Year-End Post: A Completely Random Screed, Addressing Topics Near and Dear

Last night, as Christmas '17 drew to a close, my wife and I imbibed with a (very small) glass of Pappy Van Winkle, which, if you know anything about bourbon, is totally epic shit and absolutely the right way to finish off a holiday. As I let the cordial burn the inside of my mouth (and I do mean burn), I thought about a year that was completely random in so many ways. I'll leave aside the declining discourse of our civic life and translate this to the content of this blog, which is non-compete and trade secret litigation.

I thought of the great successes my clients and I have had this year. I began the year arguing in the Third District Appellate Court, site of the Lincoln-Douglas debates, on a non-compete judgment entered in favor of my client, a former staffing industry sales employee, after a bench trial. Work then pivoted to a monster appeal in the Second District, which recently affirmed a bench trial judgment in our favor and affirmed a nearly $1.5 million fee award under corporate indemnification procedures. We now have pending, again in the Third District, a discretionary, interlocutory appeal on an issue of contract interpretation concerning non-competes. We are hopeful that this case, too, will establish precedent and continue to move the ball down the field of rationality.

In the trial courts, my work was no less significant. And again, our results--for awesome clients--continued to be great. We successfully dismissed an inevitable disclosure action in Illinois state court, with a factual and procedural context so utterly inane and bereft of competence that I cannot do it justice. But I tried, in my blog post "38 Minutes of Hell," which garnered a lot of classic feedback.

June and July were consumed with one of the truly weirdest cases I'll ever see, a replevin claim in Cook County Circuit Court, where we prevailed in a bench trial. Next, we headed to the East Coast and defeated a preliminary injunction in the Delaware Court of Chancery, following a failed business acquisition. This time, too, the merits were a real head-scratcher, with the plaintiff pursuing a claim based on a no-hiring clause that limited our ability to hire employees of the potential target company. Problem: we hired an independent contractor. Once again, we see litigation as an ex post attempt to strike a business deal that the parties never adopted. That lawsuit's in the ditch now.

Then we stepped into a federal non-compete and trade secrets case that had been pending for several months. After getting subbed in for defense counsel, I read the file and concluded rather quickly that this case, too, was purely abusive. We then immediately contacted non-party witnesses, obtained statements that undermined the plaintiff's claim of breach (and trade secrets theft) in toto, and served our initial evidence disclosures. You could almost hear the plaintiff back-pedal, as it filed a motion to dismiss the case with prejudice, conditioned of course on the "with each party to bear its own costs and fees." Ain't that easy, partner. We moving for fees. May not get 'em. But we tryin'.

***

We're now in yet another one of these cases, with similarly weak facts from the plaintiff's perspective. And as I'm litigating that one, I can't help but feel we're reaching an inflection point on non-compete cases. What I continue to see is canned pleadings and complaints, invoking the same shop-worn phrases about what it is the plaintiff is trying to protect through covenants both broad and narrow. What is missing from many such cases is a deconstructed analysis of these interests and how the enforcement action is designed to protect them from an unfair competitive threat.

In the main, these business interests sound reasonable and decent. Customer relationships and confidential information, though, are interests only protectable if the facts justify market-distorting protections. I believe that, in opaque industries not intuitively familiar to the average person, the notion of "customer relationships" can be awfully difficult to deconstruct and analyze. Put another way, the term (or the asserted interest girding the restrictive covenants) quickly gets disaggregated from the actual, relevant facts.

Business-to-business relationships, which are what most non-competes are designed to protect, are complex. The question, for instance, of who a customer even is can be iterative, not obvious. Furthermore, we live in an era (call it the post-Industrial era, since no one knows what else to call it) where businesses are becoming more and more fragmented and specialized. This is what I wrote on LinkedIn last week:

...Extreme market fragmentation within industries means that companies once deemed "rivals" now operate in a manner adjacent to, not competitive with, each other. Contractual restrictions on competing in the "same or similar line of business," once thought acceptable, now fail to account for this macroeconomic shift towards hyper-specialization....

I stand by that and think that we need to keep this in mind when assessing whether to file suit and how to defend a suit.

What I see in non-compete cases is this. Plaintiff recycles a complaint with a very nice series of allegations about customer relationships. Those allegations have no fit whatsoever to the industry they happen to be litigating. A trial judge operates under a familiar framework, constrained by time and resources, all the while failing to grasp the nuances of the business that is the subject of the dispute during an emergency hearing. The allegations may be enough to get a plaintiff a few first downs. But ultimately they get three holding penalties in a row, the punter fumbles the ball, and the team is totally blown out by halftime. (As a Chicago Bears fan, the analogy seemed obvious and temporally appropriate.)

So what is my point? The protectable interest question is really, really important. It is not nearly enough to rest on the laurels of past pleadings that survived a motion to dismiss and that invoke the black-letter principles we all now know. What is demanded is a strong look at just how the defendant, who signed a restrictive covenant, can move business in a manner that deprives his ex-employer of a fair chance to compete for the business on an even playing field. After hashing out a number of different tests, standards, or formulations, I think this is the inquiry for whether enforcement of a reasonably drafted non-compete is permissible to protect customer relationships. Anything broader restrains fair competition in the market, despite what the contract says.

To be sure, some industries are more susceptible to allowing enforcement. But many come nowhere close. I guess what I'm saying is this: I'm not tired of non-compete lawsuits. I'm tired of crappy non-compete lawsuits. And I'm absolutely done with lazy lawyering.

***

As I often do, I checked out Russell Beck's Fair Competition Law and learned Pennsylvania legislators have proposed a California-style ban on non-competes. The text of House Bill No. 1938 is available here. Of more interest, candidly, was Russell's hat-tip to a recent article published by Norm Bishara and Evan Starr, The Incomplete Noncompete Picture. Bishara and Starr conclude that some basic questions are left unanswered by empirical research. One area that seems to be problematic for researchers is the ability to track employees over time, in terms of their job advancement and wage rates. And if you think about it, incentives for these employees may change.

For early-stage employees, they are very likely to change jobs and face advancement constraints posed by non-competes that they are unable to litigate. They have, and should have, very coarse feelings about them. But over time, they may change their mind, particularly if they are entrepreneurial and can benefit from restrictive covenants imposed on others.

***

Finally, for this year, I thought the Sixth Circuit's opinion in Hall v. Edgewood Partners Ins. Center, Inc., No. 17-3744, is well worth a read for practitioners and laypersons alike. It addresses a rather common question I face regarding assignability of employee restrictive covenants following an asset sale. I will not deconstruct or case-summarize here, but I do provide a link to Judge Thapar's eminently readable opinion on an issue that is often misunderstood and extremely important to get right.

***

With that, I bow out for 2017. See you in a week or so. And thanks again for reading!

The "I'm Too Busy Edition": Non-Compete Case Law Update

I swear I try to multi-task. But it's not easy.

Running a law firm, being a husband, being a dad (!), tending to a completely out-of-control garden, and actually practicing law sometimes creates the perfect storm where I realize I'm three weeks behind on, literally, everything. For instance, I just started Season 1 of "Breaking Bad." I think the Olympics are coming up, too...I can hardly wait!

So this blog has been neglected, but I promise to make up for it. I thought I would update my readers with five interesting decisions from the past several weeks in non-compete land.

Florida: Probably the most employer friendly state, any Florida decision starts with the presumption that the employee is out of luck. So too with DePuy Orthopaedics, Inc. v. Waxman, 2012 Fla. App. LEXIS 12654 (Fla. Ct. App. Aug. 3, 2012). In that case, the Court of Appeal interpreted the Florida statute that allows for assignment of restrictive covenants from an employer to an assignee. The court reversed a trial court order holding that the assignment was ineffective, relying upon the plain language of the statute. The assignment provision was contained a separate clause in the so-called general terms and conditions of the contract. The dissenting opinion would have held that the restrictive covenant itself had to reference assignability. In its view, the general assignment language was not enough under the plain language of Florida's governing statute.

Illinois: The Fourth District Court of Appeals - where all the madness started a few years back - has reversed an employee-friendly judgment on a non-solicitation covenant. In Zabaneh Franchises, LLC v. Walker, 2012 IL App (4th) 110215, the Appellate Court reversed a judgment entered following a temporary restraining order proceeding where an H&R Block franchisee tried to enforce a covenant against a tax preparer. The court found a two-year, client-specific covenant to be reasonable under Reliable Fire Equipment v. Arredondo. It is somewhat surprising the court found it reasonable on its face, rather than remanding for the trial court to make such a determination.

South Dakota: Home of the Black Hills, Custer State Park, and Wall Drug, one of my favorite states does not produce many competition decisions. But the district court's opinion denying injunctive relief to Little Caesar Enterprises is actually very interesting. The court in Little Caesar Enterprises, Inc. v. Sioux Falls Pizza Co., Inc., 2012 U.S. Dist. LEXIS 108828 (D.S.D. Aug. 3, 2012), confronted the age-old problem of trade secrets identification. This is often a major issue for trade secrets litigants because plaintiffs frequently don't inventory or understand their trade secrets until after something bad (more accurately, something perceived to be bad) has occurred.

Unlike patents, trade secrets are not known or registered or objectively verifiable. There is no incentive, apart from litigation preparedness, to document and monitor internally how trade secrets are kept, developed, and maintained. Little Caesar could not identify a trade secret, sufficient to obtain an injunction, over its Hot-N-Ready pizza method. That method, apparently, allowed Little Caesar to sell ready-for-pickup pizzas according to a particular system - that is, what products to prepare on an hour-by-hour basis, with specific ingredients and preparation requirements. (I say "apparently" because I have not eaten a Little Caesar's pizza in at least 10 years and am in no position to understand how this is any different than your standard fare carry-out. But it must be).

The court, in denying injunctive relief, noted that the description of the Hot-N-Ready system was too generic or general to amount to a trade secret. The court also relied on evidence that many of the specifics in terms of pizza preparation were common to other proprietors. Perhaps most importantly, the end product - the actual pizza - was admittedly different and bore no similarity to Little Caesar's. If that's really the case, it's a mystery why this case is even a case.

Virginia: Hamden v. Total Car Franchising, Corp., 2012 U.S. Dist. LEXIS 111432 (W.D. Va. Aug, 7, 2012), presents one of those interesting contract interpretation questions. In this case, the court found that the expiration of a franchise agreement did not trigger post-termination obligations. Holding "expiration" and "termination" were not synonymous, the court focused on the fact that the contract listed a series of conditions under which the contract terminated automatically. Most employment contracts are at will, meaning expiration rarely comes up. But the plaintiff (the franchisee, who sued for a declaratory judgment) was able to dodge a few unfavorable cases from other jurisdictions to prevail.

Wisconsin: Section 103.465 is the Wisconsin statute that has given management lawyers fits over the years. It applies to "restrictive covenants in employment contracts." For non-employment covenants, Wisconsin's common law rule of reason analysis applies. In Key Railroad Development, LLC v. Guido, 2012 Wisc. App. LEXIS 625 (Wisc. Ct. App. Aug. 7, 2012), the Court of Appeals found that Section 103.465 applies to employees who shared equal bargaining power with the company. The court was able to distinguish a recent case involving a stock option agreement, which was not governed by Section 103.465. In Key Railroad, the employees - though they were higher level management, no doubt - still were classified under the contract as "at-will."

Asset Purchase Agreement Did Not Transfer Right to Enforce Non-Compete (JSC Terminal v. Farris)

The transfer of a business, either by way of stock sale, asset sale or merger, always yields interesting issues concerning existing non-compete arrangements.

In many cases, employees who suddenly find themselves with new ownership may be saddled with unforeseen circumstances, such as reporting to a new manager and facing a cut in incentive pay. Usually, these changes do not allow an employee to break a valid covenant.

However, the issue of whether a covenant has been (or can be) assigned to a new business owner is a much more nuanced question of law. In some states, assignments are prohibited. In others, the employment contract must speak directly to the question and permit assignments. Finally, some states allow implied assignments.

But, as with anything else, contract language still governs. And that includes the underlying sale documents themselves. A perfect illustration arose when JSC Terminal bought the assets of MidWest Terminal. MidWest transferred to JSC all fixed assets and "all other assets, whether tangible or intangible, which are required and necessary to operate the business." Employee Paul Farris was fired by JSC, hired by a competitor, and sought to solicit JSC's accounts.

A federal court in Kentucky held that the language in the Asset Purchase Agreement between MidWest and JSC did not transfer employment agreement obligations. In particular, the court noted that non-compete arrangements, which are certainly valuable and favored in Kentucky, were not necessary to operate a firm's business.

The court may have been helped by two additional facts: Farris' contract permitted assignment only if MidWest's successors were related to the then-owners of the company and the APA indicated JSC had no obligations to MidWest's employees following closing. While the latter fact was certainly not dispositive of the assignment issue, it was suggestive of the clean break in employment relationships envisioned by the parties as of the closing date.

The key factor in the case, though, was the limited language in the APA concerning transfer of assets. What is interesting is how an employee like Farris would learn of the APA's terms before deciding on whether post-employment competition was permitted or prohibited.

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Court: United States District Court for the Western District of Kentucky
Opinion Date: 5/27/10
Cite: JSC Terminal, LLC v. Farris, 2010 U.S. Dist. LEXIS 52481 (W.D. Ky. May 27, 2010)
Favors: Employee
Law: Kentucky

Oregon Case Illustates Realistic Approach to Deciding Complex Non-Compete Issue (Epiq Class Action v. Prutsman)

At the beginning of 2008, the Oregon legislature passed reforms to the state's law governing non-competition agreements. The statute is so specific it likely will create loopholes as lawyers and their clients devise ways to circumvent the law's requirements.

Prior to the 2008 amendments, the statute attempted to govern the enforceability of non-compete agreements by dictating they were enforceable only if signed at the inception of employment or upon a bona fide advancement. Agreements signed prior to the effective date of the new law are still governed by the previous iteration, and so we can expect a runoff of cases decided under the old statute.

One such case involved Jim Prutsman, a former IT chief and sales employee of Epiq Class Actions and its predecessors. When Prutsman was promoted from IT to sales in 2003, he signed a two-year non-compete agreement. Subsequently, his employer was acquired in a stock purchase by ECA. Following the closing, Prutsman signed a new non-compete agreement - which reduced his post-termination restriction from two years down to one.

As the court noted, the consideration for the agreement did not meet either criteria for enforceability - it was not signed upon the commencement of his employment and not pursuant to a bona fide advancement at ECA. However, the court took a realistic view of the statute and disagreed with Prutsman's consideration argument. Specifically, the court held that the impact of the new agreement was to reduce Prutsman's burden; he was barred from competing for only one year, not two. The court noted that enforcing the less onerous agreement was consistent with the legislature's intent in prohibiting non-competes where the employer foists a new document on an employee under threat of discharge.

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Court: United States District Court for the District of Oregon
Opinion Date: 11/13/09
Cite: Epiq Class Action and Claims Solutions, Inc. v. Prutsman, 2009 U.S. Dist. LEXIS 108129 (D. Or. Nov. 13, 2009)
Favors: Employer
Law: Oregon

Arizona Follows Majority Rule on Assignment of Restrictive Covenants (Sogeti USA v. Scariano)

One of the most common defenses raised by employees who try to break a non-compete is based on standing. Frequently, this arises when an employee signs a non-compete with one employer, who is later acquired by a successor entity. If the employer departs and competes, the successor entity will often try to enforce an agreement it never signed. Many times, the non-compete is silent as to whether the rights, duties and obligations are assignable to the successor.

In Sogeti USA v. Scariano, a federal district court addressed this issue as one of first impression under Arizona law. The court followed the majority of jurisdictions which hold that assignments of non-compete agreements are permissible even if: (a) the contract is silent regarding assignment; and (b) there has been no affirmative consent to the assignment by the employee.

Other jurisdictions following this rule include Illinois, New Jersey, and Kansas. States which hold otherwise, and require an assignability clause or consent by the employee, include Pennsylvania and Nevada. In these minority of states, courts focus on the "personal services" element to the contract and the employer's ability to write an assignment clause into the contract.

A couple of important caveats should be mentioned. First, an employee may impliedly consent to the assignment if he knows of it and continues in his employment for a significant period of time. Second, the rules on assignment are different if the business transaction is a merger rather than an acquisition. Business corporation statutes, not contract law, will govern the contractual obligations of the merged entity.

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Court: United States District Court for the District of Arizona
Opinion Date: 3/27/09
Cite: Sogeti USA, LLC v. Scariano, 2009 U.S. Dist. LEXIS 25658 (D. Ariz. Mar. 27, 2009)
Favors: Employer
Law: Arizona

Strict Construction Rule Prevents Enforcement of Non-Compete Agreement in Washington Case (Fluke Corp. v. Milwaukee Electric Tool)

Employers should always be aware that non-compete agreements will be strictly construed against it as the party in charge of drafting the contract; presumptions regarding ambiguities almost always devolve in favor of an employee. It is here where lawyers need to be particularly scrupulous in drafting agreements that reflect the intentions of the employer and guard against potential loopholes.

A recent Washington appellate case illustrates what happens when the precise contract language renders a non-compete totally ineffectual, such that traditional notions of reasonableness and protectable interests never even get addressed.

Fluke Corp. v. Milwaukee Electric Tool involves a dispute over the termination of Jonathan Morrow, who left Fluke to begin work for Milwaukee Electric in its Test and Measurement Field. But Morrow was initially hired by Jacobs Chuck Manufacturing, a subsidiary of Danaher Corporation. Fluke was a separate subsidiary of Danaher.

Morrow's two-year, broad non-compete restriction was contained in a contract with Jacbos Chuck; Fluke was not a party to it and the definition of "Company" in the preamble to the agreement referenced only Jacobs Chuck as a division of Danaher.

The non-compete clause broadened the definition of Company to include any affiliate of Danaher, but the expanded definition of Company was limited just to the non-compete term. Morrow was transferred to Fluke after he signed the non-compete contract, and he never signed a new agreement with Fluke.

Fluke balked when Morrow quit to join a competitor. Reversing the trial court's order of injunctive relief, the appellate court held that the unambiguous contract language rendered the non-compete unenforceable by Fluke against Morrow.

The reasoning: Morrow's transfer to another subsidiary - Fluke - constituted a termination of the employment agreement. It was critical that other contract provisions not at issue stated that a transfer of Morrow to another affiliate of Danaher would not constitute a termination of the agreement. However, by limiting the effect of transfer to just a few paragraphs, the fact the non-compete section was silent on this issue meant Morrow's transfer to Fluke was a termination for purposes of the non-compete covenant.

Finally, the agreement did not provide for automatic assignment to a subsidiary in the case of a transfer. Had it, the outcome may have been different - or at least the court would have been forced to address the substance of the non-compete.

The decision is an example of how employers must be careful in analyzing when the non-compete purports to operate, either in terms of an inter-company transfer, a termination or an assignment following an acquisition. It is critical that terms in one paragraph match up with another so that employees cannot argue that the strict construction rule releases them from any post-employment obligations.

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Court: Court of Appeals of Washington, Division One
Opinion Date: 2/17/09
Cite: Fluke Corp. v. Milwaukee Electric Tool Corp., 2009 Wash. App. LEXIS 364 (Wash. Ct. App. Feb. 17, 2009)
Favors: Employee
Law: South Carolina

Pennsylania Court Enforces Non-Compete Agreement Against Pyrotechnics Designer (Zambelli Fireworks v. Wood)

Cases with interesting facts usually produce interesting results, and a recent decision out of Pennsylvania demonstrates this. The case of Zambelli Fireworks v. Wood involved the defection of a pyrotechnics designer from his long-time employer to a direct competitor. At issue in the case was the reasonableness of a nationwide covenant not to compete that barred Matt Wood from working in the pyrotechnics business in any capacity for a total of two years.
The court's findings of fact were extensive, and I'll try and summarize the most critical of those here:

(1) Wood worked in several job capacities for Zambelli, primarily involving choreography and design of high-profile fireworks shows. However, he also had customer contacts and was responsible for preparing business proposals.

(2) Wood had customer responsibility throughout the United States and was not assigned a specific geographic territory.

(3) In 2007, after Wood signed his second non-compete with Zambelli, the family-owned business went through a major restructuring, whereby an outside investor group bought 50 percent of the stock from the family. Two daughters in the family business were pushed out in favor of Doug Taylor, who had no experience in the fireworks business.

(4) Wood was contacted by Pyrotechnico, a close (and apparently friendly) competitor with Zambelli, in late 2007. He negotiated with them through the beginning of 2008, eventually resigning in February. Wood prepared a list of items that he returned to Zambelli on his departure and received a verification from Zambelli that key documents were returned or deleted.

(5) After he began working at Pyrotechnico, Wood refrained from customer contact and tried to minimize competitive activity that would constitute a breach of his Zambelli agreement.

There were several issues discussed by the court in granting an injunction in favor of Zambelli. By way of background, Pennsylvania appears to have a pro-employer bent, due in large part to two factors: (1) the range of protectable interests that a non-compete can support; and (2) its willingness to modify or rewrite covenants to make them reasonable. Both issues were on display in the court's ruling.

First, the court noted that Pennsylvania will recognize a protectable interest in an employee's "specialized training or skills." This is an increasingly popular interest courts deem worthy of protection, notable in New York for its widespread use. Still, it is unavailable for employers to assert in many jurisdictions. In this case, Wood clearly had been trained and had a unique skill in a very narrow, specialized industry - pyrotechnics choreography.

Second, the court found that the lack of geographic restriction on Wood's non-compete was not fatal to the reasonableness inquiry. It was patently clear from the testimony Wood had customer contact throughout the United States, and that he could choreograph shows from his home computer for any customer wherever it may be situated.

Third, the court found the total ban on any competitive activity far too broad, stating that it "would literally prevent [Wood] from engaging in his chosen profession." Accordingly, the court modified and rewrote the contract to make it reasonable. The injunction contained two key components. First, Wood could not contact those customers with whom he developed a business relationship during his employment with Zambelli. Second, Wood's activity restriction was modified so that he could not design or choreograph aerial pyrotechnic dsiplays - the specific expertise he developed at Zambelli.

Finally, the court rejected a novel defense raised by Wood, although it appeared to be a close call. In essence, Wood claimed that the change in job conditions following the stock sale resulted in a new Zambelli and that this was an unauthorized assignment of a non-compete. Though the court called Wood's argument "weighty", it ultimately was not able to rely on any authority for the defense.

Because the company's stock was sold, Wood's non-compete was never assigned. Had Zambelli sold its assets without an express assignment provision in Wood's non-compete, the result may have been different.

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Court: United States District Court for the Western District of Pennsylvania
Opinion Date: 1/21/09
Cite: Zambelli Fireworks Mfg. Co., Inc. v. Wood, 2009 U.S. Dist. LEXIS 3974 (W.D. Pa. Jan. 21, 2009)
Favors: Employer
Law: Pennsylvania

Massachusetts Court Finds Successor Company Cannot Enforce Non-Compete (Randstad Professionals v. Wilson)

I wrote yesterday regarding the law of assignment and how it pertains to non-compete obligations of employees. Though approaches vary from one state to the next, assignments of covenants not to compete are generally permitted and may even be implied if the contract is silent.

Of course, nothing precludes a contract from prohibiting assignment altogether, as a recent Massachusetts decision illustrates. In the case of Randstad Professionals v. Wilson, the defendant signed an employment contract with a professional staffing agency, New Boston Select Group, Inc., which contained an 18-month, 100 geographic mile non-compete and a customer non-solicit clause. Several years after he started, New Boston was sold to Placement Pros. In 2008, the plaintiff - Randstad - took over Placement Pros. When it became apparent that Randstad would be Wilson's new employer, he quit.

Randstad sued to enforce the non-compete when Wilson defected and joined a direct competitor. The court had little trouble denying Randstad's motion for a preliminary injunction, holding that a specific provision of the non-compete agreement provided that "Employee's obligations ... may not be assigned."

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Court: Superior Court of Massachusetts at Worcester
Opinion Date: 12/26/08
Cite: Randstad Professionals US, LP v. Wilson, 2008 Mass. Super. LEXIS 405 (Mass. Super. Ct. Dec. 26, 2008)
Favors: Employee
Law: Massachusetts

Assignment of Non-Compete Agreements In Ohio Continues To Be Fact-Specific (Michael's Finer Meats v. Alfery)

One technical defense frequently raised by employees looking to break a non-compete agreement has to do with a change in ownership of the business. During the course of a business sale, the buyer conducts extensive due diligence regarding employee agreements and the availability of non-compete contracts, particularly as to key sales and executive employees.

The lack of valid non-compete agreements can impact the goodwill purchased in the transaction. Similarly, if those agreements are not assignable, the buyer's ability to protect customer relationships, and concomitantly a stream of sales revenue, will be detrimentally impacted. With that reality in mind, courts generally favor the assignment of non-compete covenants from a seller to a buyer. The rule is not absolute. Pennsylvania, for instance, requires a non-compete agreement to have an express assignment clause permitting the transfer.

Ohio is a more fact-specific state. Assignment of a covenant is not governed by a per se rule for or against the transfer. Rather, courts there continue to examine the facts bearing on the assignment if the non-compete agreement is silent on the issue. The precedents from Ohio are mixed.

In Michael's Finer Meats v. Alfery, the court sided with the employer on the assignment issue. Alfery began work as a sales representative with Michael's when it was a corporation owned entirely by Michael Bloch. Subsequently, Bloch merged the corporaton into a limited liability company with a Utah investor group. Bloch maintained a minority ownership interest. The merger was effectuated under Ohio law, and a certificate of merger was filed with the State pursuant to governing statute.

The court analyzed the facts and determined that the assignment was permissible for three main reasons: (1) the Bloch family remained in charge of day-to-day operations such that Alfery's line of reporting did not change significantly, (2) Alfery's job duties and sales responsibilities were not impacted significantly, and (3) assignment was necessary to protect the goodwill of the seller in the business transaction. In particular, the court stated: "nothing in Defendant's salary structure, his territory, his supervision or sales targets changed as a result of the sale of business."

Additionally, the court found that Alfery's non-compete was overbroad as drafted. It barred him from competing with Michael's for a one-year period, but the geographic term was silent. Under Ohio's liberal modification doctrine, the court rewrote the contract to prohibit Alfery from making sales of competitive products within one county around Pittsburgh, where he was the "face of the company." Assisting the court was clear evidence that Alfery did in fact make such sales to his former accounts in violation of the covenant.

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Court: United States District Court for the Southern District of Ohio
Opinion Date: 1/13/09
Cite: Michael's Finer Meats, LLC v. Alfery, 649 F. Supp. 2d 748 (S.D. Oh. 2009)
Favors: Employer
Law: Ohio

Who's On First Routine Plays Out in Georgia Non-Compete Dispute (Accurate Printers v. Stark)

Accurate Printers v. Stark took me back to law school contracts class. This is an example of how not to close a deal or conduct a lawsuit.

Kenneth Stark sold his business, Oxford Printing, to Steven Young. Accurate Printers was Young's company and admittedly a competing business with Oxford. As a condition of closing, Stark agreed to work for Young to help with the business transition. Stark also executed customary covenants not to compete and not to solicit customers for a period of 5 years. Predictably, the relationship deteriorated, and Stark went to work in printing sales, purportedly in violation of the restrictive covenants.

The asset purchase agreement (and accompanying restrictive covenants), though, was between Young - individually - and Oxford Printing. Accurate Printers was not a party to either contract. Young admitted he entered into the contract in his individual capacity, and that AP was not a party. Still, AP sued to enforce the non-compete clause.

The trial court rendered a directed verdict in favor of Stark, and the Court of Appeals of Georgia affirmed. The appellate court was not persuaded by Young's post-closing attempt to assign the restrictive covenants to AP. The closing documents required Stark's express consent to any such assignments, and there was no evidence Stark was ever aware Young assigned the contract rights he obtained at closing. Further, the closing documents prohibited an assignment unless Young's promissory note to Stark had been paid in full (which it had not).

But Stark did not emerge completely victorious. His award of attorney's fees against Young was reversed by the appellate court. Although Young was a party to the restrictive covenant (which contained a fee-shifting provision), Young was not named in the lawsuit as a plaintiff - and Stark never added him to his attorney's fee claim.

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Court: Court of Appeals of Georgia, Second Division
Opinion Date: 11/26/08
Cite: Accurate Printers, Inc. v. Stark, 671 S.E.2d 228 (Ga. Ct. App. 2008)
Favors: Neutral
Law: Georgia