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