The Reading List (2017, No. 24): Idaho Non-Competes Featured in NYT Article

Non-Compete and Trade Secrets News for the week ended August 11, 2017

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The New York Times Continues to Explore Non-Compete Agreements

Over the past few months, The New York Times has published several stories and editorial pieces concerning non-compete agreements than I ever can recall. The latest, published July 14, takes readers far away from New York to Idaho, where Conor Dougherty explores the change in the law that makes it much more difficult for employees to contest the validity of restrictive covenants. the NYT piece explores the motivations for how the law changed to favor employers and the lobbying efforts behind the legislative efforts.

Idaho's statute is focused on "key employees," which actually includes independent contractors too. The applicable definition is fairly broad and applies automatically to the top 5 percent in terms of wage earnings. But it goes beyond that to include those who "have the ability to harm or threaten an employer's legitimate business interests."

The statute does more. It creates a series of rebuttable presumptions concerning reasonableness. For time, 18 months is presumed reasonable. For territory, it's where the key employee provided services. And for activity scope, reasonableness is presumed if the covenant is limited to the type of employment that the key employee conducted. The upshot of the Idaho law is this: the employee has the unenviable burden of proving a negative, that he or she is incapable of impairing the employer's legitimate business interests.

This sort of burden-shifting approach turns non-compete law on its head. The employer, seeking to restrain trade, always should justify and establish both the legitimate business interest (beyond mere protectionism) and the imminent harm it faces to that interest. The Idaho approach is reminiscent of the way courts have analyzed 14th Amendment challenges to economic legislation through rational-basis review. That standard, which fairly can be called judicial abdication and not judicial review, requires a challenging party to disprove every conceivable basis which might support the law. And in some jurisdictions, a legitimate basis might even be economic protectionism or a pure economic interest.

The dynamism of our economy requires much more engagement by the judiciary to assess, meaningfully, the asserted interest and justification for a non-compete clause. Requiring the employee to bear the burden of proving he or she won't harm the employer will lead courts to embrace covenants that are too protectionist and safeguard against only theoretical or irrationally perceived harm.

Contractual Injunction Clauses

Non-compete agreements contain a number of important terms beyond the restrictive covenants themselves. Clauses pertaining to fee-shifting, jury trial waivers, arbitration, and venue play a big role in determining how a case gets litigated and decided.

One standard clause that receives a lot of intention is the "stipulation" that a breach necessitates an injunction. Put another way, employers try to use these clauses to convince courts that they need not prove the essential elements of an injunction. They, instead, can point to the agreement itself as the basis for equitable relief.

Most courts are not receptive to this argument, finding that contractual clauses (particularly since they're not negotiated) must give way to court rules and procedures concerning injunctions. But not all courts say that. The Court of Appeals of Minnesota in St. Jude Medical, Inc. v. Carter, found an injunction remedies provision valid, relying on a general contract principle that court must enforce unambiguous terms. The problem with this reasoning is that it equates a non-compete with a freely bargained-for, non-adhesive agreement. In reality, a non-compete is not a conventional contract but a restraint of trade. Courts should always assess whether a moving party has met its burden to obtain an injunction, regardless of any contractual stipulations.

A copy of the opinion is available here.

Wal-Mart Trade Secrets Verdict

In April, Wal-Mart was hit with a jury verdict in excess of $12 million for misappropriating technology pertaining to e-commerce software. The trade-secret owner, Cuker Interactive, thereafter moved for entry of a permanent injunction as is available under the Arkansas Trade Secret Act. The district court agreed that such an injunction was available to protect the development time Wal-Mart avoided by misappropriating Cuker's technology. The district court's opinion is an engaged discussion on the availability of injunctive relief even after entry of a damages award.

But Cuker's win was slightly tempered. The court also reduced the damages award by over $2 million based on a limitation-of-liability clause in the contract between Wal-Mart and Cuker. 

The Reading List (2017, No. 21): Levandowski's Gone

Non-Compete and Trade Secrets News for the week ended June 2, 2017

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Waymo v. Uber

We know what the lead story is: Waymo's suit against Uber. It seems every week produces new drama in the trade secrets case of the year. Why is it such a deal? We're talking about a technological development - self-driving cars - that may be among the most significant in the past hundred years.

Anthony Levandowski - the star engineer behind Waymo's self-driving car technology - has been fired from Uber. Presumably, his termination is a direct result of Judge Alsup's rulings and orders compelling Uber to account for the 14,000 files Levandowski apparently took before leaving Google. That spelled a clear division in where Uber and Levandowski were headed with this dispute.

For a thorough deconstruction of Levandowski's firing, I highly recommend reading John Marsh's excellent analysis. I couldn't do it better and won't try.

Trade Secrets Injunctions

One of the more vexing procedural questions in trade secrets cases is the extent to which wrongful conduct will be enjoined. To be sure, that was one of the flashpoints of Judge Alsup's ruling that effectively barred Levandowski from working for Uber in any competing capacity. But it didn't strictly limit what Uber could do to develop self-driving technology independent of Levandowski.

On a far more mundane level (all cases are more mundane) is Systems Spray-Cooled, Inc. v. FCH Tech, Inc., No. 16 CV 1085, out of the Western District of Arkansas. There, the court grappled with how much competitive activity to enjoin after two ex-employees had misappropriated certain design drawings and pricing information. The misappropriation finding came as a direct result of the defendants' destruction of hard-drive evidence. Without a governing non-compete, the court was faced with how far to extend a trade-secrets injunction. And here, given the evidence destruction, the court carved a middle ground - barring not only the "use" of certain information (assuming it was still available after the destruction) but also some business activity that arose from the misappropriation itself. The court would not go so far as to prohibit the defendants from working in a competitive industry, but did prevent them from using certain designs to develop competing products.

The price for a broader injunction? A $5 million bond.

David Nosal Heads to Washington?

So what's up with this guy? Besides Levandowski and Sergey Aleynikov, few names have become more household in the trade-secrets arena than David Nosal. The ex-Korn/Ferry executive was convicted under the Computer Fraud and Abuse Act for obtaining the password of a current employee. That allowed Nosal and others to access a database containing valuable information on executive search candidates. (For in-depth coverage, read Professor Orin Kerr's analysis here and a lengthier piece in the Harvard Law Review.)

After Nosal's petition for en banc rehearing was denied by the Ninth Circuit, he appealed his CFAA conviction to the Supreme Court. Representing him? Neal Katyal of Hogan Lovells, the former Solicitor General and premier appellate litigator. Nosal's petition for writ of certiorari was filed May 5.

How much does a typical non-compete case cost?

Aside from "is this thing enforceable?" the question I get asked most is "what's this gonna cost?"

What am I referring to? Non-competes and non-compete suits, of course. No easy answers there, because there are a lot of variables at play. Those variables range from the plaintiff's attorney (competent, middler, or bumptious fool) to the scope of the wrongful conduct alleged. Generally, if the case involves a claim of trade secrets misappropriation with what appears to be some kind of a physical taking of information, the litigation is hard to budget.

But what about a garden-variety non-compete case, about a customer here or there or perhaps even a dispute over the type of work the employee is engaging in? Hard to piece together data, but an unreported case out of Washington noted the prevailing employee spent about $53,000. We know that because the appellate court upheld the fee award. That amount seems about right for a case that does not proceed to trial but instead gets resolved on summary judgment.

The case is Gaddis Events, Inc. v. Wu, No. 75227-8-I, and it's available here.

The Reading List (2017, No. 15): Trade Secrets Theft and the Fifth Amendment

Non-Compete and Trade Secrets News for the week ended April 14, 2017

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The Fifth Amendment and Document Production

The Fifth Amendment, and its guarantee against self-incrimination, plays a role in civil litigation and certainly in trade-secret suits. Claims of theft implicate criminal prosecution both at the federal and state level. And while many prosecutors would decline to get involved in a garden-variety civil dispute, the Sergey Aleynikov and David Nosal experiences we have seen suggest that any line-drawing efforts between civil and criminal fact-patterns are tough for anyone to draw. When it comes document production, the general rule is fairly straightforward: the mere act of producing documents (think stolen plans or diagrams) may be a testimonial act for Fifth Amendment purposes. It may, to that end, be an admission that a person has documents that another claims were stolen.

The big trade secret case of the year is in the Northern District of California between Waymo and Uber. And it centers largely on Anthony Levandowski's alleged downloading of 14,000 documents. The case has taken on a life of its own, with twists and turns arising nearly every day on a host of substantive and procedural issues.

One particular filing of interest, though, is Levandowski's effort to avoid having Uber disclose detailed information about the allegedly downloaded documents. The unusual part of Levandowski's motion is that it does not come at the document production stage; instead, he attempted to claim Fifth Amendment rights in Uber's production of a privilege log concerning a particular "due diligence report" that related to Uber's acquisition of Levandowski's company after he left Waymo.

Levandowski's brief is an interesting take on the Fifth Amendment and the testimonial act of document production. It touches, crucially, on issues of attorney-client and common-interest privilege, given a joint defense arrangement between Levandowski and Uber. Here, Levandowski is trying to say that the joint defense between he and Uber allow him to step into the shoes of Uber and prevent it from disclosing details on a privilege log about the due diligence report. Note that Levandowski is not a party to the Waymo suit, but the conduct that is most relevant involves him directly and the allegedly mass download of Waymo materials. Levandowski's brief is available here.

Yesterday, Judge Alsup denied Levandowski's motion, holding that compelling Uber to produce a conventional privilege log would not violate Levandowski's Fifth Amendment rights. The decision is available here. Judge Alsup found that "mere invocation" of one's Fifth Amendment rights cannot automatically supplant conventional privilege log requirements. To this end, he stressed the need for "targeted factual support" - like a privilege log itself - that lends the Fifth Amendment assertion some plausibility.

Interestingly, Judge Alsup touched on an argument not really advanced but which it seems as though he felt was percolating under the surface. He rejected the idea that Levandowski could claim a privilege if the subject due diligence report was provided to Uber so Uber could see whether Levandowski was arriving with baggage - namely a potential trade secret claim to defend. Judge Alsup noted that one cannot use the attorney-client privilege to cloak wrongdoing through "due diligence." Therefore, as a result of the ruling, Uber will have to place the particulars of the due diligence report on a privilege log for Waymo to see. Whether Levandowski will assert further Fifth Amendment rights to its ultimate production remains to be seen. But I think I know the answer.

Bad Faith in California Trade Secrets Actions

I have an article coming out shortly in the Illinois Bar Journal, and it concerns bad faith in trade secrets disputes. In particular, I discuss Illinois' rule that is akin to a Rule 11 "frivolous pleading" standard. I also discuss the rule that seems to prevail elsewhere - the two-part test used by California courts, focusing on objective speciousness and litigation misconduct. As the Court of Appeal in Vescovi v. Clark makes clear, that test is really a one-part test. Objective speciousness probably is enough, because the litigation misconduct derives from the specious nature of the claim. Vescovi is unpublished, but it's a good read nonetheless. A copy of the opinion is available here.

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James Flynn of Epstein Becker & Green published a nice piece on Law360 concerning Justice Gorsuch's track record of resolving trade secrets disputes while a Tenth Circuit judge. It is worth a read.

Mid-Year Legislative Update - Arkansas, New Mexico, and ... Jimmy John's?

This year, we have seen a slight uptick in proposed legislation concerning non-compete agreements. In previous posts, I've written about legislative efforts in Wisconsin, Washington, and elsewhere. However, while most bills stall out, a few gain momentum. And recently, we have two actual legislative enactments that will change existing law.

Arkansas

The first new law comes from Arkansas, where Gov. Asa Hutchinson signed Act 921. This new law allows a court to enforce reasonable aspects of a non-compete agreement. Previously, Arkansas courts would not allow a court to blue-pencil an agreement that would allow for partial enforcement. That is, an agreement with any overbroad sub-parts rendered the whole document unenforceable. A court's ability to sever offending provisions is weapon in an employer's enforcement arsenal and encourages overbroad drafting.

Act 921 also provides for a presumption that a covenant lasting two years or less is reasonable. Finally, Act 921 specifies an array of employer protectable interests, which include goodwill, confidential information, and training. (The list also identifies protectable interests as "methods" which I found odd.)

Act 921 takes effect on August, 6, 2015.

New Mexico

In April, New Mexico enacted Senate Bill 325, which limits the enforcement of non-competes for health care practitioners (which is defined to include physicians, dentists, podiatrists, and nurse anesthetists). The law is available here.

The law, however, contains a number of significant limitations. First, it does not apply to heath care practitioners who are shareholders or partners in a practice. Second, it does not prohibit a practice from binding a health care practitioner to a non-solicitation provision with regard to patients and employees of the practice (as long as the covenant is 1 year or less). And third, it does not preclude use of a liquidated damages provision. Therefore, we can expect to see physician employment contracts track the language of the statute and (in all likelihood) tie a breach of a non-solicitation covenant to some formula for liquidated damages.

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Nationally, we have a new bill tied to enforcement of non-compete agreements and, of course, it arises out of the infamous Jimmy John's case. Illustrating once again that there is no limit to legislators' imagination when it comes to giving legislation creative and idiotic names, several Senate Democrats have backed the Mobility and Opportunity for Vulnerable Employees (MOVE) Act. A copy of the bill is available here.

The essence of the bill is that it would bar use of non-competes for low-wage workers, generally defined as those earning less than $15 per hour. A violation would result in a fine of up to $5,000 per employee subject to the non-compete, and the law would empower the Secretary of Labor to investigate complaints concerning the improper deployment of non-competes. The law also contains a posting requirement (the violation of which is punishable by a flat $5,000 fine) that would tell a low-wage employee of the ban on non-competes.

The bill also would require employers who propose to use a non-compete to disclose this to the employee before employment and "at the beginning of the process for hiring" the employee. While some states have examined this kind of notice requirement in recent years, this would mark a substantial change in the law. Best practices certainly call for up-front disclosure, but it is still very common for employees who leave a job and accept a new one to see a non-compete on the first day of work.

Inevitable Disclosure Doctrine Inapplicable to Contract Damage Claims

As readers of this blog may know, the "inevitable disclosure" doctrine is a theory of trade secrets misappropriation.


A plaintiff need not show either actual or threatened misappropriation if it can prove that it's inevitable a defendant either will use or disclose trade secrets. In many competition cases, a plaintiff asserts an inevitable disclosure claim in tandem with breach of contract claims. For remember that most employees who join a competitor (and who are worth the expense of a lawsuit) probably have some sort of non-disclosure agreement.

This raises the issue of whether a plaintiff can use the inevitable disclosure doctrine to prove breach of contract. There are relatively few cases that seem to address the issue, although the logical answer seems to be "no." The better way to apply the inevitable disclosure doctrine is to use it as a means to seek preliminary injunctive relief, as a recent Arkansas federal district court did.

In Nanomech, Inc. v. Suresh, the court rejected the plaintiff's effort to extend the inevitable disclosure doctrine to a breach of contract claim for damages, stating:

"The doctrine has only been applied in Trade Secrets Act cases, particularly where plaintiffs have alleged the 'threatened misappropriation of trade secrets,' a discrete violation of the Act that is inherently speculative in nature."

When asserting a claim for damages, it makes little sense to use the inevitable disclosure doctrine. Damages presume that some wrong already has occurred and caused an economic loss. If disclosure of trade secrets is merely "inevitable," then it's illogical to conclude the plaintiff incurred a loss. By definition, the wrong would not have occurred. Rather, the only use for the doctrine would appear to be securing injunctive relief.

This raises a related issue. Many times a non-disclosure covenant will be written in such a way as to bar a threatened disclosure of confidential information. In this circumstance, a plaintiff - faced with imminent disclosure - probably doesn't need to wait until actual breach and can instead sue on the contract. However, it's easy enough to just allege a violation of the contract, along the lines of anticipatory breach, for pleading purposes. Too, until such time as there is an actual disclosure, a plaintiff's request for a remedy should be limited to an injunction.

Recent Decisions of Interest (No. 6)

This week's Recent Decisions highlights a jury verdict in Arkansas arising out of the sale of an accounting practice. In Creed Spann v. Lovett & Co., 2012 Ark. App. LEXIS 192 (Ct. App. Feb. 1, 2012), the Court of Appeals of Arkansas affirmed a verdict where the purchaser of an accounting firm's client list received $434,777 in lost profits after the seller worked with certain restricted clients following the sale.

The decision does not necessarily break any new ground, but it does highlight a couple of important realities clients need to consider when pursuing or defending non-compete suits.

First, the plaintiff - the acquiring firm - retained a lost profits expert to show the amount of damages which would have been realized had the defendant - the selling firm - not worked with restricted clients. The jury accepted the expert's estimation of damages down to the dollar. It did not appear that the defendants put forth a rebuttal expert, suggesting that the expert witness was highly persuasive to the jury. Because damages are so difficult to prove when they are non-liquidated - such as a projection of lost income - experts are essential to a plaintiff's case. Without one, it is highly likely that a court will be left without a basis to award recoverable damages even in the event of breach.

Second, the plaintiff's legal fees in the case totaled over $250,000, an amount it recovered under Arkansas' prevailing party statute. Compared with the verdict award, the amount of fees incurred is relatively high. However, it was far from unreasonable. Competition disputes cost a lot of money, particularly when discovery focuses on triaging the issue of breach, identifying lost clients, and examining what the defendants did with those clients. Preparing for and presenting experts is costly, as well. The opportunity to resolve a case usually is lost once counsel incurs a substantial amount of these fees. Therefore, the best time to explore a business resolution outside of court is right after the issues have been framed in the suit and before discovery begins.

Bobby Petrino's New 7-Year Deal With Arkansas Contains Only In-Term Non-Compete Restriction

As the University of Arkansas prepares to play The Ohio State University (my alma mater) in the Sugar Bowl after the New Year, it apparently does not need to worry about perennial navel-gazer Bobby Petrino looking for greener pastures.

It was reported a few weeks ago that Arkansas locked up Petrino to a new employment agreement that runs through 2017, a move clearly necessitated by high-profile job openings at Florida and Miami. One aspect of Petrino's original deal that was somewhat controversial was his non-compete agreement, which was limited to the SEC's Western Division. As any college football fan well knows, the SEC is somewhat of an incestuous conference, with several coaches - Nick Saban and Houston Nutt, to name a few - jumping from one conference rival to another in a relatively short time-frame.

Notably, Florida is in the SEC's Eastern Division. Had Petrino been offered and taken the Florida job (which went to Texas' high-profile assistant, Will Muschamp), the non-compete would not have applied. Florida would have been on the hook only for the buyout payment to Arkansas, but Petrino likely would not have faced an injunction to prevent him from taking the position altogether.

Petrino's new contract contains a significant pay raise and a non-compete that extends to the entire SEC. The long form of Petrino's new deal with Arkansas is not yet final, but should be within several weeks. His letter agreement contains a total compensation package averaging $3.56 million per year. The non-compete clearly applies during the term of his employment with Arkansas only. So if Petrino reaches the end of his current 7-year deal with Arkansas, and an SEC job is open, he is free to take it. As we all know, coaches almost never reach the end of a deal. They are either extended or fired. On this score, if Petrino were fired without "cause", the SEC non-compete would not apply.

Most courts consider in-term non-competes like the one Petrino has to be far less problematic than post-termination non-competes. They are viewed as a reasonable exchange for those individuals offering unique personal services, and there is little concern about loss of livelihood or income. In fact, the interest that an employer like the University of Arkansas is seeking to protect through its in-term non-compete is the loss of Petrino's services, not irreparable harm from an ex-employee through direct competition.

I don't know how Arkansas courts have construed in-term non-competes, but the law of other states clearly demonstrates that such covenants are enforced much more broadly.

Court Rejects "Inevitable Disclosure" Claim Arising Out of Failed Transaction (Texarkana Beh. Assoc. v. Universal Health)

Courts still struggle to uphold the "inevitable disclosure" doctrine.

There's no easy way to say it. The idea of enjoining a party based on the theory that disclosure (really, use) of trade secrets is inevitable is a difficult one to grasp. Courts are called upon to make inferences and assumptions that are tough to make when the end result is a restraint on trade.

Inevitable disclosure is a theory of misappropriation. It is not based on actual use or even an identifiable threat to use a particular secret. Rather, it revolves around the idea that a party, even one who tries in good faith, cannot help but use certain secrets for an unfair competitive advantage.

A dispute arising out of a failed acquisition illustrates the struggle that courts have. The case is notable in that it does not follow the usual factual matrix of an employee leaving to join a competitor. Rather, it concerned a dispute between two nationwide healthcare management companies that operate behavioral health centers following a failed acquisition.

The two companies, Texarkana Behavioral and Universal Health Services, were direct competitors, and UHS tried to buy Texarkana in 2004. Negotiations broke down that year. Two years later, UHS bought property in Fayetteville to build a health care facility. Texarkana appropached UHS and inquired whether it was interested in buying Texarkana's facility in Fayetteville. The parties entered into a confidentiality agreement, shared business information and discussed an acquisition, but negotiations again broke down.

UHS then moved forward with constructing its own facility in Fayetteville. Texarkana sued, claiming trade secrets theft under the inevitable disclosure doctrine. The court noted that Texarkana likely had not identified its trade secrets well enough, but assumed for summary judgment purposes that it did. The court held, however, that Texarkana established nothing to demonstrate that it was inevitable UHS would disclose anything secret to Texarkana.

Three facts were central to the court's holding. First, one of Texarkana's key executives (a former UHS employee) stated that he felt as though he could perform his duties at TBA without using anything confidential to UHS. Second, UHS never manifested any intent to use anything proprietary to Texarkana. Third, and most importantly (in my mind), the confidentiality agreements contained no provisions that restricted what UHS could construct or operate around Fayetteville.

The inevitable disclosure doctrine, as applied in the commercial context, can be particularly difficult to justify. In an arms' length transaction such as the one entered into between Texarkana and UHS, the parties could have bargained for a limited non-compete as a condition to exchanging sensitive information. Clearly, Texarkana had to know in 2007 that UHS would have constructed a health facility if the deal did not go through. Texarkana did not obtain any sort of activity covenant from UHS, however.

Courts rightly should be concerned about applying the inevitable disclosure doctrine when sophisticated entities (particularly those with a history of failed negotiations) enter into a contract for a potential acquisition, are aware of the consequences of not closing the deal, and don't include some type of a non-compete. Allowing a party like Texarkana to use the inevitable disclosure doctrine in this circumstance would have vitiated those negotiations and allowed it to create non-compete provision when none was ever anticipated. Both parties had to know the potential risks if the deal did not close.

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Court: United States District Court for the Western District of Arkansas
Opinion Date: 10/26/10
Cite: Texarkana Behavioral Assocs., L.C. v. Universal Health Svcs., Inc., 2010 U.S. Dist. LEXIS 114112 (W.D. Ark. Oct. 26, 2010)
Favors: N/A
Law: Arkansas

Non-Compete Agreement's Geographic Restriction Too Specific To Be Enforced (Wright Medical Group v. Darr)

In a state that refuses to employ the blue-pencil rule, sometimes a non-compete that is too specific can render it unenforceable.

This may sound absurd, but the entire premise of the blue-pencil rule is that courts will not rewrite agreements that may suffer from overbreadth. It is relatively easy to specify too much in a geographic restriction, and that was exactly what occurred in an Arkansas dispute recently. In Wright Medical Group v. Darr, the court invalidated a non-compete that restricted an employee from engaging in a competitive business in five named northeast Arkansas counties. The problem was that the employer conducted no business in two of the counties.

The employer tried to save the covenant by contending that its "trade area" was northeast Arkansas, and that it could not be limited on a county-wide basis. However, the non-compete did not define the geographical boundaries by a term like "trade area" or "area in which the employee had selling responsibility." Instead, it listed the five specific counties.

The court actually hinted at the possibility that a more general definition - "northeast Arkansas" - would not have helped much, since "there would be no way of knowing exactly what geographic areas are and are not encompassed" by that description. In states that do not blue-pencil, any technically overbroad aspect of the non-compete can render the entire agreement invalid. It is a far preferable practice to tie the geographic restriction to something more self-executing, such as "any county in which the employee had actual sales responsibilities during the 18-month period prior to termination of employment." This type of restriction likely would avoid a finding of overbreadth on technical grounds.

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Court: United States District Court for the Eastern District of Arkansas
Opinion Date: 8/6/10
Cite: Wright Medical Group, Inc. v. Darr, 2010 U.S. Dist. LEXIS 82682 (E.D. Ark. Aug. 6, 2010)
Favors: Employee
Law: Arkansas

Restriction on Working With "Potential Customers" Held Invalid (Church Mutual Ins. Co. v. Copenhaver)

It is common for a non-solicitation covenant to extend beyond existing customers and cover prospects or potential accounts. Any territory-based non-compete accomplishes the same thing. If you can't contact customers in a certain defined region, almost by definition this will include both existing and potential customers (unless the employer has a customer monopoly).

But provisions that apply this broadly are not always valid. A recent case out of Arkansas proves this point. In Church Mutual Ins. Co. v. Copenhaver, two insurance company sales representatives were sued for violating a customer non-solicitation covenant which prevented them from selling or soliciting property and casualty insurance to churches or other religious institutions for three years within their assigned geographic territories.

The agents left, joined a competitor, and immediately increased the new employer's premiums attributable churches by a factor of five. The former employer sued to enforce the non-solicitation covenant. The court concluded that the covenant was invalid because it was broader than necessary to protect the employer's legitimate business interest in its church clients.

Specifically, the court found that the covenant extended to all churches and religious institutions in a certain territory, which meant it captured non-customers. That was too restrictive under Arkansas law. Additionally, the court found some vagueness in the term "religious institutions", opining that it could mean faith-based schools or hospitals. This ambiguity rendered it overbroad.

Lawyers drafting non-solicitation covenants must be aware of a particular jurisdiction's laws as it pertains to protectable interests. Many jurisdictions will take a very narrow view of what an employer is entitled to protect. In a state that will not blue-pencil (such as Arkansas), even the slightest drafting mistake can render the enforceable part of the covenants invalid.

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Court: United States District Court for the Eastern District of Arkansas
Opinion Date: 5/24/10
Cite: Church Mutual Ins. Co. v. Copenhaver, 2010 U.S. Dist. LEXIS 51268 (E.D. Ark. May 24, 2010)
Favors: Employee
Law: Arkansas

Garden-Leave Provision Strictly Construed Against Employer (Bannister v. Bemis Co.)

Garden-leave clauses, which essentially pay an employee for a post-termination non-compete, originated in the United Kingdom and are becoming increasingly popular in the United States. The reason is obvious: employers face uncertainty when seeking injunctive relief to enforce a non-compete claim against an ex-employee. Though relatively few cases have addressed garden-leave provisions, they have been met with favorable opinions.

In Bannister v. Bemis Co., Inc., a variant of a garden-leave clause was at issue. Roger Bannister served as director of technical and product development for Bemis. In 2000, he signed a non-compete agreement which contained an 18-month post-employment restriction against working for a competing entity. However, Bannister's contract provided he could receive his continued base-salary from Bemis if he was "unable to obtain employment consistent with his abilities and education solely because of the [non-compete clause."

Four years later, Bannister requested a release from his non-compete clause so he could join Mondi, a Bemis competitor. Apparently, Bannister was not the only employee seeking to leave Bemis for Mondi; around the same time, Bemis sued Mondi and ex-Bemis employees who accepted positions with Mondi. That suit (to which Bannister was not a party) settled with a covenant providing Mondi would not hire for 18 months any Bemis employees who were subject to non-compete agreements.

After refusing severance, Bannister was terminated a few months after the Mondi-Bemis suit was settled.

Bannister then sought his garden-leave pay from Bemis, claiming he could not find a suitable position because of his non-compete. He provided monthly statements to Bemis regarding his efforts to find work. Bemis resisted, arguing Bannister could not work for Mondi anyway because of the settlement agreement in the lawsuit. Bemis offered to release Bannister from his non-compete for all other companies except Mondi.

The Eighth Circuit had little trouble affirming a damages judgment in favor of Bannister for the nine months in which he could not find comparable work. The court rejected Bemis' arguments that the Mondi settlement had any impact on Bannister's rights: "To the extent that the Mondi settlement is relevant, the only reason it prevented Mondi from hiring Bannister is because of Bannister's [non-compete] with Bemis. Thus, even considering the settlement agreement, the [non-compete] was still the sole cause of Bannister's ability to be hired by Mondi."

Garden-leave provisions are likely to be considered by employers as more and more employees are severed without cause. Courts may have more sympathy for workers subject to restrictions who are involuntarily terminated, reasoning the application of a covenant imposes an undue hardship on the employee. Further, a garden-leave provision can yield more certainty than a non-compete clause, because the latter always carries with it some risk for the employer that its covenant will be declared invalid.

If such provisions are drafted and because garden-leave is still a new concept in American courts, counsel should still consider drafting restraints narrowly and pay careful attention to those jurisdictions like Virginia, Wisconsin and Georgia where a strict blue-pencil rule can threaten an entire agreement.

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Court: United States District Court for the Eighth Circuit
Opinion Date: 2/25/09
Cite: Bannister v. Bemis Co., Inc., 2009 U.S. App. LEXIS 3648 (8th Cir. Feb. 25, 2009)
Favors: Employee
Law: Arkansas