Deconstructing the Trump Campaign's Non-Compete Agreement

The inspiration for this post comes from Donna Ballman's terrific blog and her latest post today, titled "Trump Campaign Noncompete Agreements May Break Multiple Laws."

It probably comes as no surprise that Trump's noncompete agreement sucks and is woefully inadequate. Once you wade past the grammatical errors, the contract contains the typical, rote litany of promises not to disclose any "confidential information," not to disparage Trump, not to solicit anyone associated with Trump, and not to provide "competitive services. Absolutely no one is shocked that he has campaign workers sign these.

But given that this is not really a business agreement, and really a political one, let's try to apply some of the utterly inane provisions in this contract to the general legal principles we've come to understand.

1. The non-disclosure covenant. The longest provision of Trump's contract is a non-disclosure clause, which surprises absolutely no one. It has no time limitation, which is a red flag in many states and would render it unenforceable, for instance, against a campaign worker/volunteer in Illinois. (Incidentally, not sure who in the Trump campaign exactly signs this piece of paper, but given what we know, presume everyone.) The definition of "Confidential Information" is truly rich since it is circular in that it applies to all information of a "private, proprietary or confidential nature." Then it goes further and applies to information "that Mr. Trump insists remain private or confidential." With that qualifier, the mind truly reels. As you might expect, it gets better. If Mr. Trump so elects, confidential information can extend to "any information with respect to the personal life, political affairs, and/or business affairs of Mr. Trump." There are no carve-outs for information that is within the public domain so it may be hollow, but it is worth noting that Mr. Trump includes as non-exclusive examples of "Confidential Information" such idiotic categories like his relationships (a voter interviewed on Comedy Central?), alliances (Sarah Palin?), decisions (to build a wall?), strategies ("....."), and meetings ("Sept. 26 Debate against H. Clinton"). Unenforceable.
2. Non-disparagement. Predictably, this too is a real beauty. Trump requires that anyone working on his campaign never "disparage publicly" Mr. Trump. Hypothetically, if he is elected President and it's a disaster, a former campaign worker could not criticize his term in office. It also applies to any Family Member of Trump, including his children. So if you work on Trump's campaign, and Tiffany Trump's singing career does not go great, you cannot criticize her on Twitter. Unenforceable and non-sensical.
3. Non-solicitation. This one, actually, is hard to read. The Trump campaign has no customers, unless you consider a voter a customer. So it smartly leaves that term out. But a campaign worker may not solicit another worker "for hiring" until the campaign is over. So if you're a Trump campaign worker and meet another campaign worker, you cannot hire him/her for any type of work until the campaign is over, even if that work has nothing to do with politics. Unenforceable and almost incoherent.
4. Non-compete. The best for last. A Trump campaign worker cannot assist anyone for federal or state office besides Trump, whether for compensation or as a volunteer. Therefore, a campaign worker cannot contribute to a candidate for state representative. He or she cannot host an event for that person. He or she cannot put out a yard sign for that person. And he or she cannot seek to encourage another voter to vote for that person. Unenforceable and just plain idiotic.

On the upside, you get an arbitration clause, a favorable New York choice-of-law clause, and the possibility of fee-shifting if you prevail. Plus, and this is truly priceless, you get a piece of paper with the signature of the one and only "Donald J. Trump, President." Presumably, of his campaign and not the entire United States.

A copy of the Trump non-compete is available on my Scribd site here.

Broad Federal Policy Favors Arbitration Agreements, Can Extend to Non-Parties

With the Supreme Court last year strengthening the case for the arbitratrion of non-compete disputes, count me in as one who is fairly confident we're going to see businesses utilizing such clauses more in employment and personal services agreements.

Which begs the question...To what type of non-contract claims does the clause apply? And are third-parties bound?

The answer to the first question is generally fairly straightforward. The federal policy (expressed in the Federal Arbitration Act) generally pushes strongly in favor of arbitration, with courts resolving doubts about scope towards arbitrability.

What does this mean in practice? Let's take an example. Assume a clause provides for arbitration of claims "arising out of" the employment relationship. Then, it seems fairly clear that not only would a non-compete violation be arbitrable, but so would a common-law claim for breach of the duty of loyalty (or a statutory claim like trade secrets misappropriation). So, too, would a claim for violating my least favorite statute, the Computer Fraud and Abuse Act (as recently decided in Torbit, Inc. v. Datanyze, Inc., 2013 U.S. Dist. LEXIS 19584 (N.D. Cal. Feb. 13, 2013)). The general test is pragmatic and consistent with the scope of the FAA's reach: claims having a significant relationship to the contract are arbitrable.

The second question isn't quite so simple. To whom does it actually apply? In non-compete cases, it is very common for a business to sue a former employee's new company, most frequently on the theory it has interfered with an employment covenant and induced a breach. Does a broad arbitration clause apply? Or can a business split its claim, one against the employee in arbitration and one against the new company in court.

A non-party can compel arbitration because estoppel principles generally preclude one party (i.e., that seeking to enforce the contract) from asserting the benefits of the agreement while disclaiming other burdens under the agreement. Generally, if the claim against a non-party derives from the agreement itself, then the non-party can compel arbitration. Put differently, if the conduct of the non-signatory is substantially intertwined with the conduct of the signatory, a court's going to compel arbitration.

The relatively easy cases involve interference with contract (the non-compete covenant), because without the contract term, there's no tort. The closer cases for arbitration involve other torts that may exist independent of the contract. For instance, a business may have a dispute against an employee for violating his employment agreement, and may join into that case a dispute against the individual's current employer for deceptive trade practices (such as impermissible disparagement of a competitor's goods or services). If that's the only claim asserted, and there's no logical tie-in to the employment contact, the non-signatory may have a difficult time getting standing to compel arbitration.

2012: Year-End Review and Top 10 List

And so concludes my fourth full year of writing non-competes.com.

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!

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

Scope of Arbitration Submission Renders Decision on Non-Compete Remedy Unreviewable (Comprehensive Orthopaedics v. Axtmayer)

A physician and his former medical practice became embroiled in a dispute over his former employment, and like many such cases, the cause was submitted to arbitration. One of the issues in dispute concerned the physician's non-compete agreement, and the practice's assertion he breached it.

As part of the arbitration submission, the arbitrator was charged with awarding attorneys' fees to the plaintiff if the medical practice prevailed under its non-compete claim. The arbitrator rendered an award for the practice, but found that - as written - the non-compete claim was overbroad in its restrictions and that the liquidated damages should be reduced from $150,000 to $75,000. It declined to award attorneys' fees due to the reformation.

Was this decision proper?

Maybe, but according to the Supreme Court of Connecticut, that is not really the issue. When a matter is submitted to binding arbitration, the only reviewable issue is whether the arbitrator had the authority to reach the issue decided - not whether the decision was factually or legally correct.

Clearly, the parties disagreed as to whether the medical practice ultimately "prevailed" by winning - in essence - half of what it requested. The counterview of this is the physician may have won, just as much as the medical practice lost. Perhaps his benefit from the breach exceeded $75,000, and he considered the award not a loss at all, but rather a victory.

Ultimately it doesn't really matter. The Supreme Court of Connecticut was absolutely correct to hold that the parties' decision to kick the issue to an arbitrator meant judicial review was exceedingly narrow.

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Court: Supreme Court of Connecticut
Opinion Date: 10/20/09
Cite: Comprehensive Orthopaedics and Musculoskeletal Care, LLC v. Axtmayer, 980 A.2d 297 (Conn. 2009)
Favors: Employee
Law: Connecticut