Choice-of-law and -forum clauses are not only some of the most important issues in non-compete agreements, but they also are some of the most complex.
To step back, the clauses are just what they sound like. If you have a restrictive covenant agreement, look to the back and you'll find what many normal people call "boilerplate" terms. A choice-of-law clause says what State's law will govern the agreement. And a choice-of-forum clause will tell you where the case can, or even must, be heard.
These clauses take on added importance for employees who work for larger enterprises, because often the employee's place of citizenship will differ from the corporate nerve center. A valued sales employee may have selling responsibility only on the west coast, but her company may be situated in New York or Florida. This is extremely common, and employees often don't quite know what to do when their place of residence is different than the law governing their agreements.
Red-flag States, such as California and Oklahoma, pose special problems because of clear public policy concerns that deal with non-compete law. In those States (and others), many restrictive covenants enforceable in States like Texas or Florida won't be reasonable at all. What to do, then, when a citizen of one of these States has an agreement governed by a State's law that embraces non-competes?
Let's walk through how to assess this.
Step 1: Determine the employee's place of citizenship. This should be easy, but we've seen cases where employees move in order to take a new job in a State that is somewhat hostile to non-competes. Can this move aid the employee, or is it irrelevant?
Step 2: Find out if the employee's home State poses special enforcement problems. Those States are California, Oklahoma, North Dakota, Louisiana, and Wisconsin. There may be others, too, but for certain an employee's citizenship in one of these States should cause counsel to engage in a deep enforceability analysis.
Step 3: Ascertain whether suit in State or Federal court is likely. If there is a possibility of a suit in Federal court, then the Supreme Court's case of Atlantic Marine in 2013 will be important to consider. But, that is only if the contract contains a choice-of-forum clause.
Step 4: Review State choice-of-law rules. Most States adopt the analysis from Section 187 of the Restatement (Second) of Conflicts of Laws. If the parties select a State's law to apply, it will be given effect unless one of two conditions is met: (a) the selected State has no substantial relationship to the parties or the transaction; or (b) application of the chosen State's law would be contrary to the public policy of a State that has a materially greater interest and whose law would apply absent the choice-of-law clause.
Step 5: Apply the choice-of-law rules. Often, the first exception noted above won't apply, unless you encounter the totally bonkers situation where an employer gratuitously picks the most authoritarian State even though that State has nothing to do with the employment relationship. Or, perhaps, the employer picks Delaware when the only connection to Delaware is that the company chose to be incorporated there. That may fall within exception (a).
More likely, you'll need to do a deep dive on exception (b), which often applies when an employee has little connection to the forum State. Again, consider my example where an employee sells only in Oklahoma and has no job responsibilities in New York where the company home is. Very common fact pattern.
Step 6: Assuming you have a scenario involving exception (b), consider the nature of the public-policy at stake. Do you have a California problem, where non-competes are totally off-limits? Or do you have a State with marginal deviations to the general rule of reason, like a Nebraska which does not allow overbroad non-competes to be enforced? Sometimes these small deviations can be outcome-determinative in a particular dispute, but is that enough to qualify as a "public policy"? Debatable, to be sure.
Step 7: See if some other limiting condition applies. That is, does a State have a particular rule about choice-of-law or -forum clauses that applies to employees? Some States do by statute.
There are a few recent illustrations that involve some or all of these steps. The first comes from the redundantly-named Supreme Judicial Court of Massachusetts in a case called Oxford Global Resources, LLC v. Hernandez, in which the SJC held that a Massachusetts court would not enforce choice-of-law and -forum clauses that both selected Massachusetts against a former employee residing in California. Of particular note, that employee had job responsibilities only in California. The deciding factor was California's strong public policy that I have discussed often, which bars non-competes for employees.
Conversely, the Delaware Court of Chancery addressed a slightly different question in NuVasive, Inc. v. Miles. There, an employee in California entered into an employment contract that specified Delaware law and venue. But that agreement was entered into after California amended its Labor Code, Section 925. That section was generally intended to deepen the public policy interest against non-competes by preventing circumvention of California law through choice-of-law clauses. But Section 925 also carved out contracts where the employee's counsel negotiates the choice-of-law provision. As the Delaware court found, that carve-out balanced an overriding public policy interest in favor of free competition with a countervailing interest in the freedom to contract. As such, the choice-of-law clause was valid.
These issues are extremely important, and sometimes the case law can be confusing. That is more so with venue clauses than with choice-of-law provisions. But an employee and counsel must be attuned to the importance of both when it appears they can have an impact on the agreement.
Showing posts with label Choice-of-Law Clause. Show all posts
Showing posts with label Choice-of-Law Clause. Show all posts
Monday, November 19, 2018
Monday, November 12, 2018
California Dreamin'
I often think of living in California.
The warm weather, the fact that the air just somehow feels different. The sand running through your toes as you soak it all. And of course, the punishing taxes and regulations...but still.
And of course I think of what it would be like to be a non-compete attorney in California, because man would it be weird. You'd almost have to reverse most of your instincts. You wouldn't have to hedge when you talk to clients. You could actually dispense advice without the maddening qualifiers like, "well maybe a court would do this, but hey maybe not. Good luck!"
The reason, of course, is that California is pretty hostile to most types of restraints on trade, due to Section 16600 of the Business and Professions Code, which states that "every contract" in which one is restrained from engaging in a lawful profession, trade, or business is void. That's strong stuff. But despite attorneys' ability to give somewhat clearer answers than we can give in say Illinois, some nuance still remains.
Take no-hire clauses, which bar employees from soliciting co-workers for a reasonable period of time post-employment. Those are often far less controversial than non-competes and customer non-solicitation covenants because they don't really tend to limit one from working. Except, though, recruiters.
Recruiters are basically salespersons, but they specialize in placing people (sometimes consultants, sometimes other employees) with clients. Their relationships, which restrictive covenants try to protect, thus cross over into two different areas of the distribution chain. And so recruiters more than any group of employees feel restrained by no-hire clauses.
The California courts haven't been as troubled by no-hire clauses as the more common and restrictive form of post-employment covenants, with some courts allowing them. But that rule now appears in doubt after AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. There, the Fourth District Court of Appeal held void under Section 16600 a garden-variety no-hire clause in the travel nurse staffing business.
The employees impacted by the no-hire were travel nurse recruiters of AMN Healthcare, who had signed no-hire clauses of either a year or 18 months that limited their ability to solicit co-workers to leave AMN. Those recruiters then left and contacted various travel nurses, who typically were placed at health care facilities on 13-week assignments.
The Court of Appeal found the no-hire clauses void as a matter of law, thus casting doubt about older case that lawyers typically relied upon to enforce those clauses. The gist is that those older cases pre-dated a significant Supreme Court of California decision in a case called Edwards v. Arthur Anderson LLP, which generally disapproved of a narrow-restraint exception to Section 16600. As a result of Edwards, Section 16600 still applied when a post-employment covenant restricts only a limited part of an employee's profession, such as solicitation of clients.
The Court of Appeal in AMN Healthcare found Edwards controlling. As applied to the travel nurse recruiter scenario, the court had little trouble concluding that the no-hire clause was a void restraint. In particular, it focused on the nature of the recruiting business (which makes no-hire clauses much more significant than in other industries), the impact on recruiters' compensation if restrained from soliciting nurses for work, and the temporary nature of the travel-nurse assignments.
Despite all that, it's hard not to see AMN Healthcare as a significant shift in how courts evaluate no-hire clauses. A copy of the decision is available here.
The warm weather, the fact that the air just somehow feels different. The sand running through your toes as you soak it all. And of course, the punishing taxes and regulations...but still.
And of course I think of what it would be like to be a non-compete attorney in California, because man would it be weird. You'd almost have to reverse most of your instincts. You wouldn't have to hedge when you talk to clients. You could actually dispense advice without the maddening qualifiers like, "well maybe a court would do this, but hey maybe not. Good luck!"
The reason, of course, is that California is pretty hostile to most types of restraints on trade, due to Section 16600 of the Business and Professions Code, which states that "every contract" in which one is restrained from engaging in a lawful profession, trade, or business is void. That's strong stuff. But despite attorneys' ability to give somewhat clearer answers than we can give in say Illinois, some nuance still remains.
Take no-hire clauses, which bar employees from soliciting co-workers for a reasonable period of time post-employment. Those are often far less controversial than non-competes and customer non-solicitation covenants because they don't really tend to limit one from working. Except, though, recruiters.
Recruiters are basically salespersons, but they specialize in placing people (sometimes consultants, sometimes other employees) with clients. Their relationships, which restrictive covenants try to protect, thus cross over into two different areas of the distribution chain. And so recruiters more than any group of employees feel restrained by no-hire clauses.
The California courts haven't been as troubled by no-hire clauses as the more common and restrictive form of post-employment covenants, with some courts allowing them. But that rule now appears in doubt after AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. There, the Fourth District Court of Appeal held void under Section 16600 a garden-variety no-hire clause in the travel nurse staffing business.
The employees impacted by the no-hire were travel nurse recruiters of AMN Healthcare, who had signed no-hire clauses of either a year or 18 months that limited their ability to solicit co-workers to leave AMN. Those recruiters then left and contacted various travel nurses, who typically were placed at health care facilities on 13-week assignments.
The Court of Appeal found the no-hire clauses void as a matter of law, thus casting doubt about older case that lawyers typically relied upon to enforce those clauses. The gist is that those older cases pre-dated a significant Supreme Court of California decision in a case called Edwards v. Arthur Anderson LLP, which generally disapproved of a narrow-restraint exception to Section 16600. As a result of Edwards, Section 16600 still applied when a post-employment covenant restricts only a limited part of an employee's profession, such as solicitation of clients.
The Court of Appeal in AMN Healthcare found Edwards controlling. As applied to the travel nurse recruiter scenario, the court had little trouble concluding that the no-hire clause was a void restraint. In particular, it focused on the nature of the recruiting business (which makes no-hire clauses much more significant than in other industries), the impact on recruiters' compensation if restrained from soliciting nurses for work, and the temporary nature of the travel-nurse assignments.
Despite all that, it's hard not to see AMN Healthcare as a significant shift in how courts evaluate no-hire clauses. A copy of the decision is available here.
Friday, December 15, 2017
The Reading List (2017, No. 30): Ex Parte Seizure Orders, North Dakota Non-Competes, and 9 Years of Blogging
Non-Compete and Trade Secrets News for the week ended December 15, 2017
***
Ex Parte Seizures of Trade Secrets
The Defend Trade Secrets Act's provision for ex parte seizures of property has generated considerable buzz and commentary, much more so than the remedy's narrow application seems to be worth. I am interested in it only in the academic sense, not the pragmatic one.
If you want nuts and bolts as to how it works, look elsewhere. I'm not covering it here. (Though if you're truly jonesing for stuff, e-mail me and I'll send you a white paper on it.) The gist is simple: if a plaintiff feels a defendant has stolen trade secrets, it can petition the court for an order to retrieve the property containing those secrets.
The case law applying the ex parte seizure order is understandably thin, given how new the DTSA is. Still, there's more on this remedy than more conventional ones, simply because it takes longer to try a case to judgment than it does to pursue an emergency interim order. So we have some helpful cases.
The most interesting one so far is Blue Star Land Services, LLC v. Coleman, No. 17-931, a case pending in the Western District of Oklahoma. Of course, it involves an employee departure that appears to have gone completely haywire. And even less surprisingly given the venue, it involves the oil and gas industry.
I am showing at the bottom of this post the district court's original ex parte seizure order. This one is pretty interesting since it involves an application for electronic storage devices and a Dropbox account (really, credentials to get into that account). Misappropriation tools tend to be digital, presenting sticky issues for law-enforcement seizure efforts. Put another way, it's easier to seize a bag of dope than it is a cloud-based folder of PDFs.
The Order below is a bit broad, but perhaps necessarily so. That is, it orders the seizure of "[a]ny computers, computer hard drives, or memory devices in Defendants' possession that may contain [trade secret information]." It further extends to seizure of usernames and passwords, information even less apt to forcible retrieval but obviously related to the instrumentalities needed to facilitate the alleged theft. All in all, I think counsel did a good job proposing this quirky remedy, and the court did a nice job entering it given the difficult aspects of seizing digital assets.
North Dakota Non-Compete Decision
We now move upwards to North Dakota, awash in fracking material but mercifully bereft of non-compete litigation. Tell that, though, to one Dawn Osborne, an office supply house sales representative who signed a two-year non-compete with Brown & Saenger.
The problem for Osborne is that even though she worked in Fargo, her employer was a South Dakota company. And the non-compete agreement contained a South Dakota choice-of-law/choice-of-forum clause. But North Dakota prohibits non-compete agreements along the same lines that California does. The Supreme Court of North Dakota held the forum-selection clause invalid, stating "one may not contract for application of another state's law or forum if the natural result is to allow enforcement of a non-compete agreement in violation of North Dakota's long-standing and strong public policy against non-compete agreements." This shows the importance in non-enforcement states of establishing venue through a declaratory judgment action to challenge a forum-selection clause. Litigants in California and Georgia know this tactic well.
A link to Osborne v. Brown & Saenger, Inc. is available here.
My 9-Year (Blogging) Anniversary
I've been blogging about non-competes longer than I've been married.
If my wife is reading this, it feels like I just got married yesterday and I'm still in the throes of wedded bliss! I can't say the same about blogging, but it has been a fun journey to share my thoughts and ideas on here. When I originally started this, my goal was simply to provide helpful, informative content.
My style has changed a great deal from those first timid days when I wasn't sure what my voice would be. I suspect that's true for most people who provide commentary in this format. I was interested, after 9 years, to see which posts (out of more than 600) were read the most, figuring that there would be some sort of logical pattern.
Nope. Some of the most widely-read posts were fairly predictable, like my attack on one of the worst, if not the worst, non-compete I've seen. Then there were my twin posts (here and here) on Tradesman Int'l v. Black, which discussed an important Seventh Circuit case I litigated on bad faith in trade secrets cases. Among the more popular posts was a discussion on pursuing declaratory judgment actions (much like Ms. Osborne did in North Dakota) and ensuring you have a sufficiently ripe controversy. I get tons of e-mails, messages, and calls on that from other attorneys and potential clients.
By far my most popular post, though, was an assessment of what exactly a "solicitation" is in the context of restrictive covenant litigation. I figured it would be a good one, but the numbers were staggering. But even some really obscure, pedantic posts generated an abnormal number of hits, such as about using contention interrogatories. Or this one involving the mootness rule on appeal. Or for God's sakes this one, with the almost intoxicating title "Some Thoughts on Pursuing Expedited Discovery." Turns out, y'all are civil procedure nerds.
The future of legal blogging is a bit uncertain. In this particular area, it's easy to get drowned out by blogs that are manufactured and designed to attract viewers. Many are unhelpful, uninteresting, and apparently undertaken solely as part of a poorly conceived executive committee marketing endeavor. Still, there are many excellent sources of information online which add context and color to the discussion.
I don't where this, my blog, ends, but I know it does end. And I will know when the time is right. So God willing, it may have started before my marriage, but it won't outlast it. For now, thanks for reading.
***
Ex Parte Seizures of Trade Secrets
The Defend Trade Secrets Act's provision for ex parte seizures of property has generated considerable buzz and commentary, much more so than the remedy's narrow application seems to be worth. I am interested in it only in the academic sense, not the pragmatic one.
If you want nuts and bolts as to how it works, look elsewhere. I'm not covering it here. (Though if you're truly jonesing for stuff, e-mail me and I'll send you a white paper on it.) The gist is simple: if a plaintiff feels a defendant has stolen trade secrets, it can petition the court for an order to retrieve the property containing those secrets.
The case law applying the ex parte seizure order is understandably thin, given how new the DTSA is. Still, there's more on this remedy than more conventional ones, simply because it takes longer to try a case to judgment than it does to pursue an emergency interim order. So we have some helpful cases.
The most interesting one so far is Blue Star Land Services, LLC v. Coleman, No. 17-931, a case pending in the Western District of Oklahoma. Of course, it involves an employee departure that appears to have gone completely haywire. And even less surprisingly given the venue, it involves the oil and gas industry.
I am showing at the bottom of this post the district court's original ex parte seizure order. This one is pretty interesting since it involves an application for electronic storage devices and a Dropbox account (really, credentials to get into that account). Misappropriation tools tend to be digital, presenting sticky issues for law-enforcement seizure efforts. Put another way, it's easier to seize a bag of dope than it is a cloud-based folder of PDFs.
The Order below is a bit broad, but perhaps necessarily so. That is, it orders the seizure of "[a]ny computers, computer hard drives, or memory devices in Defendants' possession that may contain [trade secret information]." It further extends to seizure of usernames and passwords, information even less apt to forcible retrieval but obviously related to the instrumentalities needed to facilitate the alleged theft. All in all, I think counsel did a good job proposing this quirky remedy, and the court did a nice job entering it given the difficult aspects of seizing digital assets.
North Dakota Non-Compete Decision
We now move upwards to North Dakota, awash in fracking material but mercifully bereft of non-compete litigation. Tell that, though, to one Dawn Osborne, an office supply house sales representative who signed a two-year non-compete with Brown & Saenger.
The problem for Osborne is that even though she worked in Fargo, her employer was a South Dakota company. And the non-compete agreement contained a South Dakota choice-of-law/choice-of-forum clause. But North Dakota prohibits non-compete agreements along the same lines that California does. The Supreme Court of North Dakota held the forum-selection clause invalid, stating "one may not contract for application of another state's law or forum if the natural result is to allow enforcement of a non-compete agreement in violation of North Dakota's long-standing and strong public policy against non-compete agreements." This shows the importance in non-enforcement states of establishing venue through a declaratory judgment action to challenge a forum-selection clause. Litigants in California and Georgia know this tactic well.
A link to Osborne v. Brown & Saenger, Inc. is available here.
My 9-Year (Blogging) Anniversary
I've been blogging about non-competes longer than I've been married.
If my wife is reading this, it feels like I just got married yesterday and I'm still in the throes of wedded bliss! I can't say the same about blogging, but it has been a fun journey to share my thoughts and ideas on here. When I originally started this, my goal was simply to provide helpful, informative content.
My style has changed a great deal from those first timid days when I wasn't sure what my voice would be. I suspect that's true for most people who provide commentary in this format. I was interested, after 9 years, to see which posts (out of more than 600) were read the most, figuring that there would be some sort of logical pattern.
Nope. Some of the most widely-read posts were fairly predictable, like my attack on one of the worst, if not the worst, non-compete I've seen. Then there were my twin posts (here and here) on Tradesman Int'l v. Black, which discussed an important Seventh Circuit case I litigated on bad faith in trade secrets cases. Among the more popular posts was a discussion on pursuing declaratory judgment actions (much like Ms. Osborne did in North Dakota) and ensuring you have a sufficiently ripe controversy. I get tons of e-mails, messages, and calls on that from other attorneys and potential clients.
By far my most popular post, though, was an assessment of what exactly a "solicitation" is in the context of restrictive covenant litigation. I figured it would be a good one, but the numbers were staggering. But even some really obscure, pedantic posts generated an abnormal number of hits, such as about using contention interrogatories. Or this one involving the mootness rule on appeal. Or for God's sakes this one, with the almost intoxicating title "Some Thoughts on Pursuing Expedited Discovery." Turns out, y'all are civil procedure nerds.
The future of legal blogging is a bit uncertain. In this particular area, it's easy to get drowned out by blogs that are manufactured and designed to attract viewers. Many are unhelpful, uninteresting, and apparently undertaken solely as part of a poorly conceived executive committee marketing endeavor. Still, there are many excellent sources of information online which add context and color to the discussion.
I don't where this, my blog, ends, but I know it does end. And I will know when the time is right. So God willing, it may have started before my marriage, but it won't outlast it. For now, thanks for reading.
Thursday, May 25, 2017
The Reading List (2017, No. 20): Are Prince's Unreleased Songs "Trade Secrets"?
Non-Compete and Trade Secrets News for the week ended May 26, 2017
***
The Trade Secret Status of Prince's Unreleased Recordings
Prince's death last year unleashed an unfortunate - and somewhat predictable - wave of litigation in his home State of Minnesota.
One lawsuit involves a claim of trade secrets misappropriation. The nature of the action? A sound engineer's possession of five previously unrecorded Prince songs. Prince's estate sued to enjoin the promotion and distribution of those recordings. The engineer signed a Confidentiality Agreement providing that any recordings were the "sole and exclusive property" of Paisley Park Enterprises, a corporation Prince owned while he was alive. The five songs were recorded and edited between 2006 and 2008, long before Prince's death. Around this time, the engineer had stopped working with Prince.
After Prince's estate learned that the engineer was planning to release one of the recordings, it sued and sought both possession of all recordings and a temporary restraining order barring their release. The court ultimately issued a temporary restraining order in favor of Prince's estate and Paisley Park. But the claim to trade-secret protection over the recordings failed.
Though the recordings themselves were kept secret, that alone was not enough to vest them with trade-secret status under Minnesota law. The court stated that "[n]o other artist or record company could take market share from Paisley Park Enterprises by discovering the contents of the disputed recordings." Though the recordings unquestionably had economic value, that value did not derive from their secrecy; rather, the value came from Paisely Park's exclusive right to sell them to the public.
Here is a link to the district court's opinion.
Stryker Wins Sixth Circuit Appeal
Back in February, I noted the significance of Stone Surgical LLC v. Striker Corp., at least in the sense that the Sixth Circuit appeal from a jury verdict raised an interesting choice-of-law question. The dispute centered on a non-compete with a Michigan choice-of-law clause. But the relevant conduct involved a Louisiana salesman who had Louisiana contacts. Given that State's pro-employee stance towards non-compete agreements, the employee (Ridgeway) had a good argument that applying Michigan law would violate Louisiana public policy.
But the Sixth Circuit - though acknowledging it was a fairly close question - found that Louisiana's interest was not materially greater than Michigan's. In other words, though Louisiana had an interest in protecting its residents from unfair and overbroad non-compete agreements, the court had to weigh the employer's interest in protecting its economic rights against a breach. And on that score, it saw no error in the district court's conclusion that Louisiana's interest was not significantly greater. The Michigan choice-of-law clause applied, and the jury's verdict against Ridgeway was upheld.
Here is a link to the Stone Surgical opinion.
Baseless Suits as a "Deceptive Trade Practice"
Defense strategies for fighting frivolous lawsuits generally are fairly limited. Counsel always have the ability to seek fees under Rule 11 or state-law equivalents if the suit is groundless. Most trade-secret statutes have "bad faith" fee-shifting clauses. Those are a tough sell in most suits. In other cases, business corporation act indemnity provisions may give rise to broad fee-shifting. And, of course, prevailing-party clauses that allow for winners to obtain fees may provide relief.
But are there other grounds for prevailing defendants to seek legal costs? The options are out there. I was interested to read an Order out of the Eastern District of Louisiana in a case called Byram Healthcare Centers, Inc. v. Rauth, No. 16-16854. In that case, the court allowed a defendant to counterclaim against her ex-employer for seeking to prevent her from working for a competitor. The legal basis? The state's Unfair Trade Practices Act, which allows a person to bring an action if she suffers "any ascertainable loss of money or movable property, corporeal or incorporeal, as a result of the use or employment by another person of an unfair or deceptive method..."
The gist of the opinion is that misuse of the judicial process itself can be a deceptive trade practice. Some state-law interpretations of the abuse of process tort would say, in essence, the same thing. But state trade practices statutes often provide for mandatory fee-shifting. This is a very creative use of state law by the employee's counsel to gain leverage in a case where the employer, even on a flimsy case, holds all the leverage simply because it is able to bear the cost of litigation.
***
It's pretty hard not to read the New York Times and the Washington Post these days, a journalistic battle that illustrates the profound benefits of competition. But the NYT has gone well past all things Russia and has published a series of pieces concerning non-competition agreements. The latest comes from Paul Krugman in an opinion piece tilted "The Unfreeing of American Workers." This article discusses the shackling of employees due to the unreasonable proliferation of non-competes and the irrational linkage of health care to employment. Krugman even manages to work in a reference to Russia - noting American workers are "yoked to corporate employers the way Russian peasants were once tied to their masters' land."
***
The Waymo-Uber driverless car technology fight continues to dominate the news. Jonathan Pollard takes an in-depth look at the latest developments, including Waymo's "loss" at not obtaining a broader injunction to stop Uber from pursuing its competing technology. In his usual candid style, Jonathan thinks Uber's lawyers are getting the better of their counterparts at Waymo.
For background on the man at the center of the trade-secrets case of the year, I recommend the Wall Street Journal profile on Anthony Levandowski and his rather unconventional tenure at Google.
***
Russell Beck's Fair Competition Law blog discusses an amendment to the Texas Uniform Trade Secrets Act. The amendment does not allow for a trade-secrets injunction that prohibits a person from using his general skill, knowledge, and experience acquired during employment. That language helps, but it still falls short of what is needed - a clear ban on so-called inevitable disclosure injunctions.
Eric Ostroff has an excellent practical piece for lawyers who represent clients in trade-secrets suits. The gist: as an ethical matter, they probably need to encrypt e-mails that refer to the trade secrets. The American Bar Association's opinion on encryption only formalizes what a lot of us have been discussing for sometime, particularly given law firms' obvious status as targets for hackers.
Dechert has a lengthy analysis, in case summary form, of the Ninth Circuit's opinion in United States v. Liew. This matter arose of the conviction of Walter Liew under the Economic Espionage Act arising out of his theft of certain trade secrets of DuPont and his apparent agreement with the Chinese government to supply it with certain technology for titanium dioxide. Confirming the correctness of my decision never to eat Oreo cookies, titanium dioxide is the pigment that makes the center of the Oreo white. Almost as troubling as what Liew did.
Michael Starr of Holland & Knight discusses the Molon Motor case, about which I wrote last week, and its preliminary ruling that an inevitable disclosure claim withstood a defense motion to dismiss. Despite some scuttlebutt, Molon Motor does nothing to pierce the DTSA's ban on inevitable disclosure claims in the employment context. We lawyers tend to overread cases from time to time. The upshot is this: inevitable disclosure claims, even in States that recognize the theory, are incredibly hard to pursue and by no means give an employer a clear path to injunctive relief. Without some evidence of bad-faith conduct giving rise to an actual threat, they almost always fail.
***
The Trade Secret Status of Prince's Unreleased Recordings
Prince's death last year unleashed an unfortunate - and somewhat predictable - wave of litigation in his home State of Minnesota.
One lawsuit involves a claim of trade secrets misappropriation. The nature of the action? A sound engineer's possession of five previously unrecorded Prince songs. Prince's estate sued to enjoin the promotion and distribution of those recordings. The engineer signed a Confidentiality Agreement providing that any recordings were the "sole and exclusive property" of Paisley Park Enterprises, a corporation Prince owned while he was alive. The five songs were recorded and edited between 2006 and 2008, long before Prince's death. Around this time, the engineer had stopped working with Prince.
After Prince's estate learned that the engineer was planning to release one of the recordings, it sued and sought both possession of all recordings and a temporary restraining order barring their release. The court ultimately issued a temporary restraining order in favor of Prince's estate and Paisley Park. But the claim to trade-secret protection over the recordings failed.
Though the recordings themselves were kept secret, that alone was not enough to vest them with trade-secret status under Minnesota law. The court stated that "[n]o other artist or record company could take market share from Paisley Park Enterprises by discovering the contents of the disputed recordings." Though the recordings unquestionably had economic value, that value did not derive from their secrecy; rather, the value came from Paisely Park's exclusive right to sell them to the public.
Here is a link to the district court's opinion.
Stryker Wins Sixth Circuit Appeal
Back in February, I noted the significance of Stone Surgical LLC v. Striker Corp., at least in the sense that the Sixth Circuit appeal from a jury verdict raised an interesting choice-of-law question. The dispute centered on a non-compete with a Michigan choice-of-law clause. But the relevant conduct involved a Louisiana salesman who had Louisiana contacts. Given that State's pro-employee stance towards non-compete agreements, the employee (Ridgeway) had a good argument that applying Michigan law would violate Louisiana public policy.
But the Sixth Circuit - though acknowledging it was a fairly close question - found that Louisiana's interest was not materially greater than Michigan's. In other words, though Louisiana had an interest in protecting its residents from unfair and overbroad non-compete agreements, the court had to weigh the employer's interest in protecting its economic rights against a breach. And on that score, it saw no error in the district court's conclusion that Louisiana's interest was not significantly greater. The Michigan choice-of-law clause applied, and the jury's verdict against Ridgeway was upheld.
Here is a link to the Stone Surgical opinion.
Baseless Suits as a "Deceptive Trade Practice"
Defense strategies for fighting frivolous lawsuits generally are fairly limited. Counsel always have the ability to seek fees under Rule 11 or state-law equivalents if the suit is groundless. Most trade-secret statutes have "bad faith" fee-shifting clauses. Those are a tough sell in most suits. In other cases, business corporation act indemnity provisions may give rise to broad fee-shifting. And, of course, prevailing-party clauses that allow for winners to obtain fees may provide relief.
But are there other grounds for prevailing defendants to seek legal costs? The options are out there. I was interested to read an Order out of the Eastern District of Louisiana in a case called Byram Healthcare Centers, Inc. v. Rauth, No. 16-16854. In that case, the court allowed a defendant to counterclaim against her ex-employer for seeking to prevent her from working for a competitor. The legal basis? The state's Unfair Trade Practices Act, which allows a person to bring an action if she suffers "any ascertainable loss of money or movable property, corporeal or incorporeal, as a result of the use or employment by another person of an unfair or deceptive method..."
The gist of the opinion is that misuse of the judicial process itself can be a deceptive trade practice. Some state-law interpretations of the abuse of process tort would say, in essence, the same thing. But state trade practices statutes often provide for mandatory fee-shifting. This is a very creative use of state law by the employee's counsel to gain leverage in a case where the employer, even on a flimsy case, holds all the leverage simply because it is able to bear the cost of litigation.
***
It's pretty hard not to read the New York Times and the Washington Post these days, a journalistic battle that illustrates the profound benefits of competition. But the NYT has gone well past all things Russia and has published a series of pieces concerning non-competition agreements. The latest comes from Paul Krugman in an opinion piece tilted "The Unfreeing of American Workers." This article discusses the shackling of employees due to the unreasonable proliferation of non-competes and the irrational linkage of health care to employment. Krugman even manages to work in a reference to Russia - noting American workers are "yoked to corporate employers the way Russian peasants were once tied to their masters' land."
***
The Waymo-Uber driverless car technology fight continues to dominate the news. Jonathan Pollard takes an in-depth look at the latest developments, including Waymo's "loss" at not obtaining a broader injunction to stop Uber from pursuing its competing technology. In his usual candid style, Jonathan thinks Uber's lawyers are getting the better of their counterparts at Waymo.
For background on the man at the center of the trade-secrets case of the year, I recommend the Wall Street Journal profile on Anthony Levandowski and his rather unconventional tenure at Google.
***
Russell Beck's Fair Competition Law blog discusses an amendment to the Texas Uniform Trade Secrets Act. The amendment does not allow for a trade-secrets injunction that prohibits a person from using his general skill, knowledge, and experience acquired during employment. That language helps, but it still falls short of what is needed - a clear ban on so-called inevitable disclosure injunctions.
Eric Ostroff has an excellent practical piece for lawyers who represent clients in trade-secrets suits. The gist: as an ethical matter, they probably need to encrypt e-mails that refer to the trade secrets. The American Bar Association's opinion on encryption only formalizes what a lot of us have been discussing for sometime, particularly given law firms' obvious status as targets for hackers.
Dechert has a lengthy analysis, in case summary form, of the Ninth Circuit's opinion in United States v. Liew. This matter arose of the conviction of Walter Liew under the Economic Espionage Act arising out of his theft of certain trade secrets of DuPont and his apparent agreement with the Chinese government to supply it with certain technology for titanium dioxide. Confirming the correctness of my decision never to eat Oreo cookies, titanium dioxide is the pigment that makes the center of the Oreo white. Almost as troubling as what Liew did.
Michael Starr of Holland & Knight discusses the Molon Motor case, about which I wrote last week, and its preliminary ruling that an inevitable disclosure claim withstood a defense motion to dismiss. Despite some scuttlebutt, Molon Motor does nothing to pierce the DTSA's ban on inevitable disclosure claims in the employment context. We lawyers tend to overread cases from time to time. The upshot is this: inevitable disclosure claims, even in States that recognize the theory, are incredibly hard to pursue and by no means give an employer a clear path to injunctive relief. Without some evidence of bad-faith conduct giving rise to an actual threat, they almost always fail.
Friday, February 10, 2017
The Reading List (2017, No. 6): Surprise Result on Blue-Penciling Rule in Georgia
Non-Compete and Trade Secrets News for the week ended February 10, 2017
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Georgia Blue-Penciling of Restrictive Covenants
Last December, a federal district court in Georgia limited courts' ability to modify overbroad restrictive covenants. More on this significant case in my end-of-the-month column, but LifeBrite Labs. v. Cooksey, No. 1:15-cv-4309, merits a brief mention this week.
The court held that Georgia's relatively new state statute concerning non-competes, which permits courts to "modify a covenant that is otherwise void and unenforceable," allowed it only to excise language that rendered the agreement overbroad. In other words, courts could not rewrite the contract, or supply it with any new terms, as part of its statutory ability to modify agreements. The court relied principally on Georgia's existing case law in the sale-of-business context and the rule that it must construe statutes in derogation of the common-law narrowly. Put simply, "modify" means blue-penciling. The opinion and order, with its very insightful analysis, is available here.
(FordHarrison also comments on this case in its Non-Compete News.)
Military Contractor Trade Secrets
The Eleventh Circuit Court of Appeals has reversed a summary judgment of a trade-secrets claim between military contractors, Advantor Systems of Florida and DRS Technical Services, Inc. The disputed technology involved intrusion detection systems that Advantor originally sold certain United States Air Force bases. When the Air Force elected to consolidate its security systems across all AF bases, Advantor was left out in the cold. DRS won the contract and dumped Advantor as a potential sub-contractor during negotiations. The parties had signed a transactional confidentiality agreement and a one-year "no direct hire" agreement that precluded either from directly soliciting the other's employees.
The ruling is rather lengthy (53 pages) and since it's unpublished, it does not merit an extended discussion. However, it is worth reading the passage where the court of appeals reverses summary judgment on the trade-secrets claim based on the Air Force's disclosure of technical manuals and drawings to DRS. Those manuals were necessary for DRS' continued service of Advantor equipment previously sold to the AF (recall that Advantor used to supply systems to several, but not all, AF bases). The analysis discusses a rarely litigated question concerning the term "misappropriation": whether the defendant (DRS) had "reason to know" that a third-party (AF) had some limitation on its ability to disseminate information obtained in confidence (from Advantor).
A copy of the Eleventh Circuit's unpublished opinion is available here.
Choice-of-Law Clauses
California courts have continued a trend of invalidating choice-of-law clauses with regard to employee restrictive covenants. The general principle is that courts will enforce such clauses unless the contractually chosen law is "contrary to the fundamental policy of the forum state." In Stryker Sales Corp. v. Zimmer Biomet, No. 1:16-cv-01670, a California federal district court found a public-policy rift between Michigan and California law concerning non-competes. No surprise there. Michigan is a fairly typical state when it comes to non-compete law, employing a reasonableness test to restrictive covenants. But California bars them almost entirely, which led the court to invalidate the choice-of-law clause in Stryker Sales.
This case illustrates why obtaining the proper forum, and enforcing forum selection clauses, is so crucial to non-competes directed at parties with some California connection. The original action was brought in Michigan, but venue wasn't proper there. A copy of the decision is available here.
Restoration Hardware Trade Secrets Suit
Multiple outlets have reported on a trade-secrets suit between Restoration Hardware and Crate and Barrel. The Complaint, filed in California state court, alleges that Crate and Barrel CEO and former Restoration Hardware employee Doug Diemoz tried to hire other RH executives in violation of a no-hire agreement. According to the Chicago Tribune, Diemoz is alleged to have used Gmail to communicate with RH employees, stating in one such e-mail "that damn non solicitation!" Diemoz' supposed recruitment allegedly ties into another employee's downloading of confidential information about RH's food and beverage operations in Chicago.
The crux of the trade-secret allegation is a little odd. RH seems to be claiming that Crate and Barrel is attempting to replicate its "model" of providing food-and-beverage services in conjunction with its other retail offerings. I suppose that something about the roll-out of those operations could be secret, but it seems like an allegation primed for a reverse-engineering defense. RH's pilot program was launched at the Three Arts Club in Chicago. Before its conversion (it was badly rundown), I lived at the Three Arts Club for a summer in my early 20s and consumed an untold number of alcoholic beverages - not the coffee drinks RH is now peddling to its shoppers.
***
In other news, Holland & Hart reports on a $5.175 million trade-secrets verdict it obtained in Utah on behalf of Hydro Engineering, Inc. against Riveer Environmental. The case stemmed from Riveer's hiring of a key salesperson who had a non-compete with Hydro. The verdict summary illustrates, once again, that e-mail communications among the defendant's employees were central to the plaintiff's proofs.
***
Georgia Blue-Penciling of Restrictive Covenants
Last December, a federal district court in Georgia limited courts' ability to modify overbroad restrictive covenants. More on this significant case in my end-of-the-month column, but LifeBrite Labs. v. Cooksey, No. 1:15-cv-4309, merits a brief mention this week.
The court held that Georgia's relatively new state statute concerning non-competes, which permits courts to "modify a covenant that is otherwise void and unenforceable," allowed it only to excise language that rendered the agreement overbroad. In other words, courts could not rewrite the contract, or supply it with any new terms, as part of its statutory ability to modify agreements. The court relied principally on Georgia's existing case law in the sale-of-business context and the rule that it must construe statutes in derogation of the common-law narrowly. Put simply, "modify" means blue-penciling. The opinion and order, with its very insightful analysis, is available here.
(FordHarrison also comments on this case in its Non-Compete News.)
Military Contractor Trade Secrets
The Eleventh Circuit Court of Appeals has reversed a summary judgment of a trade-secrets claim between military contractors, Advantor Systems of Florida and DRS Technical Services, Inc. The disputed technology involved intrusion detection systems that Advantor originally sold certain United States Air Force bases. When the Air Force elected to consolidate its security systems across all AF bases, Advantor was left out in the cold. DRS won the contract and dumped Advantor as a potential sub-contractor during negotiations. The parties had signed a transactional confidentiality agreement and a one-year "no direct hire" agreement that precluded either from directly soliciting the other's employees.
The ruling is rather lengthy (53 pages) and since it's unpublished, it does not merit an extended discussion. However, it is worth reading the passage where the court of appeals reverses summary judgment on the trade-secrets claim based on the Air Force's disclosure of technical manuals and drawings to DRS. Those manuals were necessary for DRS' continued service of Advantor equipment previously sold to the AF (recall that Advantor used to supply systems to several, but not all, AF bases). The analysis discusses a rarely litigated question concerning the term "misappropriation": whether the defendant (DRS) had "reason to know" that a third-party (AF) had some limitation on its ability to disseminate information obtained in confidence (from Advantor).
A copy of the Eleventh Circuit's unpublished opinion is available here.
Choice-of-Law Clauses
California courts have continued a trend of invalidating choice-of-law clauses with regard to employee restrictive covenants. The general principle is that courts will enforce such clauses unless the contractually chosen law is "contrary to the fundamental policy of the forum state." In Stryker Sales Corp. v. Zimmer Biomet, No. 1:16-cv-01670, a California federal district court found a public-policy rift between Michigan and California law concerning non-competes. No surprise there. Michigan is a fairly typical state when it comes to non-compete law, employing a reasonableness test to restrictive covenants. But California bars them almost entirely, which led the court to invalidate the choice-of-law clause in Stryker Sales.
This case illustrates why obtaining the proper forum, and enforcing forum selection clauses, is so crucial to non-competes directed at parties with some California connection. The original action was brought in Michigan, but venue wasn't proper there. A copy of the decision is available here.
Restoration Hardware Trade Secrets Suit
Multiple outlets have reported on a trade-secrets suit between Restoration Hardware and Crate and Barrel. The Complaint, filed in California state court, alleges that Crate and Barrel CEO and former Restoration Hardware employee Doug Diemoz tried to hire other RH executives in violation of a no-hire agreement. According to the Chicago Tribune, Diemoz is alleged to have used Gmail to communicate with RH employees, stating in one such e-mail "that damn non solicitation!" Diemoz' supposed recruitment allegedly ties into another employee's downloading of confidential information about RH's food and beverage operations in Chicago.
The crux of the trade-secret allegation is a little odd. RH seems to be claiming that Crate and Barrel is attempting to replicate its "model" of providing food-and-beverage services in conjunction with its other retail offerings. I suppose that something about the roll-out of those operations could be secret, but it seems like an allegation primed for a reverse-engineering defense. RH's pilot program was launched at the Three Arts Club in Chicago. Before its conversion (it was badly rundown), I lived at the Three Arts Club for a summer in my early 20s and consumed an untold number of alcoholic beverages - not the coffee drinks RH is now peddling to its shoppers.
***
In other news, Holland & Hart reports on a $5.175 million trade-secrets verdict it obtained in Utah on behalf of Hydro Engineering, Inc. against Riveer Environmental. The case stemmed from Riveer's hiring of a key salesperson who had a non-compete with Hydro. The verdict summary illustrates, once again, that e-mail communications among the defendant's employees were central to the plaintiff's proofs.
Friday, February 3, 2017
The Reading List (2017, No. 5): Plaintiffs and Courts Avoid the DTSA's Ex Parte Seizure Order
Non-Compete and Trade Secret News for the week ended February 3, 2017
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Defend Trade Secrets Act
I alluded to this case in my prior post.
But we have another federal district court case that discusses the Defend Trade Secrets Act and the ex parte seizure order. In Magnesita Refractories Co. v. Mishra, the court found that a temporary restraining order issued under Federal Rule of Civil Procedure 65, which mandated the seizure of a defendant's laptop, did not require the plaintiff to follow the process outlined in Section 1836(b)(2) of the DTSA.
This is about as in-the-weeds as you can get, but it reaffirms the much larger point: courts are going to issue TROs that have the same effect as the seizure order. And if that's the protocol, then the seizure order may - as I predicted - be more bark than bite. A copy of Judge Simon's ruling, which is truly for nerds like me, is available here.
Non-Recruitment Clauses
Tesla Motors has sued a director of its Autopilot program, Sterling Anderson, claiming misappropriation of "hundreds of gigabytes" of confidential information and improper solicitation of Tesla employees. The Complaint reads like a typical bad divorce between a key employee and a jilted employer, with some fairly serious allegations related to efforts to conceal electronic evidence and pre-termination "cloak and dagger" meetings to plan a competing venture. In California, where the suit is based, post-employment restrictions on soliciting employees are enforceable. That's the centerpiece of the contract claim.
The case is pending in Santa Clara Superior Court. A copy of the Complaint is available here. For a detailed news account, see this article in The Verge.
Sixth Circuit Appeal
The Sixth Circuit Court of Appeals this week heard oral argument in the case of Stryker Corp. v. Ridgeway, No. 16-1654. A jury in the Western District of Michigan entered a verdict in favor of Stryker in the amount of $745,000, which was based in part on Ridgeway's breach of a non-compete agreement. Among other things, the appeal raises a very important choice-of-law/choice-of-forum issue concerning Louisiana law. That state's law is very favorable to employees, but the district court did not apply it. (The district court ruling on the choice-of-law issue is at 2015 WL 5682317.)
***
Russell Beck discusses in his Fair Competition blog post the renewed efforts at non-compete reform in Massachusetts. This has become an annual rite of passage. Seyfarth Shaw discusses the same proposals floating around the Massachusetts house and senate.
IPWatchdog has posted an article entitled How to Write Enforceable Non-Compete Agreements. This is a very nice, concise summary of employers' considerations in deciding whether and how to use restrictive covenants. A number of helpful quotes from some of my colleagues...
Other colleagues of mine, from Seyfarth Shaw, have posted their Top Developments/Headlines in Trade Secret, Computer Fraud, and Non-Compete Law in 2016. This post is notably longer than my year-end list and gives a few more illustrative cases - particularly on non-competes and federal computer fraud claims.
***
Defend Trade Secrets Act
I alluded to this case in my prior post.
But we have another federal district court case that discusses the Defend Trade Secrets Act and the ex parte seizure order. In Magnesita Refractories Co. v. Mishra, the court found that a temporary restraining order issued under Federal Rule of Civil Procedure 65, which mandated the seizure of a defendant's laptop, did not require the plaintiff to follow the process outlined in Section 1836(b)(2) of the DTSA.
This is about as in-the-weeds as you can get, but it reaffirms the much larger point: courts are going to issue TROs that have the same effect as the seizure order. And if that's the protocol, then the seizure order may - as I predicted - be more bark than bite. A copy of Judge Simon's ruling, which is truly for nerds like me, is available here.
Non-Recruitment Clauses
Tesla Motors has sued a director of its Autopilot program, Sterling Anderson, claiming misappropriation of "hundreds of gigabytes" of confidential information and improper solicitation of Tesla employees. The Complaint reads like a typical bad divorce between a key employee and a jilted employer, with some fairly serious allegations related to efforts to conceal electronic evidence and pre-termination "cloak and dagger" meetings to plan a competing venture. In California, where the suit is based, post-employment restrictions on soliciting employees are enforceable. That's the centerpiece of the contract claim.
The case is pending in Santa Clara Superior Court. A copy of the Complaint is available here. For a detailed news account, see this article in The Verge.
Sixth Circuit Appeal
The Sixth Circuit Court of Appeals this week heard oral argument in the case of Stryker Corp. v. Ridgeway, No. 16-1654. A jury in the Western District of Michigan entered a verdict in favor of Stryker in the amount of $745,000, which was based in part on Ridgeway's breach of a non-compete agreement. Among other things, the appeal raises a very important choice-of-law/choice-of-forum issue concerning Louisiana law. That state's law is very favorable to employees, but the district court did not apply it. (The district court ruling on the choice-of-law issue is at 2015 WL 5682317.)
***
Russell Beck discusses in his Fair Competition blog post the renewed efforts at non-compete reform in Massachusetts. This has become an annual rite of passage. Seyfarth Shaw discusses the same proposals floating around the Massachusetts house and senate.
IPWatchdog has posted an article entitled How to Write Enforceable Non-Compete Agreements. This is a very nice, concise summary of employers' considerations in deciding whether and how to use restrictive covenants. A number of helpful quotes from some of my colleagues...
Other colleagues of mine, from Seyfarth Shaw, have posted their Top Developments/Headlines in Trade Secret, Computer Fraud, and Non-Compete Law in 2016. This post is notably longer than my year-end list and gives a few more illustrative cases - particularly on non-competes and federal computer fraud claims.
Tuesday, October 18, 2016
Changes on the Horizon: Venue and Choice-of-Law Provisions in California Contracts
One of the most vexing procedural issues in recent years has been what to do with out-of-state litigation against a California employee. The contractual framework usually goes something like this:
- California resident has a non-compete covenant in an employment contract.
- California resident leaves to compete.
- The contract contains a choice-of law and choice-of-venue provision that applies some other state's law.
- That other state's law is more employer-friendly than California.
- Litigation commences in the contractually selected state.
- And sometimes, the employee files satellite litigation in California to get around the contractual framework.
Unfortunately, courts have not resolved these questions in a consistent manner. Some states, like Illinois and Delaware, appear to give primacy to California's overarching public policy interest embodied in its long-standing statutory prohibition on non-competes. Other states are more willing to enforce the venue and choice-of-law provisions despite that well-known California policy.
The question may get easier to resolve next year, when Section 925 of the California Labor Code goes into effect.That law will bar the procedural hurdles California employees sometimes face and give him or her the option to void contractually agreed-to venue and law provisions. An aggrieved employee also may recover fees arising out of this procedural dispute and may obtain an injunction in California against parallel litigation in another state.
Section 925 contains a potentially broad exception, stating that it "shall not apply to an employee who is individually represented by legal counsel in negotiating the terms of an agreement to waive any legal right, penalty, remedy, forum, or procedure for a violation of this code." In other words, if an employee engages counsel and waives Section 925 (and presumably gets some payment for that waiver), then the employee cannot undo the change after the fact.
By its plain language, the Section 925(i) exception does not apply to any individually negotiated agreement - only those where the actual agreement results in an express waiver of a challenge to foreign venue and choice-of-law rights.
Section 925 represents a legislative solution to a potentially serious problem of interstate comity involving California residents. In fact, it's exactly what I advocated for in a post nearly four years ago - which you can find here. I choose to be positive and will assume that the fine legislators in California relied on my blog post in crafting Section 925.
Monday, December 14, 2015
Fifth Circuit Addresses Meaning of "Fundamental Policy" In Choice-of-Law Dispute
Choice-of-law clauses are one of the most important procedural frontiers in non-compete disputes.
State law concerning enforceability of covenants not to compete often contains unique twists and turns. Witness Illinois' rather unique rule on consideration in the at-will employment context. Increasingly, choice-of-law clauses are becoming prevalent in non-compete litigation. This paradigm arises because of our increasingly mobile economy where employees work for companies domiciled in other states, the effect of mergers and acquisitions, and corporate counsel's more informed awareness to selecting a particular state's law when drafting contracts in the first place.
I have written many times on the tensions posed by choice-of-law clauses, and generally courts need to assess several questions, including the connection that the chosen state's law has to the litigants. Choice-of-law clauses pose even more difficult questions when the state with the greater interest in the lawsuit has a strong public policy concerning non-competes.
A stark illustration of these choice-of-law rules comes from the recent Fifth Circuit case of Cardoni v. Prosperity Bank. The case involved a very common set of facts that can give rise to choice-of-law disputes. Prosperity Bank in Texas bought an Oklahoma-based bank called F&M, and in connection with that acquisition had key F&M employees sign new employment contracts governed by Texas law. Those contracts contained typical non-competition, non-solicitation, and non-disclosure covenants. Four bankers, who all were Oklahoma residents, then left to compete against Prosperity.
The Fifth Circuit's analysis of the choice-of-law clause focused on the degree to which Oklahoma's public policy was "fundamental" and whether it was sufficient to override the Texas choice-of-law clause. The court described the notion of a "fundamental policy" as an "elusive concept" but made clear to note that it is not one that focuses on assessing potential outcomes of the case. Put another way, courts do not look to whether the difference in state law changes the result at trial. The "fundamental policy" question must strike deeper than that. (This is not the standard in a minority of other states.)
As applied to the bankers' contracts in Cardoni, the court found that Oklahoma's public policy against enforcement of employment non-compete agreements was "fundamental" on account of its state statute. It is fairly safe to assume that a state's enactment of a statute directly concerning non-competes expresses the will of the people or, less colloquially, a "fundamental policy" for purposes of a choice-of-law analysis. Oklahoma, for its part, is one of a handful of states (along with California and North Dakota) that generally ban non-competes.
The court's analysis was different for the bankers' non-solicitation clauses, which the same Oklahoma statute generally permits. The law in Oklahoma is nuanced as to those clauses' permissive scope, but even the narrower limits of enforceability do not implicate a fundamental policy (at least in the Fifth Circuit's eyes). Therefore, in Cardoni, the court reached a somewhat unusual result that Texas law (the chosen law in the contracts) governed the non-solicitation covenants but not the broader non-competition covenants.
The result illustrates the importance counsel must pay to choice-of-law questions when cross-border disputes arise. It is crucial to examine the nature of the contacts the parties have to the competing states, the relationship of those contacts to the actual dispute, and the permutations of the law between the respective states.
State law concerning enforceability of covenants not to compete often contains unique twists and turns. Witness Illinois' rather unique rule on consideration in the at-will employment context. Increasingly, choice-of-law clauses are becoming prevalent in non-compete litigation. This paradigm arises because of our increasingly mobile economy where employees work for companies domiciled in other states, the effect of mergers and acquisitions, and corporate counsel's more informed awareness to selecting a particular state's law when drafting contracts in the first place.
I have written many times on the tensions posed by choice-of-law clauses, and generally courts need to assess several questions, including the connection that the chosen state's law has to the litigants. Choice-of-law clauses pose even more difficult questions when the state with the greater interest in the lawsuit has a strong public policy concerning non-competes.
A stark illustration of these choice-of-law rules comes from the recent Fifth Circuit case of Cardoni v. Prosperity Bank. The case involved a very common set of facts that can give rise to choice-of-law disputes. Prosperity Bank in Texas bought an Oklahoma-based bank called F&M, and in connection with that acquisition had key F&M employees sign new employment contracts governed by Texas law. Those contracts contained typical non-competition, non-solicitation, and non-disclosure covenants. Four bankers, who all were Oklahoma residents, then left to compete against Prosperity.
The Fifth Circuit's analysis of the choice-of-law clause focused on the degree to which Oklahoma's public policy was "fundamental" and whether it was sufficient to override the Texas choice-of-law clause. The court described the notion of a "fundamental policy" as an "elusive concept" but made clear to note that it is not one that focuses on assessing potential outcomes of the case. Put another way, courts do not look to whether the difference in state law changes the result at trial. The "fundamental policy" question must strike deeper than that. (This is not the standard in a minority of other states.)
As applied to the bankers' contracts in Cardoni, the court found that Oklahoma's public policy against enforcement of employment non-compete agreements was "fundamental" on account of its state statute. It is fairly safe to assume that a state's enactment of a statute directly concerning non-competes expresses the will of the people or, less colloquially, a "fundamental policy" for purposes of a choice-of-law analysis. Oklahoma, for its part, is one of a handful of states (along with California and North Dakota) that generally ban non-competes.
The court's analysis was different for the bankers' non-solicitation clauses, which the same Oklahoma statute generally permits. The law in Oklahoma is nuanced as to those clauses' permissive scope, but even the narrower limits of enforceability do not implicate a fundamental policy (at least in the Fifth Circuit's eyes). Therefore, in Cardoni, the court reached a somewhat unusual result that Texas law (the chosen law in the contracts) governed the non-solicitation covenants but not the broader non-competition covenants.
The result illustrates the importance counsel must pay to choice-of-law questions when cross-border disputes arise. It is crucial to examine the nature of the contacts the parties have to the competing states, the relationship of those contacts to the actual dispute, and the permutations of the law between the respective states.
Wednesday, June 17, 2015
Florida's Non-Compete Law Is, Apparently, "Truly Obnoxious"
One of the most important issues in analyzing any non-compete agreement is choice of law. My experience is that at least 9 out of 10 contracts contain explicit choice-of-law clauses, which describe in the contract which state's law will govern enforcement.
A few years ago, I represented the prevailing defendants in Tradesman Int'l v. Black, 724 F.3d 1004 (7th Cir. 2013). Judge David Hamilton's concurring opinion in that case illustrates the importance of choice-of-law clauses and how predictability over which state's law applies is essential to litigation strategy. It is an extremely thoughtful and interesting opinion, and my post discussing it can be found here.
There are a number of red-flag states where choice-of-law issues are bound to come up. Certainly, if California has any kind of a nexus to the proceedings, then choice of law will be front and center. Other states, like Wisconsin, also pay particular attention to clauses that select another state's law. And Florida, by virtue of its pro-enforcement stance, is a third example.
On this score, Illinois courts will not enforce Florida choice-of-law clauses because they are contrary to our state's public policy. Recently, New York courts have followed this lead and have held that a Florida choice-of-law provision in an employment non-solicitation covenant is unenforceable and contrary to New York public policy.
The case is Brown & Brown, Inc. v. Johnson. The Court of Appeals of New York set forth the standard for invalidating a contractual choice-of-law clause: the foreign law must be "truly obnoxious." Now, that's a standard.
So what's the problem with Florida law, and why do some courts view its stance on non-competes as contrary to public policy. The New York court identified the following:
A few years ago, I represented the prevailing defendants in Tradesman Int'l v. Black, 724 F.3d 1004 (7th Cir. 2013). Judge David Hamilton's concurring opinion in that case illustrates the importance of choice-of-law clauses and how predictability over which state's law applies is essential to litigation strategy. It is an extremely thoughtful and interesting opinion, and my post discussing it can be found here.
There are a number of red-flag states where choice-of-law issues are bound to come up. Certainly, if California has any kind of a nexus to the proceedings, then choice of law will be front and center. Other states, like Wisconsin, also pay particular attention to clauses that select another state's law. And Florida, by virtue of its pro-enforcement stance, is a third example.
On this score, Illinois courts will not enforce Florida choice-of-law clauses because they are contrary to our state's public policy. Recently, New York courts have followed this lead and have held that a Florida choice-of-law provision in an employment non-solicitation covenant is unenforceable and contrary to New York public policy.
The case is Brown & Brown, Inc. v. Johnson. The Court of Appeals of New York set forth the standard for invalidating a contractual choice-of-law clause: the foreign law must be "truly obnoxious." Now, that's a standard.
So what's the problem with Florida law, and why do some courts view its stance on non-competes as contrary to public policy. The New York court identified the following:
- The employee largely bears the burden of proof to show that enforcement is not necessary to protect an asserted business interest.
- Courts many not consider hardship to the employee from the covenant's enforcement.
- Courts may not use rules of contract construction that would require a court to construe a vague or unclear contract against the employer.
Overall, the New York court - like the courts in Illinois before it - were concerned with "Florida's nearly-exclusive focus on the employer's interests" in contrast with the traditional balancing test that governs enforcement.
Going back to my post from two years ago when I analyzed Judge Hamilton's concurring opinion in Tradesman, there still is no clear test that I can find to determine when a state's law contravenes another state's public policy. I raised three possibilities:
- The legislature has spoken on the issue and declared the state's public policy, much like California has done.
- A state's case law reflects a clear, uniform rule applicable without regard to the specific facts of the case. An example would be a court's refusal to partially enforce an overbroad agreement.
- The difference between the chosen state and the forum state would be outcome-determinative.
After reading Brown & Brown, I might add a fourth possibility: the chosen state's rules disproportionately favor the employer and undermine the foundation of the rule-of-reason analysis.
Thursday, August 15, 2013
More from Tradesmen Int'l v. Black: Analyzing Judge Hamilton's Concurring Opinion
When construction staffing industry titan Tradesmen International lost its appeal in the Seventh Circuit, it suffered more than just a defeat in a particular lawsuit that (in my opinion) it had no expectation of winning.
In the course of its analysis, the Court of Appeals made it perfectly clear that Tradesmen's non-compete was unenforceable under Ohio law. As Judge Tinder noted in his opinion, the non-compete had a nationwide reach and extended to all Tradesmen customers and prospects throughout the country even though the individual defendants worked solely in Indiana. Consequently, the agreement went far beyond what was necessary to protect Tradesmen's business interests.
To me, one of the more interesting aspects of the Seventh Circuit's ruling was Judge David Hamilton's concurring opinion and his discussion of the blue-pencil rule, which generally deals with a court's willingness to strike overbroad portions of a non-compete.
That Judge Hamilton wrote separately in this case is not surprising. During oral argument, it was clear to me he was troubled by the scope of Tradesmen's agreement and what precisely it was trying to protect. Though he is the newest member of the Seventh Circuit, Judge Hamilton quickly has become known as an active questioner during argument. And this case provided him the opportunity to live up to that reputation. Judge Hamilton has made it known in interviews that he has a great interest in the law of non-compete agreements and trade secrets.
Although he agreed with the majority opinion, Judge Hamilton wrote about the intersection of choice-of-law clauses and the blue-pencil rule. In Tradesmen, the individual non-compete agreements all contained Ohio choice-of-law provisions. The choice isn't unreasonable, since Tradesmen is an Ohio-based company with a nationwide footprint. Businesses certainly have an interest in seeing that its contracts are interpreted under a uniform set of rules. But the case potentially posed a significant choice-of-law issue because the individual defendants were Indiana citizens, and the litigation took place in Illinois.
Judge Hamilton, though, is troubled (and has been in the past) by courts' willingness to enforce choice-of-law clauses when another state has a greater interest in the case and the chosen state's law embraces an employer-friendly blue-pencil rule. As he wrote, even though most states assess non-competes under a general rule of reason framework, "even a gentle tap on that fragile surface of similarity shows important differences from state to state."
According to Judge Hamilton, courts should "not discount too quickly the force of ... public policy" that certain states have adopted when refusing to enforce overbroad non-compete agreements. In his mind, a state's unwillingness to rewrite or pare back non-compete agreements can be a strong enough public policy to invalidate a choice-of-law clause.
As an example, Indiana courts - like many others - subscribes to a strict blue-pencil rule. This means a court will not rewrite an overbroad contract, but will sever offending clauses from the rest of the agreement. States like Ohio, and to a lesser degree Illinois, have different policies (nuanced though they may be) that allow for courts to modify agreements or enforce them to the extent they are reasonable.
Is this a strong enough difference in public policy to invalidate a choice-of-law clause?
Judge Hamilton thinks it might be for a very pragmatic reason: an employer like Tradesmen can draft an obviously unenforceable contract and throw it to the courts to enforce a reasonable contract the parties could have signed instead. A state's unwillingness to adopt a liberal rule allowing for partial enforcement may signal a broader public policy that the state "protect[s] employees from overly broad coveants." The employer-friendly rule impacts employees who may not have the ability to obtain firm guidance on what type of competitive activity is prohibited legally, even with the sound advice of counsel.
Judge Hamilton addressed this same public policy issue in a lengthy opinion when he sat as a district court judge in the Southern District of Indiana. The case was Dearborn v. Everett J. Prescott, Inc., 486 F. Supp. 2d 802 (S.D. Ind. 2007), and the case had strong similarities to some of the issues in the Tradesmen suit concerning choice-of-law. Though his opinion in Dearborn was thoughtful and extremely thorough, I didn't entirely agree with everything Judge Hamilton wrote in that case. Still, his reasoning has great appeal, for it recognizes the critical role the blue-pencil rule plays in non-compete suits. Judge Hamilton's concurrence in Tradesmen rings many of the same alarm bells he struck in Dearborn concerning choice-of-law.
Divining when a state's public policy is so strong as to override a contractual choice-of-law clause is no easy task. To me, courts could look at this one of three ways:
(1) Has the legislature enacted a clear statement of public policy? This is the easy analysis, because legislatures typically bear the laboring oar of setting forth public policy choices. As a result, states that have strong legislative enactments on non-competes - California, North Dakota, and Oklahoma on the employee side; Florida on the employer side - present obvious examples of when parties will have to confront critical choice-of-law issues.
(2) Have courts expressed a consistent, widely applied rule that clearly expresses a public policy choice? This becomes more nuanced because non-compete cases are so fact-specific. But, taking the blue-pencil rule as an example, if a state's case law shows a uniform pattern where courts are unwilling to rewrite or modify overbroad covenants, this may rise to the level of a public policy sufficient to invalidate a choice-of-law clause. Illinois, for instance, has suggested in recent years that despite its black-letter principle of allowing modification of overbroad non-competes, public policy considerations may not allow a court to do the work an employer should have done when drafting contracts.
(3) Could the difference in state law change the outcome? This approach would take a broader view of public policy, and to me it's not the proper analysis. For instance, in some (but not all) states, "continued employment" is sufficient consideration to enforce a non-compete signed after the start of employment. Certain states seem to have broader pronouncements that a non-compete cannot extend to "prospective" customers. To be sure, these are significant differences depending on the facts of the case, and they well may be dispositive in litigation. But they are really at the edges of a state's public policy as to enforcement. Courts long have recognized that mere differences in a state's law don't rise to the level of a strong public policy.
Judge Hamilton seems to subscribe to the second approach, and he views a state's willingness to rewrite non-competes as a strong enough choice to implicate public policy concerns. Ultimately, this may signal the Seventh Circuit's willingness to examine choice-of-law issues more carefully and retreate from prior decisions where the court seemingly has deferred to a choice-of-law clause as long as it has some connection to the dispute.
In Tradesmen, I didn't make an issue out of choice-of-law for the simple reason that Tradesmen never could point to any evidence my clients breached any agreement. The issue was, to be frank, moot and not worth spending a nickel of legal fees over. Had my clients decided to challenge the enforceability of the contracts, then certainly choice-of-law would have been a more significant legal issue to consider.
In the course of its analysis, the Court of Appeals made it perfectly clear that Tradesmen's non-compete was unenforceable under Ohio law. As Judge Tinder noted in his opinion, the non-compete had a nationwide reach and extended to all Tradesmen customers and prospects throughout the country even though the individual defendants worked solely in Indiana. Consequently, the agreement went far beyond what was necessary to protect Tradesmen's business interests.
To me, one of the more interesting aspects of the Seventh Circuit's ruling was Judge David Hamilton's concurring opinion and his discussion of the blue-pencil rule, which generally deals with a court's willingness to strike overbroad portions of a non-compete.That Judge Hamilton wrote separately in this case is not surprising. During oral argument, it was clear to me he was troubled by the scope of Tradesmen's agreement and what precisely it was trying to protect. Though he is the newest member of the Seventh Circuit, Judge Hamilton quickly has become known as an active questioner during argument. And this case provided him the opportunity to live up to that reputation. Judge Hamilton has made it known in interviews that he has a great interest in the law of non-compete agreements and trade secrets.
Although he agreed with the majority opinion, Judge Hamilton wrote about the intersection of choice-of-law clauses and the blue-pencil rule. In Tradesmen, the individual non-compete agreements all contained Ohio choice-of-law provisions. The choice isn't unreasonable, since Tradesmen is an Ohio-based company with a nationwide footprint. Businesses certainly have an interest in seeing that its contracts are interpreted under a uniform set of rules. But the case potentially posed a significant choice-of-law issue because the individual defendants were Indiana citizens, and the litigation took place in Illinois.
Judge Hamilton, though, is troubled (and has been in the past) by courts' willingness to enforce choice-of-law clauses when another state has a greater interest in the case and the chosen state's law embraces an employer-friendly blue-pencil rule. As he wrote, even though most states assess non-competes under a general rule of reason framework, "even a gentle tap on that fragile surface of similarity shows important differences from state to state."
According to Judge Hamilton, courts should "not discount too quickly the force of ... public policy" that certain states have adopted when refusing to enforce overbroad non-compete agreements. In his mind, a state's unwillingness to rewrite or pare back non-compete agreements can be a strong enough public policy to invalidate a choice-of-law clause.
As an example, Indiana courts - like many others - subscribes to a strict blue-pencil rule. This means a court will not rewrite an overbroad contract, but will sever offending clauses from the rest of the agreement. States like Ohio, and to a lesser degree Illinois, have different policies (nuanced though they may be) that allow for courts to modify agreements or enforce them to the extent they are reasonable.
Is this a strong enough difference in public policy to invalidate a choice-of-law clause?
Judge Hamilton thinks it might be for a very pragmatic reason: an employer like Tradesmen can draft an obviously unenforceable contract and throw it to the courts to enforce a reasonable contract the parties could have signed instead. A state's unwillingness to adopt a liberal rule allowing for partial enforcement may signal a broader public policy that the state "protect[s] employees from overly broad coveants." The employer-friendly rule impacts employees who may not have the ability to obtain firm guidance on what type of competitive activity is prohibited legally, even with the sound advice of counsel.
Judge Hamilton addressed this same public policy issue in a lengthy opinion when he sat as a district court judge in the Southern District of Indiana. The case was Dearborn v. Everett J. Prescott, Inc., 486 F. Supp. 2d 802 (S.D. Ind. 2007), and the case had strong similarities to some of the issues in the Tradesmen suit concerning choice-of-law. Though his opinion in Dearborn was thoughtful and extremely thorough, I didn't entirely agree with everything Judge Hamilton wrote in that case. Still, his reasoning has great appeal, for it recognizes the critical role the blue-pencil rule plays in non-compete suits. Judge Hamilton's concurrence in Tradesmen rings many of the same alarm bells he struck in Dearborn concerning choice-of-law.
Divining when a state's public policy is so strong as to override a contractual choice-of-law clause is no easy task. To me, courts could look at this one of three ways:
(1) Has the legislature enacted a clear statement of public policy? This is the easy analysis, because legislatures typically bear the laboring oar of setting forth public policy choices. As a result, states that have strong legislative enactments on non-competes - California, North Dakota, and Oklahoma on the employee side; Florida on the employer side - present obvious examples of when parties will have to confront critical choice-of-law issues.
(2) Have courts expressed a consistent, widely applied rule that clearly expresses a public policy choice? This becomes more nuanced because non-compete cases are so fact-specific. But, taking the blue-pencil rule as an example, if a state's case law shows a uniform pattern where courts are unwilling to rewrite or modify overbroad covenants, this may rise to the level of a public policy sufficient to invalidate a choice-of-law clause. Illinois, for instance, has suggested in recent years that despite its black-letter principle of allowing modification of overbroad non-competes, public policy considerations may not allow a court to do the work an employer should have done when drafting contracts.
(3) Could the difference in state law change the outcome? This approach would take a broader view of public policy, and to me it's not the proper analysis. For instance, in some (but not all) states, "continued employment" is sufficient consideration to enforce a non-compete signed after the start of employment. Certain states seem to have broader pronouncements that a non-compete cannot extend to "prospective" customers. To be sure, these are significant differences depending on the facts of the case, and they well may be dispositive in litigation. But they are really at the edges of a state's public policy as to enforcement. Courts long have recognized that mere differences in a state's law don't rise to the level of a strong public policy.
Judge Hamilton seems to subscribe to the second approach, and he views a state's willingness to rewrite non-competes as a strong enough choice to implicate public policy concerns. Ultimately, this may signal the Seventh Circuit's willingness to examine choice-of-law issues more carefully and retreate from prior decisions where the court seemingly has deferred to a choice-of-law clause as long as it has some connection to the dispute.
In Tradesmen, I didn't make an issue out of choice-of-law for the simple reason that Tradesmen never could point to any evidence my clients breached any agreement. The issue was, to be frank, moot and not worth spending a nickel of legal fees over. Had my clients decided to challenge the enforceability of the contracts, then certainly choice-of-law would have been a more significant legal issue to consider.
Saturday, January 12, 2013
Playing the California Card Doesn't Always Work
One issue that has arisen frequently over the last several years in non-compete disputes is the forum fight involving California. This usually arises when California has some, but not a complete, connection to the dispute. How does that connection arise? Usually in one of two ways:
1. The party bound by the non-compete lives or is domiciled in California.
2. The prospective business opportunity somehow bears a substantial relationship to California. An example? The new employer is based there. Or, even better, the employee's job calls for him to move to California.
Employees seeking to void non-competes have been aggressive in recent years in filing preemptive declaratory judgment actions in California courts when that state has some arguable connection to the parties' business relationship. And, in many cases, California courts have issued judgments that invalidate the contract as an illegal restraint under California's Business and Professions Code.
But the problem is more nuanced when another state also has a substantial interest in the case. For instance, a national company with a footprint in many states may use one form agreement calling for another state's choice of law, or even a forum selection clause. If an employee lives in California, the presence of choice-of-law and choice-of-forum clauses would undercut California's interest in the dispute, since another state (most likely, that where the employer maintains its nerve center) has an equal interest in regulating its out-of-state affairs on a uniform, consistent basis.
So these competing interests can lead to forum fights? What to do?
I am probably in the minority on this, but I happen to feel that the New York court got it right in the Aon Risk Services v. Cusack decision this past week when it refused to dismiss a suit on venue grounds in favor of a pending California case. Even though the defendant, Peter Arkley, was a California resident working for an Aon subsidiary principally in California, Illinois law governed his employment agreement (it contained a narrow, 2-year non-solicitation covenant). And Aon commenced injunction proceedings in Illinois (and later New York state court) right after Arkley's preemptive strike suit in California. Arkley was enjoyed in Illinois and in New York, despite the presence of his California action.
Fights over venue when there is a California connection are not easy to resolve, and courts have to be respectful of litigation in other states. But in my opinion, courts should take a pragmatic approach and decline to override choice-of-law provisions in all but a narrow set of cases. It makes little sense why a New York entity can't have one state's laws govern all of its contracts, unless that choice is completely arbitrary.
There's also an easy fix to this. If a state decides that choice-of-law clauses over its residents' non-compete agreements should not be enforced, then it can pass a law making this established public policy. I happen to think that venue and choice-of-law fights are unfortunate, expensive distractions in cases demanding a quick resolution. This is one of many reasons that the presence of choice-of-law and choice-of-forum clauses ought to command great deference.
Saturday, December 1, 2012
Georgia Case Demonstrates Importance of Addressing Choice of Venue and Law Clauses
Non-compete contracts entered into before the ratification of a constitutional amendment in 2011 are governed by the common law, and that body of law remains exceedingly treacherous for companies enforcing covenants.
A recent Georgia appellate case illustrates why procedural choice of venue and choice of law rules are vitally important.
The case of Carson v. Obor Holding Co., LLC yields a fairly common fact-pattern. Carson wore two hats for Obor Digital, a company that supplies staffing and software services in the defense industry. He was a member of the holding company (the defendant in the case) and an employee of the operating entity (not a defendant). He resigned in April of 2011, claiming "constructive discharge" by virtue of a reduction in his commissions. He then immediately filed suit in Georgia state court seeking an injunction against enforcement of the restrictive covenants contained in the Holding Company operating agreement.
The trial court dismissed his case, finding a Florida choice-of-forum clause was valid. That contract also required application of Florida law. Florida, in direct contrast to Georgia, is an exceedingly friendly enforcement state.
The Court of Appeals of Georgia reversed and held that the forum selection clause was invalid. It is important to note that courts won't invalidate forum selection clauses simply because one state's law (here, Georgia) is more favorable to employees than another state's (here, Florida). Rather, the difference has to implicate some fundamental public policy.
Florida tends to pose special problems with choice-of-forum and choice-of-law clauses if the suit is brought in another state. This is so for two primary reasons. First, Florida has a mandatory blue-pencil rule, requiring courts to modify overbroad covenants to the extent necessary for protection of the enforcing party. Georgia (pre-2011) is the exact opposite, essentially adopting an all-or-nothing policy. Second, Florida disallows a court from considering any employee hardships - economic or otherwise - that may result from enforcement. Georgia requires courts to consider such hardships in the balancing analysis. (Illinois adopted a similar rationale a few years back to invalidate Florida choice-of-law provisions in non-compete cases pending in Illinois courts.)
Turning to the substance of the covenants, Obor Holding's operating agreement had the following deficiencies in the restrictive covenants:
(1) The non-disclosure covenant did not define "confidential information," and it barred use of confidential information in perpetuity. Georgia law holds this is invalid if the non-disclosure for non-trade secret information is unlimited. (This is ridiculous, but maybe more on this in another post.)
(2) The non-solicitation covenant was not limited either (a) to a discrete class of customers, or (b) territorially. It also barred Carson from accepting business from a customer. Georgia cases hold that non-solicitation covenants that bar this so-called "passive solicitation" are invalid. (Again, stupid. How can an enforcing party know who contacted whom?)
(3) The non-compete covenant was invalid because it applied throughout the country and had no discernible territory limitation and because it had no activity scope tied to it. That is, it barred any affiliation with a competitor, not just some particular competitive conduct.
Because of the fundamental difference in how Georgia and Florida courts view non-competes, the Court of Appeals found that the operating agreement covenants violated Georgia public policy and that a Florida court would enforce them (at least to some extent). That means that, in Georgia, the choice-of-venue clause was invalid. A Georgia court had to hear the case and had to apply Georgia law. IIt must be nice to be a Georgia non-compete lawyer. No shortage of cases. And plenty of contract rewrites given the change in the law in 2011.
Other states that will pose similar procedural problems like this are Wisconsin, Oklahoma, North Dakota, and California. States that are viewed as more employee-friendly may not have robust public policy considerations that require courts to override choice-of-forum and choice-of-law clauses.
--
Court: Court of Appeals of Georgia
Opinion Date: 11/20/12
Cite: Carson v. Obor Holding Co., LLC, 2012 Ga. App. LEXIS 971 (Ga. Ct. App. Nov. 20, 2012)
Favors: Employee
Law: Georgia
Saturday, May 5, 2012
Case Law and Non-Compete News Update
News Stories
A couple of years ago, FLIR Systems engaged in an ill-advised trade secrets action in California which resulted in a substantial fee award to the defendants under a theory of bad faith. Now, the defendants are going after FLIR's counsel in that case, Latham & Watkins, on a malicious prosecution theory of liability. Apparently, the genesis of the claim against L&W arose when the plaintiffs (that is, the defendants in the original trade secrets case) discovered FLIR was invoking the "advice of counsel" defense. There a number of interesting procedural issues which could come out of this, including the possibility that L&W may have a SLAPP defense under California law. Epstein Becker & Green discusses the case.
In this author's opinion, counsel should not be granted an absolute privilege for bad faith or malicious litigation if they act as a mere instrumentality for their client.
John Marsh discusses the high-profile dispute between sports agent Aaron Mintz and Priority Sports Entertainment, a battle taking place in California over a non-compete apparently governed by Illinois law. Given California's clear public policy on non-competes, there certainly will be questions whether the choice-of-law clause is valid. Mintz joined CAA, which represents NBA stars LeBron James, Chris Bosh, Dwyane Wade, Carmelo Anthony and others. Priority Sports is headed by Mark Bartelstein, a graduate of the University of Illinois and a resident of suburban Chicago. Some salacious details of the suit can be found here.
Reported Cases
The Tennessee case of ProductiveMD, LLC v. 4UMD, LLC, 821 F. Supp. 2d 955 (M.D. Tenn. 2011), contains a good discussion of the "same proof" standard to determine trade secrets preemption. This standard essentially examines whether proof of a non-trade secrets claim would also establish a claim for misappropriation of trade secrets. If the answer is yes, the claim is preempted. Most frequently, the same proof test will jeopardize claims of common law unfair competition, unjust enrichment, breach of the duty of loyalty (at least in part), and civil conspiracy. To my knowledge, Hawaii is the only other state which has adopted the "same proof" test of preemption.
Grace Hunt IT Solutions, LLC v. SIS Software, LLC, 2012 Mass. Super. LEXIS 40 (Sup. Ct. Feb. 14, 2012), discusses the Massachusetts rule which voids non-compete agreements if there has been a "material change" in the employment relationship. The rationale for this rule is that a material change equates to a brand new employment relationship, which requires a new non-compete to be signed. An example of a material change would be a reduction in compensation. Interestingly, in the Grace Hunt case, the court discounted the employer's point that the reduced compensation could be made up through bonuses, because the evidence equivocated over whether those bonuses could realistically be achieved.
Franchise non-competes are usually enforced, as demonstrated by Outdoor Lighting Perspectives Franchising, Inc. v. OLP-Pittsburgh, Inc., 2012 U.S. Dist. LEXIS 53583 (W.D.N.C. Apr. 17, 2012). As I have noted on this blog before, the interests to be protected under franchise covenants are different than those in an employment contract, even though most franchise covenants are non-negotiable. The interest is not only business goodwill, but protection of the franchise system itself. Often times, the court will examine the interests of third-parties, other franchisees, who need protection. The case was interesting in one respect, however. The non-compete extended to a 100-mile buffer around the ceded franchise territory and other franchisees' territories. This was too broad, almost by definition, and the court cut it back to eliminate the 100-mile buffer language. However, the court did state that the restriction on competition within other franchisees' territories was reasonable.
Thursday, April 15, 2010
The Key to Protection Is Good Drafting
Having drafted and reviewed non-compete agreements for 13 years, I have seen plenty of good and even more bad. It continues to surprise me how sophisticated companies make boneheaded drafting mistakes.
Drafting non-competes is not that difficult, but it does require attention to detail and consideration of individual circumstances. And it requires you not to buy something off Legal Zoom.
Here are some general, key principles for employers to remember. (Note to employees: Pay attention. This will help you determine whether your agreement might suffer from a fatal flaw or loophole).
1. Remember that each employee is different. Companies (and their attorneys) are often tied to forms. There is nothing wrong with having a template, but don't sacrifice enforceability for the sake of expediency. A non-compete for someone involved in sales should look different than one who is in product development. Also, depending on the applicable jurisdiction, a current employee asked to sign a non-compete for the first time may have to be given tangible consideration, like a bonus, for signing. Finally, if your employee works on-site at a client and you don't want the client stealing him or her, does your covenant strictly prohibit the employee from accepting a position with that client, or (more likely) does it just prohibit solicitation for competitive purposes?
2. Consider less restrictive alternatives. Not every employee needs to have a business non-compete. Particularly for salespersons, a well-drafted client non-solicitation provision may protect the employer more than adequately.
3. Define key terms. Nothing is more annoying than reading a contract where every fifth word is defined. But as I've written in the past, the dictionary is not necessarily your friend. For certain key terms - like "prospective customer" or "competitor" or "solicit" - consider defining the term so there is no quibble after the fact about what the employee's obligation really is.
4. Address proprietary rights. Standard employee confidentiality clauses don't pose much of a problem, but consider other protections too - such as an invention assignment clause (particularly for those employees charged with creating proprietary products, such as source code developers), a clause dealing with return of company information on termination, and (for those followers of the Computer Fraud and Abuse Act) a clause putting an employee on notice that s/he does not have authorization to use the company's computer system for any reason relating to post-departure competitive plans.
5. Choose Law and Venue. Depending on what jurisdictions have an interest in a dispute, a clear choice of law clause can reduce a preliminary (and expensive) fight over conflicts of laws. If you conduct business in multiple states, consider what forum has the most favorable non-compete law and whether each contract can fix this law as the default.
6. Don't forget remedies. Liquidated damages clauses are fraught with drafting peril. They are not right for every occasion, but they may work well for non-solicitation or no-hire provisions. Finally, employers ought to consider adding an equitable tolling, or extension, provision that empowers a court to toll the period of time in which an employee has been in breach of the agreement so the employer, if it prevails, can obtain the full benefit of the contract.
These are by no means all the considerations employers must think about, but be wary of using one standard document for all employees. This usually leads to problems when someone jumps ship.
Drafting non-competes is not that difficult, but it does require attention to detail and consideration of individual circumstances. And it requires you not to buy something off Legal Zoom.
Here are some general, key principles for employers to remember. (Note to employees: Pay attention. This will help you determine whether your agreement might suffer from a fatal flaw or loophole).
1. Remember that each employee is different. Companies (and their attorneys) are often tied to forms. There is nothing wrong with having a template, but don't sacrifice enforceability for the sake of expediency. A non-compete for someone involved in sales should look different than one who is in product development. Also, depending on the applicable jurisdiction, a current employee asked to sign a non-compete for the first time may have to be given tangible consideration, like a bonus, for signing. Finally, if your employee works on-site at a client and you don't want the client stealing him or her, does your covenant strictly prohibit the employee from accepting a position with that client, or (more likely) does it just prohibit solicitation for competitive purposes?
2. Consider less restrictive alternatives. Not every employee needs to have a business non-compete. Particularly for salespersons, a well-drafted client non-solicitation provision may protect the employer more than adequately.
3. Define key terms. Nothing is more annoying than reading a contract where every fifth word is defined. But as I've written in the past, the dictionary is not necessarily your friend. For certain key terms - like "prospective customer" or "competitor" or "solicit" - consider defining the term so there is no quibble after the fact about what the employee's obligation really is.
4. Address proprietary rights. Standard employee confidentiality clauses don't pose much of a problem, but consider other protections too - such as an invention assignment clause (particularly for those employees charged with creating proprietary products, such as source code developers), a clause dealing with return of company information on termination, and (for those followers of the Computer Fraud and Abuse Act) a clause putting an employee on notice that s/he does not have authorization to use the company's computer system for any reason relating to post-departure competitive plans.
5. Choose Law and Venue. Depending on what jurisdictions have an interest in a dispute, a clear choice of law clause can reduce a preliminary (and expensive) fight over conflicts of laws. If you conduct business in multiple states, consider what forum has the most favorable non-compete law and whether each contract can fix this law as the default.
6. Don't forget remedies. Liquidated damages clauses are fraught with drafting peril. They are not right for every occasion, but they may work well for non-solicitation or no-hire provisions. Finally, employers ought to consider adding an equitable tolling, or extension, provision that empowers a court to toll the period of time in which an employee has been in breach of the agreement so the employer, if it prevails, can obtain the full benefit of the contract.
These are by no means all the considerations employers must think about, but be wary of using one standard document for all employees. This usually leads to problems when someone jumps ship.
Friday, June 26, 2009
Choice of Law Ends Inevitable Disclosure Case Between Consumer Products Titans (Clorox Company v. S.C. Johnson & Son)
The most interesting inevitable disclosure cases tend to involve the migration of key executives from one direct competitor to another. The cases involving Bill Redmond and Mark Papermaster, among others, have served as influential precedents and will continue to do so for many years.
Another recent executive defection, this time between two well-known consumer products companies, ended with somewhat of a thud.
S.C. Johnson & Son - makers of Ziploc, Drano and Nature's Source - hired away Timothy Bailey to serve as Vice-President of Product Supply. Formerly, Bailey worked in a similar position with Clorox Company, makers of Glad bags, Liqui-Plumr and GreenWorks. Clorox filed suit in Wisconsin against SCJ only, contending that its hiring of Bailey resulted in trade secrets misappropriation. The gist of Clorox's complaint relied on the inevitable disclosure theory of misappropriation, though there were enough conclusory allegations of threatened misappropriation to withstand a motion to dismiss.
The case hinged on choice of law. Clorox chose not to sue Bailey for obvious reasons - the PepsiCo v. Redmond case. Since Clorox and Bailey were California residents, adding him would have destroyed diversity of jurisdiction and Clorox would not have been able to sue in a district court within the Seventh Circuit where PepsiCo remains a significant precedent. It could have sued in Wisconsin state court, but convincing a state court to apply a Seventh Circuit case, which itself applied llinois law, would have been much more of a challenge. And Wisconsin has not adopted the inevitable disclosure theory, so Clorox really had to hinge its case on PepsiCo.
SCJ predictably argued California law applied, and the court agreed. Because of the vague nature of the allegations concerning threatened misappropriation of trade secrets, Clorox lost the injunction motion. In finding California law applied, the court considered a number of important factors, among them the following:
(1) Clorox and Bailey entered into an employment relationship in California, and Bailey apparently executed a confidentiality agreement governed by California law;
(2) California had a significant interest, given its hostility to non-compete agreements and refusal to recognize a closely related doctrine - the inevitable disclosure claim;
(3) The law concerning inevitable disclosure under California law was clear, whereas no Wisconsin case addressed the issue.
The court did mention that the trade secrets which Clorox would have to disclose must have been developed or maintained in California.
--
Court: United States District Court for the Eastern District of Wisconsin
Opinion Date: 6/9/09
Cite: The Clorox Co. v. S.C. Johnson & Son, Inc., 627 F. Supp. 2d 954 (E.D. Wisc. 2009)
Favors: Employee
Law: California
Another recent executive defection, this time between two well-known consumer products companies, ended with somewhat of a thud.
S.C. Johnson & Son - makers of Ziploc, Drano and Nature's Source - hired away Timothy Bailey to serve as Vice-President of Product Supply. Formerly, Bailey worked in a similar position with Clorox Company, makers of Glad bags, Liqui-Plumr and GreenWorks. Clorox filed suit in Wisconsin against SCJ only, contending that its hiring of Bailey resulted in trade secrets misappropriation. The gist of Clorox's complaint relied on the inevitable disclosure theory of misappropriation, though there were enough conclusory allegations of threatened misappropriation to withstand a motion to dismiss.
The case hinged on choice of law. Clorox chose not to sue Bailey for obvious reasons - the PepsiCo v. Redmond case. Since Clorox and Bailey were California residents, adding him would have destroyed diversity of jurisdiction and Clorox would not have been able to sue in a district court within the Seventh Circuit where PepsiCo remains a significant precedent. It could have sued in Wisconsin state court, but convincing a state court to apply a Seventh Circuit case, which itself applied llinois law, would have been much more of a challenge. And Wisconsin has not adopted the inevitable disclosure theory, so Clorox really had to hinge its case on PepsiCo.
SCJ predictably argued California law applied, and the court agreed. Because of the vague nature of the allegations concerning threatened misappropriation of trade secrets, Clorox lost the injunction motion. In finding California law applied, the court considered a number of important factors, among them the following:
(1) Clorox and Bailey entered into an employment relationship in California, and Bailey apparently executed a confidentiality agreement governed by California law;
(2) California had a significant interest, given its hostility to non-compete agreements and refusal to recognize a closely related doctrine - the inevitable disclosure claim;
(3) The law concerning inevitable disclosure under California law was clear, whereas no Wisconsin case addressed the issue.
The court did mention that the trade secrets which Clorox would have to disclose must have been developed or maintained in California.
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Court: United States District Court for the Eastern District of Wisconsin
Opinion Date: 6/9/09
Cite: The Clorox Co. v. S.C. Johnson & Son, Inc., 627 F. Supp. 2d 954 (E.D. Wisc. 2009)
Favors: Employee
Law: California
Wednesday, March 25, 2009
Illinois Court Goes Bananas Over Unlimited Non-Compete Agreement (Del Monte Fresh Produce v. Chiquita Brands)
Illinois courts have been fairly uniform on the rule-of-reason as applied to industry non-compete agreements. While there is a legitimate debate brewing over whether (or, perhaps to what extent) an employer must show a protectable interest in support of a non-compete, patently unreasonable and overbroad covenants continue to be struck down.
Consider the case of Kim Kinnavy, a former district sales manager with Del Monte who was in charge of customers with banana supply contracts. Kinnavy signed a one-year non-compete contract barring her from working industry-wide for a wide range of businesses involved in the supply or brokerage of fresh vegetables or fruit.
As Judge Hibbler noted, "the Non-Compete prohibits Kinnavy from 'being connected in any manner with' an entity that brought fruit, vegetables, or other produce from Del Monte. Under these terms, Kinnavy could not work as a cashier at a Piggly-Wiggly that bought produce from Del Monte." This example highlights a problem I frequently see in analyzing non-competes: employers give too little thought to drafting the contract so that it contains reasonable parameters on the type of employment that is off-limits.
The fundamental problem here is with notice: if a non-compete is a blanket, industry-wide ban, the employee has no idea what he or she is entitled to do and is therefore discouraged from seeking a job with any competitor, even if that job bears no rational nexus to the job he or she has just left. The court also noted the worldwide ban on employment for one-year and deemed it fundamentally unreasonable, citing a litany of Illinois cases construing and rejecting as unreasonable similar covenants.
Given the breadth of the restrictions, the court declined to modify or blue-pencil the covenant to make it more reasonable. Of primary concern to Illinois courts is the language of the contract. Courts simply won't employ the blue-pencil rule if the employer misses by a wide margin. Here, the covenant failed on two grounds of reasonableness - geographic reach and scope of activity - and the court was not inclined to rewrite the contract for the employer.
The court declined to use the modification rule based on the express language of the contract. Even though the non-compete contained a severability clause, the court found that the non-compete was an "essential feature of the contract at issue" and that the severability rule could not apply. In particular, the contract specifically stated "each of the above provisions is essential to the Company and the Company would not furnish the Employee the consideration set forth in this Policy [of Trade Secret and Non-Competition] absent the Employee's agreement to abide by and be bound by each of the above provisions..." In any case where an employer seeks to invoke the blue-pencil doctrine, the reasoning employed in Judge Hibbler's ruling should be examined carefully.
Finally, for the third time in the last two years, the court struck down a Florida choice-of-law clause as contrary to Illinois public policy. I previously wrote about this issue in another post.
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Court: United States District Court for the Northern District of Illinois
Opinion Date: 3/19/09
Cite: Del Monte Fresh Produce, N.A., Inc. v. Chiquita Brands Int'l, Inc., 616 F. Supp. 2d 805 (N.D. Ill. 2009)
Favors: Employee
Law: Illinois
Tuesday, March 24, 2009
Michigan Courts Continue Favorable Policy Towards Enforcement of Non-Compete Agreements (Kelly Services v. Marzullo)
Prior to 1985, Michigan was one of the most employee-friendly states when it came to non-compete agreements. With one very narrow exception, such covenants were void under state statute. Since then, however, the repeal of Michigan's old law and the enactment of a new statutory scheme has made Michigan one of the most-employer friendly venues with respect to non-competes.
Michigan's broad policy favoring non-compete agreements was on display in Kelly Services v. Marzullo, a case in the ever-litigious employment staffing services industry. Marzullo was a high-level executive for Kelly Services, working in its Dallas, Texas office as Regional Manager/Vice-President. In June of 2007, Marzullo signed a new restrictive covenant agreement, which was governed by Michigan law. In addition to a non-solicitation and non-disclosure clause, the contract contained a one-year industry non-compete covenant which barred Marzullo from working in the employee staffing business in any state in which he had responsibility during the three years prior to his termination. From the facts, it appears Texas would be the only state included within the industry non-compete.
After his resignation, Marzullo went to work for Roth Staffing Companies, and he stated that he would be responsible for West Coast operations. At the time he left, Marzullo indicated he would not have responsibility for clients in Dallas and mentioned he would have to relocate. Aided by a LinkedIn profile indicating otherwise, Kelly Services determined Marzullo was not only still living in Dallas after his resignation but was responsible for Roth's Dallas territory.
At the preliminary injunction hearing, Kelly Services conceded Marzullo had not yet solicited any of his old accounts in violation of the contract, nor had it discovered misappropriation of confidential information. Marzullo, however much he tried to downplay the extent of his work in Texas, was in violation of the industry non-compete.
Under Michigan's pro-employer law, this was enough to warrant an injunction in Kelly Services' favor. Marzullo's defense was based mainly on the choice-of-law clause; had he been able to apply Texas law (which he wasn't), Marzullo stood a chance of prevailing on a technical consideration argument, but the court even seemed dubious that contention would enable Marzullo to escape the one-year covenant.
Employers in Michigan have a significant upper hand when litigating non-compete agreements, and they are able to prevail even if less-restrictive activity covenants would otherwise protect an employer.
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Court: United States District Court for the Eastern District of Michigan
Opinion Date: 11/20/08
Cite: Kelly Services, Inc. v. Marzullo, 2008 U.S. Dist. LEXIS 107793 (E.D. Mich. Nov. 20, 2008)
Favors: Employer
Law: Michigan
Wednesday, February 18, 2009
Illinois Decision Demonstrates Difficulty of Proving Protectable Interest in Customer Relationships (Brown & Brown v. Ali)
One of the most nebulous areas of non-compete law concerns the scope of a protectable business interests. While many states recognize similar interests that support a restrictive covenant, the devil always lies in the details.
In Illinois, only two protectable interests will validate an otherwise enforceable non-compete agreement: (1) confidential information an employee has attempted to use for his own benefit; and (2) near-permanent relationships with customers that the employee would not have had but for his affiliation with the employer.
Attorneys representing employers should exhaust every avenue to invoke the first protectable interest - use of confidential information. This rather undefined term gives an attorney the flexibility to be creative and make his or her case for why a departed employee has purloined information and tried to use it for his own self-interest. No physical taking of documents is necessary; use of confidential information can come from one's memory.
The second business interest is harder to justify, and a recent federal district court bench-trial confirms why this is so. In Brown & Brown v. Ali, the defendant was a highly paid, highly regarded executive for a wholesale insurance broker, specializing in the placement of insurance for public entities and non-profit insurance pools or trusts. His two-year client non-solicitation agreement prohibited him from contacting all of Brown & Brown's customers after his departure.
Despite the fact insurance brokerage is a highly competitive, relationship-driven business, the court found Brown & Brown could not establish a protectable interest in near-permanent customer relationships. The court relied on a number of Illinois decisions holding that, ordinarily, an employer engaged in sales has no protectable interest in its customer relationships because business is highly mobile and fluid.
Ultimately, the issue was of little consequence, and perhaps Brown & Brown's proof that Ali misused and took its business information impacted its presentation of evidence on customer relationships. Still, the ruling serves as a cautionary tale for employers relying on near-permanency to support its non-compete.
Additionally, the court again invalidated a choice-of-law provision - this time one favoring application of Florida law. The court relied on another state court decision involving the same employer and same agreement to conclude that public policy mandated application of Illinois law, rather than the chosen law by contract. Florida law prohibits consideration of whether a non-compete will impose a hardship on an employee, while Illinois courts have long considered this issue under the rubric of reasonableness.
The choice-of-law ruling demonstrates courts in Illinois will take a close look at an out-of-state's substantive law to determine whether applying it would be consistent with public policy in Illinois.
--
Court: United States District Court for the Northern District of Illinois
Opinion Date: 1/7/09
Cite: Brown & Brown, Inc. v. Ali, 2009 U.S. Dist. LEXIS 10252 (N.D. Ill. Jan. 7, 2009)
Favors: Employee
Law: Illinois
In Illinois, only two protectable interests will validate an otherwise enforceable non-compete agreement: (1) confidential information an employee has attempted to use for his own benefit; and (2) near-permanent relationships with customers that the employee would not have had but for his affiliation with the employer.
Attorneys representing employers should exhaust every avenue to invoke the first protectable interest - use of confidential information. This rather undefined term gives an attorney the flexibility to be creative and make his or her case for why a departed employee has purloined information and tried to use it for his own self-interest. No physical taking of documents is necessary; use of confidential information can come from one's memory.
The second business interest is harder to justify, and a recent federal district court bench-trial confirms why this is so. In Brown & Brown v. Ali, the defendant was a highly paid, highly regarded executive for a wholesale insurance broker, specializing in the placement of insurance for public entities and non-profit insurance pools or trusts. His two-year client non-solicitation agreement prohibited him from contacting all of Brown & Brown's customers after his departure.
Despite the fact insurance brokerage is a highly competitive, relationship-driven business, the court found Brown & Brown could not establish a protectable interest in near-permanent customer relationships. The court relied on a number of Illinois decisions holding that, ordinarily, an employer engaged in sales has no protectable interest in its customer relationships because business is highly mobile and fluid.
Ultimately, the issue was of little consequence, and perhaps Brown & Brown's proof that Ali misused and took its business information impacted its presentation of evidence on customer relationships. Still, the ruling serves as a cautionary tale for employers relying on near-permanency to support its non-compete.
Additionally, the court again invalidated a choice-of-law provision - this time one favoring application of Florida law. The court relied on another state court decision involving the same employer and same agreement to conclude that public policy mandated application of Illinois law, rather than the chosen law by contract. Florida law prohibits consideration of whether a non-compete will impose a hardship on an employee, while Illinois courts have long considered this issue under the rubric of reasonableness.
The choice-of-law ruling demonstrates courts in Illinois will take a close look at an out-of-state's substantive law to determine whether applying it would be consistent with public policy in Illinois.
--
Court: United States District Court for the Northern District of Illinois
Opinion Date: 1/7/09
Cite: Brown & Brown, Inc. v. Ali, 2009 U.S. Dist. LEXIS 10252 (N.D. Ill. Jan. 7, 2009)
Favors: Employee
Law: Illinois
Monday, January 5, 2009
Federal Court in Pennsylvania Upholds Choice-of-Law Clause (Perma-Liner Industries v. U.S. Sewer & Drain)
Choice-of-law clauses continue to be a ripe area of litigation, with rules and cases that yield results difficult to reconcile.
Disputes frequently arise when a corporation is headquartered or maintains its principal place of business in one state, while the employee works in another state. Almost always, the choice-of-law clause provides for application of the law from the employer's home state. Is such a provision valid, particularly if the employee's only real connection to the forum state is that his employer is based there?
That was the issue in Perma-Liner Industries v. U.S. Sewer & Drain, where the district court in Pennsylvania upheld a Florida choice-of-law clause in a Pennsylvania employee's contract. Perma-Liner was a Florida-based company, and this apparently was enough to validate the clause and give effect to the terms of the written agreement.
The trend in these choice-of-law cases appears to be a sharp move towards upholding the validity of the choice-of-law clause, unless it is so totally arbitrary to be unreasonable. In a garden-variety breach of contract case, the choice of substantive state law matters little. For the most part, contract law is static across state lines.
Not so in non-compete cases. Each state has permutations and quirks and odd precedents on which either side can rely. The Perma-Liner case is a perfect example. In Pennsylvania, continued employment is not sufficient consideration for execution of a non-compete agreement, while in Florida it is. Had the employee signed the non-compete after he began work - there is no indication that was the case in the lawsuit - then choice of law could be outcome-determinative on this issue alone.
In fact, Florida is perhaps the most employer-friendly state for non-compete law. The fact a Pennsylvania federal court held no public policy was implicated in applying Florida law to a Pennsylvania employee does not bode well for others seeking to invalidate a choice-of-law provision.
The black-letter law is fairly simple: choice-of-law clauses will be honored, unless: (a) the chosen state has no substantial relationship to the dispute; or (b) application of the chosen state's law is contrary to a fundamental public policy of a state with a materially greater interest in the dispute (i.e., the state where the employee lives and works). It is the latter exception that employees often rely upon. But mere differences in non-compete law, even ones that are outcome-determinative, will not suffice to implicate public policy concerns.
Outside of a completely arbitrary selection (for instance, choosing employer-friendly Florida law when neither the employer nor employee have any connection there at all), I can envision two paradigms where choice-of-law clauses may give employers problems if they seek to enforce them against out-of-state employees: (a) anything involving a California resident; and (b) application of Delaware law if the only connection is incorporation to take advantage of its body of corporate law.
--
Court: United States District Court for the Eastern District of Pennsylvania
Opinion Date: 12/31/08
Cite: Perma-Liner Indus., Inc. v. U.S. Sewer & Drain, Inc., 630 F. Supp. 2d 516 (E.D. Pa. 2008)
Favors: Employer
Law: Pennsylvania
Disputes frequently arise when a corporation is headquartered or maintains its principal place of business in one state, while the employee works in another state. Almost always, the choice-of-law clause provides for application of the law from the employer's home state. Is such a provision valid, particularly if the employee's only real connection to the forum state is that his employer is based there?
That was the issue in Perma-Liner Industries v. U.S. Sewer & Drain, where the district court in Pennsylvania upheld a Florida choice-of-law clause in a Pennsylvania employee's contract. Perma-Liner was a Florida-based company, and this apparently was enough to validate the clause and give effect to the terms of the written agreement.
The trend in these choice-of-law cases appears to be a sharp move towards upholding the validity of the choice-of-law clause, unless it is so totally arbitrary to be unreasonable. In a garden-variety breach of contract case, the choice of substantive state law matters little. For the most part, contract law is static across state lines.
Not so in non-compete cases. Each state has permutations and quirks and odd precedents on which either side can rely. The Perma-Liner case is a perfect example. In Pennsylvania, continued employment is not sufficient consideration for execution of a non-compete agreement, while in Florida it is. Had the employee signed the non-compete after he began work - there is no indication that was the case in the lawsuit - then choice of law could be outcome-determinative on this issue alone.
In fact, Florida is perhaps the most employer-friendly state for non-compete law. The fact a Pennsylvania federal court held no public policy was implicated in applying Florida law to a Pennsylvania employee does not bode well for others seeking to invalidate a choice-of-law provision.
The black-letter law is fairly simple: choice-of-law clauses will be honored, unless: (a) the chosen state has no substantial relationship to the dispute; or (b) application of the chosen state's law is contrary to a fundamental public policy of a state with a materially greater interest in the dispute (i.e., the state where the employee lives and works). It is the latter exception that employees often rely upon. But mere differences in non-compete law, even ones that are outcome-determinative, will not suffice to implicate public policy concerns.
Outside of a completely arbitrary selection (for instance, choosing employer-friendly Florida law when neither the employer nor employee have any connection there at all), I can envision two paradigms where choice-of-law clauses may give employers problems if they seek to enforce them against out-of-state employees: (a) anything involving a California resident; and (b) application of Delaware law if the only connection is incorporation to take advantage of its body of corporate law.
--
Court: United States District Court for the Eastern District of Pennsylvania
Opinion Date: 12/31/08
Cite: Perma-Liner Indus., Inc. v. U.S. Sewer & Drain, Inc., 630 F. Supp. 2d 516 (E.D. Pa. 2008)
Favors: Employer
Law: Pennsylvania
Saturday, December 20, 2008
Virginia Court Refuses to Dismiss Nationwide Non-Compete Agreement (Senture, LLC v. Dietrich)
Geographic restrictions in non-compete agreements continue to undergo a judicial re-analysis in light of the high-tech, nationwide economy. Most older cases across jurisdictions require an employer to craft a non-compete agreement with a reasonable geographic scope.
However, a recent Virginia case demonstrates the problem when an employer conducts business nationwide. Senture, LLC entered into an employment agreements with Joe Dietrich and Tom Swider. Each contained a Kentucky choice-of-law provision, which the court found was reasonable given Senture's business ties to Kentucky. The agreements also contained nationwide non-compete covenants, which the employees challenged on a Rule 12(b)(6) motion to dismiss.
The court refused to dismiss the claims for breach of contract, expressly noting that nationwide non-competes can be valid if the employer demonstrates that it conducts business throughout the United States. Because of the procedural posture of the case, Senture will still have to demonstrate a nexus between its business and the contractual restrictions.
Employers can always limit a challenge to the scope of a non-compete agreement by instead including an activity restraint requiring an ex-employee to stay away from customers he or she worked with during the course of employment. Such clauses normally mitigate a defendant's arguments as to overbreadth. In Illinois, however, customer non-solicitation covenants also must make sure they do not include all of the employer's accounts as restricted - only those the employee had some responsibility for servicing or supervising.
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Court: United States District Court for the Eastern District of Virginia
Opinion Date: 9/8/08
Cite: Senture, LLC v. Dietrich, 2008 U.S. Dist. LEXIS 100288 (E.D. Va. Sept. 8, 2008)
Favors: Employer
Law: Kentucky
However, a recent Virginia case demonstrates the problem when an employer conducts business nationwide. Senture, LLC entered into an employment agreements with Joe Dietrich and Tom Swider. Each contained a Kentucky choice-of-law provision, which the court found was reasonable given Senture's business ties to Kentucky. The agreements also contained nationwide non-compete covenants, which the employees challenged on a Rule 12(b)(6) motion to dismiss.
The court refused to dismiss the claims for breach of contract, expressly noting that nationwide non-competes can be valid if the employer demonstrates that it conducts business throughout the United States. Because of the procedural posture of the case, Senture will still have to demonstrate a nexus between its business and the contractual restrictions.
Employers can always limit a challenge to the scope of a non-compete agreement by instead including an activity restraint requiring an ex-employee to stay away from customers he or she worked with during the course of employment. Such clauses normally mitigate a defendant's arguments as to overbreadth. In Illinois, however, customer non-solicitation covenants also must make sure they do not include all of the employer's accounts as restricted - only those the employee had some responsibility for servicing or supervising.
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Court: United States District Court for the Eastern District of Virginia
Opinion Date: 9/8/08
Cite: Senture, LLC v. Dietrich, 2008 U.S. Dist. LEXIS 100288 (E.D. Va. Sept. 8, 2008)
Favors: Employer
Law: Kentucky
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