Monday, March 30, 2015

What's Driving Wisconsin Senate Bill 69?

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

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

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

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

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

Friday, March 6, 2015

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Wednesday, March 4, 2015

Central District of Illinois Explains Its Disagreement With Fifield Consideration Rule

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

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

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

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

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

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

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

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

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

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

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

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

A copy of the Cumulus Radio decision is embedded below.