Legal Developments In Non-Competition Agreements

I am in Hawaii and have a non-compete clause in th...

2012-02-09T16:21:52.786-06:00

I am in Hawaii and have a non-compete clause in the mobile phone industry. It goes as far as saying I cannot even promote another company in my industry without defining promote. So if I have a buddy nearby that can meet a need for my solution, I cannot refer business that way.

The company I represent argues since they pump in tons of money into advertising, if I were to sell another company, it would be utilizing their hard earned money. However other companies have huge marketing are much larger and have larger brand names. In fact people come to my store looking for the other carriers.

I feel I am doing a disservice to my customers with my hands tied and not providing them the most beneficial solution to them.

True, but not on the grounds discussed in this pos...

2011-12-28T14:57:35.645-06:00

True, but not on the grounds discussed in this post.

This decision was over-turned by the Appellete Cou...

2011-12-28T14:53:06.609-06:00

This decision was over-turned by the Appellete Court.

Kenneth, This very short slip ruling is inconsist...

2011-11-04T10:13:54.319-05:00

Kenneth,

This very short slip ruling is inconsistent with California law on UTSA preemption, including two state court appellate opinions which should be binding on a federal district court purporting to apply California law.

California takes the majority position, including ruling preemption on alternative confidentiality formulations at the demurrer (pleading stage) as a question of law, and not as something for further factual analysis. The KC Multimedia and Intel cases both make that clear, as do other federal court rulings such as AirDefense.

In addition, California does not recognize a "confidential but not secret" theory in any event because of the policies of Business & Professions Code section 16600. Even before the UTSA was enacted, that statute protected potential defendants by applying a single-tier IP standard: secret information was off-limits, but nonsecret information was fair game. There was no intermediate tier in the pre-UTSA days.

In other words, one could never even reach the issue the Wisconsin court seemed to contemplate in Burbank Grease, because no such alternative claim could be allowed under pre-UTSA California law. That is why there would be no basis to delay a ruling to see if the plaintiff could establish some intermediate IP category of "confidential but not secret," whatever that would mean.

This very cursory slip ruling does not mention any of that, and it does not mention California's strong preemption of common law claims under Uniform Acts in general, such as the UCC and others.

I believe that this is an outlier and not worth the attention of your excellent blog. Certainly this ruling does not place California with Wisconsin as an anti-preemption state (a federal slip opinion can't overrule published state appellate decisions on a question of state law), so I respectfully submit that statement in your posting should be revised.

If the California Supreme Court were to take up the issue, it would almost certainly side with the two published appellate opinions and the host of better-reasoned federal court opinions on UTSA preemption, and it would also likely follow its own broad 2007 ruling on UCC preemption of common law claims.

My guess is that the litigants here did not fully brief the issue -- the preemption question gets only a couple of paragraphs with very sloppy case citations -- and the court thus did not recognize its importance or consider all the cases and other policy considerations in play.

Unfortunately, trade secret litigants do not always do a good job of explaining the UTSA preemption issue during briefing, which leaves courts vulnerable to making rulings like this one. Ultimately the question is whether each UTSA state allows a two-tier system of state-created intellectual property, one tier governed by the UTSA and its guidelines and the other, alternative tier ("confidential but not secret") governed by no rules, procedural safeguards, or other definitinal limits, and with serious Supremacy Clause problems. Preemption favors a one-tier system, and anti-preemption favors a two-tier system.

That's a very important policy question (for innovation encouragement, employee mobility, and regional economic growth), and one that should not be dealt with through simplistic briefing. Unfortunately even the attorneys litigating a case do not always recognize that bigger picture issues are in play on the preemption question.

I agree with you that this is a very important issue.

Thank you.

Great advice! These will surely allow smooth trans...

2011-04-25T21:15:26.599-05:00

Great advice! These will surely allow smooth transition and lessen the risk of liability under a non-compete covenant.

I am laughing ... because as soon as I saw the wed...

2011-02-03T11:53:04.103-06:00

I am laughing ... because as soon as I saw the wedding photo, I thought "copyright violation." THEN I saw your disclaimer! As one who writes about protecting intellectual property, I'm glad you stay on the right side of that issue.

Good understanding blog to everyone. Really intere...

2010-12-01T03:50:52.061-06:00

Good understanding blog to everyone. Really interesting story give more details about that.

Goodwill (and customer records and other intangibl...

2010-11-09T08:41:42.836-06:00

Goodwill (and customer records and other intangibles) CAN be amortized (deducted) over 15 years by the Buyer under IRC Section 197 and are eligible for (possible long term) capital gains treatment by the Seller. The problem is with Non-compete allocations, that must be treated as regular income to the Seller but must be amortized over 15 years by the Buyer - it's a lose/lose taxwise. So, allocations to non-competes get shifted to goodwill as "no harm" to the Buyer and a big tax benefit to the Seller. The IRS is thinking about requiring equality between the goodwill and non-compete allocations.

I have used the threat of bankruptcy to convince t...

2010-08-21T16:18:28.202-05:00

I have used the threat of bankruptcy to convince the bank to renegotiate a client's practice purchase loan, since the bank would get none of the goodwill value out of the practice on bankruptcy in the absence of a non-competition agreement.

I was told about this case by the plaintiff in a d...

2010-08-21T15:54:21.165-05:00

I was told about this case by the plaintiff in a dental discussion group. I have since changed my Seller oriented non-competition agreements to bar "actual and potential competition" through any "public or private facility." I like this blog, I'm glad to have found it.

Nice post Kenneth. This case clearly demonstrates...

2010-08-03T11:13:15.007-05:00

Nice post Kenneth. This case clearly demonstrates California's strong public policy favoring employee mobility. Employers will face a tough choice now when presented with a cease and desist letter.

I write about the Silguero case in my California Trade Secrets blog: http://caltradesecrets.com/

Best,
Charles

This is the Supreme Court of Canada case I was ref...

2010-07-29T09:48:23.560-05:00

This is the Supreme Court of Canada case I was referring to from Westlaw. The SCC comes down in the Court Will Not Reform or Blue-Pencil Covenant group:

Insurance agent MS sold his Vancouver agency in 1987 and continued to be employed under contract which was renewed repeatedly, and which included non-competition clause applicable to "Metropolitan City of Vancouver" — MS left his employment in 2000 and in January 2001 began working as insurance agent for another agency in Richmond — Trial judge dismissed employer's action for breach of restrictive covenant, finding term "Metropolitan City of Vancouver" neither clear nor certain, and in any event, unreasonable — Court of Appeal reversed trial judge's decision, finding restrictive covenant reasonable and enforceable, and applying doctrine of notional severance, construing term "Metropolitan City of Vancouver" as applying to "City of Vancouver, the University of British Columbia Endowment Lands, Richmond and Burnaby" — MS appealed — Appeal allowed — Court of Appeal erred in rewriting restrictive covenant as it did — Term "Metropolitan City of Vancouver" was ambiguous and there was no context or other evidence demonstrating mutual understanding of parties at time contract was entered into as to what geographic area it covered — As trial judge found restrictive covenant was unreasonable, it was inappropriate for Court of Appeal to rewrite geographic scope in restrictive covenant to what it thought was reasonable.

SCC, KRG Insurance Brokers (Western) Inc. v. Shafron (2009), [2009] 1 S.C.R. 157

Thanks very much for the post. I'm doing a pa...

2010-07-25T05:39:01.034-05:00

Thanks very much for the post. I'm doing a paper on this subject. I wonder about your sources though for placing each state in a particular category. The blue-line rule is used up in Canada also. Courts are highly reluctant to adjust the terms of a non-competition covenant. The most recent SCC decision on this issue was strongly against such pragmatic adjustments.

TruGreen got Nothing! The defendants won on all m...

2010-07-21T12:11:30.168-05:00

TruGreen got Nothing! The defendants won on all motions... as submitted by the court in writing on 7/06/10.

See Compass Bank v. Hartley, 430 F. Supp. 2d 973 (...

2010-05-10T09:34:53.523-05:00

See Compass Bank v. Hartley, 430 F. Supp. 2d 973 (D. Ariz. 2006) as an example of a court in a blue pencil jurisdiction upholding step down provisions.

Mike: I can't give you legal advice unless we...

2010-05-05T16:11:22.059-05:00

Mike:

I can't give you legal advice unless we have entered into an attorney-client relationship. However, I do consult with clients on their agreements and other competition issues at very reasonable, discounted rates. Please e-mail me (see profile for address) if you're interested! Thanks for visiting.

Ken

I am currently party to a non-compete/non solicita...

2010-05-05T15:31:53.937-05:00

I am currently party to a non-compete/non solicitation that is extremely vague and ambigious. In fact, though a map outlining the geographical area is included, the "employer" argues that the entire state is subject. It is a very weak document. It also includes a section where the employer didn't scrub the document and lists Utah as the state of jurisdiction. Would something like this render the entire thing invalid?

Thanks!
Mike P

Interesting case. The United States Courts of App...

2010-04-29T08:54:43.390-05:00

Interesting case. The United States Courts of Appeals for the Sixth Circuit issued an opinion touching upon similar subject matter a few days ago: BDT Products v. Lexmark International. The 6th Circuit considered whether a district court could sanction a law firm that brought a trade secrets claim subsequently found to be meritless. Link to the opinion is as follows: http://www.clelaw.lib.oh.us/public/DECISION/CTA6/042110.html.

Keep up the good blogging, Ken.

Regards,
Mike Greco

Kenneth: Great post and a interesting case. I ack...

2010-04-14T15:16:45.995-05:00

Kenneth: Great post and a interesting case. I acknowledge my bias (we only represent employees in fighting non-competes) but it is my position that the "public policy" exception should always apply when the employee goes to work for the state or local government or a non-profit. This decision in this case will be interesting. Dan Frith

Great post, Ken, and great advice for clients. I&#...

2010-03-09T15:05:47.256-06:00

Great post, Ken, and great advice for clients. I've told clients the same thing for years: make sure you're wearing the white hat, or the judge will find a way to rule against you.

Thanks for the shout out.

Jay

I signed (in FL), a non compete and a separate non...

2010-02-25T09:49:10.549-06:00

I signed (in FL), a non compete and a separate non-disclose agreement at the time of hire. They both start with "For good consideration, and in consideration of being employed by" and then go on with some vaguely worded stuff that implies I can't work in my trade at all in the next five years. My former boss says he's not going to sue me if I tell certian employers what web sites I created for him and follow certain vague rules and do certain works (this is all verbal and I have not yet said whether I agree) for free for him.

Doesn't the first line mean that I should be getting something besides my employment to comply? His interpretation is quite burdensome as it's almost impossible to get a job in my industry without showing my latest works.

Thanks

Good analysis as always Kenneth. If there is an e...

2010-02-17T13:49:23.078-06:00

Good analysis as always Kenneth. If there is an enforceable non-compete in place the employer should be entitled for compliance during the entire term of the non-compete. That's the benefit of the bargain.

Rob Radcliff

If Staffing companies (or any other company) provi...

2010-02-05T12:06:23.130-06:00

If Staffing companies (or any other company) provided competitive wages to their employees, non compete agreements could be banished to the trash bin where they belong.

Non compete agreements only serve to keep employees earnings to whatever that employer wishes to pay.

Ken: Interesting blog and an interesting ruling b...

2010-02-02T08:57:52.046-06:00

Ken: Interesting blog and an interesting ruling by the Fourth Circuit. I spend most of my time representing employess in non-compete litigation. I respectfully differ with your description of $557,555.30 in attorneys' fees as " not at all out of the realm of reasonableness." To my way of thinking... a large law firm "over-lawyered" the case in an attempt to increase profits and penalize the employee. Just my thoughts, Dan

Like all agreements, the enforceability will flow ...

2010-01-03T09:35:40.107-06:00

Like all agreements, the enforceability will flow from the specific language of the non-compete agreement. With that said, however, I offer the following:

To your first question, the scenario you offered will not specifically shield the employee. The employee likely signed the non-compete personally and is therefore personally responsible for complying with it - regardless of whether the employee goes to work for his/her own company or a company owned by a third party. The employee is going to be personally liable for performance and has personal exposure to a lawsuit from the former employer.

To your second question, the location of incorporation of his/her company is likely to be irrelevant - the relevant inquiry will be the actual location of the competition. In your scenario, the employee is going to work for his/her own company. Alter the scenario a little and say the employee is going to work for GE in the same geographic location in which the employee was previously employed. Even though GE is not likely incorporated in Texas, the competition is in Texas so the employee is likely to be restricted. The employee is less likely to be restricted if the employee was going to go to work for GE, or for the employee’s own company, out of state like in Nevada, but that is not the scenario you put forth.

I hope that helps.