural choice of venue and choice of law rules are vitally important.

The case of Carson v. Obor Holding Co., LLC yields a fairly common fact-pattern. Carson wore two hats for Obor Digital, a company that supplies staffing and software services in the defense industry. He was a member of the holding company (the defendant in the case) and an employee of the operating entity (not a defendant). He resigned in April of 2011, claiming "constructive discharge" by virtue of a reduction in his commissions. He then immediately filed suit in Georgia state court seeking an injunction against enforcement of the restrictive covenants contained in the Holding Company operating agreement.

The trial court dismissed his case, finding a Florida choice-of-forum clause was valid. That contract also required application of Florida law. Florida, in direct contrast to Georgia, is an exceedingly friendly enforcement state.

The Court of Appeals of Georgia reversed and held that the forum selection clause was invalid. It is important to note that courts won't invalidate forum selection clauses simply because one state's law (here, Georgia) is more favorable to employees than another state's (here, Florida). Rather, the difference has to implicate some fundamental public policy.

Florida tends to pose special problems with choice-of-forum and choice-of-law clauses if the suit is brought in another state. This is so for two primary reasons. First, Florida has a mandatory blue-pencil rule, requiring courts to modify overbroad covenants to the extent necessary for protection of the enforcing party. Georgia (pre-2011) is the exact opposite, essentially adopting an all-or-nothing policy. Second, Florida disallows a court from considering any employee hardships - economic or otherwise - that may result from enforcement. Georgia requires courts to consider such hardships in the balancing analysis. (Illinois adopted a similar rationale a few years back to invalidate Florida choice-of-law provisions in non-compete cases pending in Illinois courts.)

Turning to the substance of the covenants, Obor Holding's operating agreement had the following deficiencies in the restrictive covenants:

(1) The non-disclosure covenant did not define "confidential information," and it barred use of confidential information in perpetuity. Georgia law holds this is invalid if the non-disclosure for non-trade secret information is unlimited. (This is ridiculous, but maybe more on this in another post.)

(2) The non-solicitation covenant was not limited either (a) to a discrete class of customers, or (b) territorially. It also barred Carson from accepting business from a customer. Georgia cases hold that non-solicitation covenants that bar this so-called "passive solicitation" are invalid. (Again, stupid. How can an enforcing party know who contacted whom?)

(3) The non-compete covenant was invalid because it applied throughout the country and had no discernible territory limitation and because it had no activity scope tied to it. That is, it barred any affiliation with a competitor, not just some particular competitive conduct.

Because of the fundamental difference in how Georgia and Florida courts view non-competes, the Court of Appeals found that the operating agreement covenants violated Georgia public policy and that a Florida court would enforce them (at least to some extent). That means that, in Georgia, the choice-of-venue clause was invalid. A Georgia court had to hear the case and had to apply Georgia law. IIt must be nice to be a Georgia non-compete lawyer. No shortage of cases. And plenty of contract rewrites given the change in the law in 2011.

Other states that will pose similar procedural problems like this are Wisconsin, Oklahoma, North Dakota, and California. States that are viewed as more employee-friendly may not have robust public policy considerations that require courts to override choice-of-forum and choice-of-law clauses.


Court: Court of Appeals of Georgia
Opinion Date: 11/20/12
Cite: Carson v. Obor Holding Co., LLC, 2012 Ga. App. LEXIS 971 (Ga. Ct. App. Nov. 20, 2012)
Favors: Employee
Law: Georgia

Wednesday, November 28, 2012

Product Disparagement At Heart of Merge/Medstrat Lawsuit Over Lost Customers

As reported in Crain's Chicago Business on Monday, Merge Healthcare Inc. has filed suit against rival Medstrat for allegedly using unfair means to target a specific group of clients. Merge and Medstrat are competitors in the field of medical-imaging technology.

The central allegations it the Complaint revolve around a marketing plan Medstrat allegedly developed to poach customers away through a series of inaccurate or disparaging remarks, including claims that Merge was not "stable" and that Merge had retained an investment bank, ostensibly suggesting Merge was trying to combine itself with another industry player.

The meatier allegations of unfair competition concern a claim that Medstrat used improper tactics to poach away specific customers from Merge's prior acquisition of Stryker Imaging. Those so-called "legacy" customers had a different type of imaging system (that is, a hardware/software system that captured and stored medical images) that other Merge customers.

The crux of Merge's claim is that Medstrat was "scaring" customers into believing that Merge was going to convert these legacy Stryker customers into using (or migrating to) a different imaging platform. Ostensibly, the alleged purpose of these communications was to suggest the transition or conversion would be costly, painful, and difficult.

Merge's take is that no customer would be forced to convert to a single imaging product and that it would continue providing support for any legacy product that ex-Stryker customers use. Interestingly, Merge alleges that it is aware of nearly 40 accounts that have switched to Medstrat during the time period proximate to disparaging remarks. It claims that lost profits easily could reach into the eight figures.

The lawsuit seeks both injunctive relief and damages. Any time a court issues an injunction that ostensibly affects speech (which disparagement is), a First Amendment concern arises. And an injunction against speech could easily be deemed an improper prior restraint.

The law in Illinois is not particularly well-developed but it appears Merge recognizes the First Amendment difficulties that its injunction could pose. In my opinion, plaintiffs sometimes pursue a shotgun approach that seeks a broad injunction against false or misleading remarks - without specifically exactly what a court should enjoin. That clearly is wrong and would lead to significant legal problems crafting an injunction order.

Merge, though, was pretty careful. With its preliminary injunction motion, it has submitted a proposed order identifying what types of communications it wants enjoined. It outlined very specific comments that it believes should be enjoined and also wants the court to prevent Medstrat from distributing certain marketing communications that it believes incorporate disparaging material.

This is an example of a injunction request that affects speech, but which may be appropriately and narrowly crafted to avoid the latent First Amendment "prior restraint" problem that often crops up in disparagement cases between competitors.

Medstrat has not yet responded to the Complaint, but it will be interesting to see if the prior restraint issue is part of its defense at the preliminary injunction phase.

A copy of the Merge Complaint is embedded below. The case is No. 12-cv-9140 (N.D. Ill.). Judge Samuel Der-Yeghiayan.

Merge Healthcare v. Medstrat, Inc. - Complaint

Tuesday, November 27, 2012

Supreme Court of the United States Reverses Oklahoma Non-Compete Decision

It is not often - never? - that the Supreme Court of the United States renders a decision that impacts non-compete law.

But such is the case in one of the year's more significant non-compete developments. In Nitro-Lift Techs. v. Howard, the Court held that the Supreme Court of Oklahoma improperly decided the enforceability of a non-competition agreement between a company and two former employees. The Court held that the mandatory arbitration clause required an arbitrator, not a state court, to decide the enforceability question under Oklahoma law.

This is a rare Oklahoma non-compete case, because non-competes are not enforceable in Oklahoma. Some limited activity restraints are, to be sure, but general non-competition covenants are treated in Oklahoma like they are in California and North Dakota.

It is perhaps for this reason why the ex-employees decided to file suit against their former employer, Nitro-Lift Technologies, when they quit and joined a competitor. Faced with a demand for arbitration, the employees went on the offensive to a court of law. This is a common tactic in employee friendly states like Oklahoma or California.

But, with an arbitration clause in the underlying agreement, did the ex-employees pursue the wrong avenue? The Supreme Court of Oklahoma said "no." A year ago, it boldly declared that "[o]ur jurisprudence controls this issue." The Supreme Court of the United States did not like that, chastising the state court for disregarding the law and not bowing to the broad policy favoring arbitration (even in state court) under the Federal Arbitration Act.

Due to that minor little thing called the Supremacy Clause, Oklahoma had to follow the Supreme Court's interpretation of the FAA. And because there was no challenge to the validity of the arbitration clause, an arbitrator - not a court - had to pass on whether the covenants not to compete were enforceable under Oklahoma law. Whatever arbitration panel is seated just might be influenced, however, by the Supreme Court of Oklahoma's decision that the non-competes were void against public policy.

A copy of Nitro-Lift, a per curiam decision, is below.

Nitro-Lift v. Howard

Monday, November 26, 2012

Preliminary Injunction Order Cannot Be Used As Substantive Evidence at Trial

This one completely baffles me.

Lawyers have to make judgment calls at trial over evidence all the time. Just as important as deciding what to introduce by way of oral testimony or documentary evidence is deciding what to leave out - even if it may be marginally helpful.

In a South Carolina competition dispute, the plaintiffs tried to introduce for a jury the temporary injunction order that the judge entered at the start of the case. And the court agreed to admit it and let the jury review an 11-page order the judge signed after the case was filed.

The case arose out of a business divorce in the PEO industry. PEO stands for professional employer organization, and it is common now for firms to, in effect, outsource their human resources departments. When a shareholder of Allegro failed in his efforts to buy out the majority owner, he left to start his own PEO firm. Lawsuit follows. Injunction entered. Trial ensues.

But why would the grant of an injunction ever be something the jury should see? And how did this happen?

Those questions aren't answered by the Court of Appeals' decision, except for the following:

"It is hard for this court to determine an instance where admission of a preliminary injunction order into the trial record would not be highly prejudicial."


It's not hard to see the prejudice. Injunctions are misunderstood. It takes a lot of effort, at least in this lawyer's experience, to explain to a client what a preliminary injunction is, and how that piece fits into the total litigation puzzle. Clients who prevail on an injunction motion think they've "won the case." Not so. They're surprised they may have to testify again. Injunctions are decided on truncated records. In some courts, the judge may not hear live evidence. And by their very nature, only part of the evidentiary record is developed.

Even if an aggressive plaintiff's lawyer wanted to trumpet its injunction order before a jury (which is something I can't come to terms with), a judge should know better. The court should have known its findings on a temporary injunction order would greatly influence a jury.

This was a basic mistake that never should have happened. And the plaintiff now has to retry its case at great cost. As I tell my clients, always expect the unexpected in competition disputes.


Court: Court of Appeals of South Carolina
Opinion Date: 7/11/12
Citation: Allegro, Inc. v. Scully, 2012 S.C. App. LEXIS 334 (S.C. Ct. App. July 11, 2012)
Favors: Employee
Law: South Carolina

Saturday, November 24, 2012

Court of Appeals of Colorado Overturns Jury Verdict on Abuse of Process Counterclaim

Employees aren't equipped with an overwhelming array of weapons to fight back anticompetitive lawsuits.

I have written many times on this blog about this topic. In this author's view, the legal system works most efficiently when parties can rely upon contract law to allocate rights and responsibilities with some predictability. Though non-competes are restraints of trade, they should be struck down only when patently overbroad and when the objective intent from the contract language is to deter fair competition.

I also believe that trade secrets law is a species of property law, and that if an employer can demonstrate a taking of protected (that is, valuable and secret) property, the law should honor that. But in the absence of protection efforts that place a third-party on objective notice that the property is truly something that is "secret", trade secrets law can be a destructive, overused weapon between competitors that disrupts parties' reasonable expectations in dealing with each other.

Employees sometimes assert abuse of process counterclaims when faced with a competition lawsuit appears to be filed as an end in itself - not as a means to an end. Abuse of process claims are tough to prove, but generally require the employee to show three things:

(1) an ulterior purpose to the suit;

(2) actions by the employer that are not proper in the course of the lawsuit; and

(3) damages.

There's another hurdle to clear, though, when an abuse of process counterclaim is based on the idea that the lawsuit itself is not proper. It's called the "sham litigation" exception, because lawsuits generally are protected by the First Amendment's clause enabling parties to petition the government to redress grievances. The sham litigation exception to First Amendment immunity further requires a counterclaiming party to show an objectively baseless suit brought in bad faith.

A recent Court of Appeals ruling in Colorado reversed a district court's jury verdict in favor of ex-employees who each obtained a $200,000 judgment on an abuse of process counterclaim. The problem that the district court made was not assessing the sham litigation exception properly on a post-trial motion by the employer. Instead of assessing whether the employer's competition claims were objectively baseless and devoid of factual support, it held a reasonable jury could have found for the employees on their counterclaim.

This conclusion missed the mark, since the court - not a jury - must pass on the First Amendment constitutional issue. Interestingly, Colorado rejected a bright-line gatekeeper rule. Specifically, it found that just because an employer's competition claims survive summary judgment does not mean the abuse of process counterclaim automatically fails. The court noted that trials may often be more efficient than resolving summary judgment motions, and that summary judgment denials often don't contain the type of exacting analysis that would automatically dispose of an abuse of process counterclaim.

One issue that is not discussed in the Colorado case - or in many cases like this - is the second element of the abuse of process tort. As listed above, an employee must generally show some action "not proper in the course of the lawsuit." When the theory is that the lawsuit is a sham, it is hard to identify something concrete that is improper, such as the misuse of subpoena power. However, my view is that the sham litigation analysis subsumes the second element. If a lawsuit is objectively baseless, then the process itself - the cost of discovery, disruption in the marketplace - has been subverted entirely.


Court: Court of Appeals of Colorado, Division Three
Opinion Date: 11/8/12
Cite: Health Grades, Inc. v. Boyer, 2012  Colo. App. LEXIS 1842 (Col. Ct. App. Nov. 8, 2012)
Favors: Employer
Law: Colorado

Tuesday, November 20, 2012

Department of Justice Sues EBay Over No-Poaching Agreement With Intuit

Last week, the Department of Justice filed another suit against one of the nation's tech giants for entering into horizontal no-hire agreements. This time the suit is against EBay, and it generally alleges that EBay and Intuit engaged in an informal and formal contract not to hire each other's key employees.

The DOJ has sued under the Sherman Act, claiming that the no-hire agreement is both illegal under a per se and rule of reason analysis. Though the suit is pending in California - a state with a well-known and broad policy against enforcement of non-competes - the California law receives only one passing mention in the complaint. And the state public policy would appear not to have any impact on the Sherman Act analysis.

It is not clear what the imminent harm is, or whether EBay and Intuit have continued their understanding not to hire each other's people, however informal that understanding may have been. The DOJ had obvious access to e-mail communications and probably gained them from another suit that it brought in California federal court against other tech companies.

Intuit is not a defendant, as it is under an agreed order in a similar case. A copy of the Complaint is contained below.

US v. eBay, Inc.

Wednesday, November 14, 2012

Non-Compete Radio: Episode 4 Link

Today's episode (link below) features an interview with Rob Dean of the Roanoke, Virginia firm, Frith & Ellerman. Rob's practice includes the representation of employees in non-compete matters.

Rob and I discuss a wide range of topics including the use of social media evidence in non-compete cases, Virginia's trend against enforcement of non-competes, the blue-pencil rule, declaratory judgment suits, and (most critically) his bold prediction that Michigan will top Ohio State in this year's Big Game (at least to us alumni).

The 30 minutes flew by, and I thank Rob for joining me. I hope to have him back on the podcast to discuss the Urban Meyer era and how poorly he predicts college football games.

Listen to this episode

Saturday, November 10, 2012

Supreme Court of Illinois Recognizes Intrusion Upon Seclusion Tort in Non-Compete Investigation

Non-lawyers would be surprised at the type of feelings and emotions that run through competition cases. One only need to read Steve Jobs' biography to get a sense of how raw his feelings were on the upcoming smart phone patent wars he did not get a chance to see.

Non-compete cases are much the same way. Employers feel ex-employees are disloyal. Ex-employees feel entitled to do what they want. Suspicion and speculation abound. And, as a lawyer, I have always been amazed at how personal the lawyers take most cases.

Frequently (though not often), employers overstep their bounds in investigating a non-compete breach. It is hardly uncommon for companies to hire investigators to look into what an ex-employee is doing out in the field for her new company. But sometimes those investigations can go off-course. Real life, after all, is not an episode of The Good Wife.

The Supreme Court of Illinois in Lawlor v. North American Corp. recently recognized the tort of intrusion upon seclusion in the context of a non-compete investigation gone south. The tort is a branch of the invasion of privacy claim and is fairly flexible in what types of facts can give rise to the claim. It essentially provides for tort liability when one party intentionally interferes with another's private affairs, such as by examining bank account information or opening personal mail.

The Court had never recognized the cause of action until Lawlor. The case arose when North American's outside counsel retained a private investigation firm to investigate whether Kathleen Lawlor was improperly competing following her departure from North American. The firm obtained Lawlor's phone records to examine whether she was talking to competitors. Lawlor sued for the tort of intrusion upon seclusion. North American defended the case on the grounds that there was no principal-agent relationship between it and the investigation firm. Unfortunately for North American, the Court determined sufficient grounds existed for the jury to find that North American was intimately tied into what the private eye firm was doing.

The case is emblematic of the type of emotions that can run high in non-compete cases. Precisely because facts concerning competition are intended to be hidden, a company often resorts to creative means to find out what is happening in the field. Though not all pretexting may be illegal or tortious, a company must determine which tactics are vigilant and which are overzealous. And it is the job of outside counsel to ensure that the company is taking reasonable, yet appropriate and measured, steps to triage what happened.

A copy of Lawlor is contained below.


Court: Supreme Court of Illinois
Opinion Date: 10/18/12
Cite: Lawlor v. North American Corp. of Illinois, 2012 IL 112530
Favors: Employee
Law: Illinois

Wednesday, November 7, 2012

Employer Unable To Condition ERISA Severance Payments on Signing Undisclosed Non-Compete

For those of you dying to know more about ERISA, here ya go.

First, the basics. ERISA is a sweeping federal statute that governs employee health, welfare, and benefit plans. Employers often institute ERISA-based plans and within those plans provide that terminated employees are eligible to receive severance benefits under certain condictions. For instance, employees who have been discharged without cause or who worked at the company for a certain number of years may be eligible for severance pay, even if that is not contained within an employment contract.

Simple enough. But ERISA-based plans almost always contain the requirement that an employee, as a condition of receiving severance pay, execute a release. That makes perfect sense, for it would be somewhat absurd for an employer to pay out benefits and not get some assurance that a Title VII charge won't arrive in the mail months later.

Severance plan documents often attach a form release for employees to see, and from there, it's just a matter of filling in the blanks at the time the severance benefit rights accrue. But what rights does an employer have to insert in a severance document the requirement that the employee sign a non-compete?

According to one Illinois federal court, none.

The case of Pactiv Corp. v. Rupert dealt with a case where the ERISA plan simply stated that the employee's separation agreement must "be in a form acceptable to the company." The plan documents mentioned nothing about a non-compete. Though Pactiv understandably was concerned that its ex-employee was in a position to capitalize on knowledge he gained while at Pactiv, the court refused to imply a requirement into the severance plan Pactiv adopted.

The court stated: "Reserving the right to have a separation agreement in a 'form acceptable to the Company' is not notice to an ERISA beneficiary that a non-competition covenant could be required as a condition to receive benefits." ERISA plans are not subject to ad hoc amendments or interpretation.


Court: United States District Court for the Northern District of Illinois
Opinion Date: 11/1/12
Cite: Pactiv Corp. v. Rupert, 2012 U.S. Dist. LEXIS 158413 (N.D. Ill. Nov. 1, 2012)
Favors: Employee
Law: Federal/Illinois

Tuesday, November 6, 2012

Non-Compete Radio: Episode 3 Link

Today's podcast on Non-Compete Radio features a discussion with Bill Tarnow, chair of the Labor and Employment Law practice at Neal Gerber and Eisenberg. The topic is "Mistakes in Non-Compete Litigation." Bill and I discussed our thoughts on the blue-pencil rule, what percentage of non-compete agreements we think are poorly drafted, and the perils of adding weak trade secrets claims.

We also went over Vanko's "Three Pillars of Death" and even gave brief mention to the current state of Illini football.

Enjoy the discussion by clicking below. You also can subscribe to the podcast through iTunes.

Listen to this episode

Friday, October 26, 2012

Permanent Injunctions and The Erie Problem

God help us all!

I am discussing the Erie v. Tompkins case from 1938. This was like the fourth most annoying case from law school, and I thought I left it once and for all in Champaign, Illinois in 1997.

But it rears its head - fittingly so, perhaps - in the tragicomedy known as E.I. duPont v. Kolon Industries. The issue, though, is one that is likely to repeat, so if for no other reason than I feel an obligation to get this issue on the table, I have to discuss this. And it's somewhat surprising that I haven't seen it come up much before.

The issue, put simply, is this: does federal or state law apply to determining whether to issue a permanent injunction in a diversity case for violation of the trade secrets act?

Why is this issue important? For injunctions arising under federal law, courts apply the so-called eBay test that requires a court to examine four factors before awarding a permanent injunction: (1) irreparable injury, (2) inadequate remedy at law, (3) balance of hardships favoring the plaintiff, and (4) that the public interest is not disserved by issuing an injunction.

This differs from the state-law approach. In many states, courts have held that if a statute authorizes a court to issue an injunction, then a plaintiff need not prove irreparable harm. Demonstrating success on the merits is enough.

Trade secrets law is governed by state law. And every state that has adopted the Uniform Trade Secrets Act (47 states) allows for injunctions to issue in trade secrets cases.

So in Kolon Industries, the Eastern District of Virginia found that the Erie doctrine applies, and a federal court must apply state substative law to determine whether a permanent injunction remedy is appropriate in a trade secrets case. Erie basically says this: on a matter of substance, a federal court must apply the law of forum state. On procedural issues, federal law applies.

My problem is not so much with the Erie-based holding in Kolon Industries, because it is hard to see a permanent injunction order as anything other than substantive. But state laws that do not apply an eBay-like test, to me, make no sense. It should never follow that because a legislature has authorized an injunction for a violation of a state statute, that the injunction should automatically be entered.

This is particularly the case when the plaintiff has damages remedies available to it. In the Kolon Industries case, DuPoint obtained compensatory damages of $919.9 million. I can see where an injunction should automatically follow if the statutory violation does not allow for the recovery of damages, such as in the case of some deceptive trade practices statutes. Or in the case of a prophylactic law applicable to a regulated industry.

But when a damages remedy is available (and indeed has been awarded), it is short-sighted to rely on the fact that a statute has authorized injunctive relief to award injunctive relief. This is not to say, of course, that Kolon Industries was wrongly decided on DuPont's entitlement to an injunction, which was clearly warranted on the facts.

Monday, October 22, 2012

Non-Compete Radio Is Back: Episode 2 Link

It was either watch the debate or finish Episode 2 of my podcast. The first few minutes of the debate were excruciating.

So, after 6 months, Episode 2 of Non-Compete Radio is on the air. You can listen directly to Remedies in Non-Compete Litigation by clicking below. And remember to subscribe to Non-Compete Radio in the iTunes store.

Next week, I will be interviewing Bill Tarnow of Neal Gerber & Eisenberg, a great non-compete lawyer who recently was named one of Chicago's "40 Under 40" attorneys to watch. Bill and I are going to discuss mistakes we see in non-compete and trade secret litigation.

I look forward to having other guests join me in future episodes.

Listen to this episode

Saturday, October 20, 2012

The Reading List (No. 12)

We start this week's Reading List with two entries from a site I need to visit more often.

Burr & Forman's non-compete blog has a very interesting article on potential antitrust implications when competitors settle non-compete disputes.

Also from the Burr & Forman blog, a report on how Tennessee courts employ the "rule of reason" analysis when modifying non-compete agreements. This post discusses the various approaches courts have taken and also warns employers not to fall in love with the idea that a court will backstop an overbroad or poorly written non-compete.

John Marsh has tackled the legendary case of E.I. DuPont v. Kolon Industries in a number of posts, and this week reports on the federal indictment of Kolon and several executives for trade secrets theft. John hales from Columbus, Ohio (where I went to school), and hopefully he can figure out Ohio State football's porous defense as well as he has the DuPont litigation.

For those trending to an intellectual bent, Judge Richard Posner writes this week on the interplay between "luck" and financial wealth. This is as esoteric as it gets, but what interested me is Judge Posner's somewhat dismissive attitude towards Ayn Rand. For some reason, this surprised me.

Robert Milligan of Seyfarth Shaw has an in-depth and excellent post on the sports agent kerfuffle involving Aaron Mintz and Mark Bartlestein. This feels to me like two petulant kids playing in the sandbox.

Later this week, I will write more on the Supreme Court of Illinois' decision in Lawlor v. North American Corporation, provide a case law update, and link to the (long overdue) second podcast from Non-Compete Radio. That's a lot to tackle, but after a short vacation, I'm feeling up to it.

Thursday, October 18, 2012

A Lesson In How Not to Do It: Vibra-Tech Engineers v. Kavalek

Competition disputes fascinate me partly because of the ways people manage to screw things up.

For my employee clients who are looking to leave and compete, the advice I often end up giving is simple and straightforward. In a nutshell...

1. Don't take anything when you leave.

2. Be honest and forthright on your way out the door.

3. Know your contractual obligations.

4. Don't compete before quitting.

Of course, there are the inevitable line-drawing exercises that have to be hashed out, as I end up answering countless "what if I do this" questions. But as long as employees can stick to these four basic rules, things can't go too terribly wrong.

Scott Kavalek stuck to none of these rules.

The case is Vibra-Tech Engineers, Inc. v. Kavalek, and if nothing else, it is first-rate primer on how not to compete. Earlier this year, a federal court entered a judgment against Kavalek, his wife, and their two companies in the amount of $3.39 million. The suit was a not-so-garden variety non-compete and duty of loyalty action that Vibra-Tech brought in New Jersey. And the facts were startling to read.

Vibra-Tech is in the business of measuring vibrations in construction, quarry, and mining operations, and it also performs related consulting services. Kavalek was a high-level executive and corporate officer of Vibra-Tech who, years before his termination, set up two competing businesses and actively competed with Vibra-Tech while employed by it.

Among Kavalek's actions:

1. Hiring then-current Vibra-Tech employees to work for a competing entity.

2. Diverting several large customers to his own company, costing Vibra-Tech business.

3. Setting up another company as a "supplier" of geotechnical equipment and causing Vibra-Tech to purchase equipment from this supplier at inflated rates.

4. Lying at the time of termination of his involvement in these companies.

5. Tampering with sales invoices produced in discovery in an effort to hide Kavalek's sales activity with diverted customers.

6. Causing his attorneys to make repeated false representations in court about the production of documents and his association with corporations he controlled.

In a case such as this, contractual obligations almost seem to take a back seat. And indeed, the district court in rendering its judgment makes only passing references to the non-compete's enforceability. To be certain, if Kavalek never signed a contract, the outcome would have been the same.

The only real interesting legal issue to come out of the case is that the district court applied a disgorgement theory of damages, largely under the principles of agency associated with fiduciary duty law. Vibra-Tech had offered alternative damages theories, based on both lost profits and disgorgement. Ultimately, the court had little trouble finding that punitive damages also were appropriate.


Court: United States District Court for the District of New Jersey
Opinion Date: 3/29/12
Cite: Vibra-Tech Engineers, Inc. v. Kavalek, 849 F. Supp. 2d 462 (D.N.J. 2012)
Favors: Employer
Law: New Jersey