Non-Compete Disputes and the Mootness Rule on Appeal

One of the reasons non-compete cases generate a lot of appeals is that the law is tense. By that, I mean that non-compete cases present a unique tension between freedom of contract and freedom to compete. And because public policy underlies many non-compete cases, appellate courts often scrutinize trial court rulings more carefully than garden-variety contract disputes or tort judgments.

But taking a non-compete case on appeal presents a unique legal issue: mootness. Most non-compete cases concern an agreement of relatively short duration, say one year or maybe two. Even if litigation is expedited, the non-compete period may run its course if there is an appeal.

How courts treat the issue of mootness on appeal is one of the more interesting procedural questions that non-compete lawyers face. Here are the three possible treatments:

1. Expiration of the covenant renders the appeal moot. Some courts treat expiration of the covenant on appeal as mooting any issue pertaining to injunctive relief. Remember: mootness only affects the injunction request. A damage claim can subsist for years after the defendant is free to work unencumbered. Texas is an example of a jurisdiction that seems to have a fairly strong mootness rule, as reflected in the recent case of Argo Group US, Inc. v. Levinson, 2015 Tex. App. LEXIS 250 (Tex. Ct. App. Jan. 14, 2015).

2. Expiration of the covenant does not impact an appeal. Other courts take the opposite approach, finding in essence that the appeal may not be moot. The doctrine is called "equitable tolling." A line of Ohio cases suggests an appeal from a denial of injunctive relief may not be moot even if the term of the post-termination covenant has run. But as the case of Tradesman Int'l, Inc. v. Black, 724 F.3d 1004 (7th Cir. 2013), illustrates, this doctrine relies heavily on the factual and procedural posture of the case. Generally, a plaintiff must move promptly for injunctive relief to secure the benefit of the equitable tolling doctrine. If it does so, and an appellate court finds the trial court incorrectly denied the injunction, the employer still can gain the benefit of its bargain through a new term of injunctive relief that nominally extends past the expiration date. The Tradesman case dealt with the opposite fact pattern. The employer there did nothing to pursue preliminary injunctive relief and then, after the covenants expired, sought to impose a permanent injunction - effectively restarting the non-compete period against its ex-employees. As the Seventh Circuit's opinion discusses, this type of litigation conduct will not allow a plaintiff to pursue an injunction.

3. Expiration is a function of what the non-compete says. The final approach that some courts have taken is to push the expiration or mootness issue back onto the contract itself. Courts in Illinois seem to have endorsed this approach, though the case law has enough fluidity in it to make it sound like there still are no hard-and-fast rules on mootness. The notable cases are Prairie Eye Center, Ltd. v. Butler, 329 Ill. App. 3d 293 (4th Dist. 2002), and Stenstrom Petroleum Svcs. Group, Inc. v. Mesch, 375 Ill. App. 3d 1077 (2d Dist. 2007). Both look at mootness in the context of whether the parties agreed upon an extender clause within the non-compete itself. As a result, it is fairly common to see sophisticated Illinois-based agreements with robust remedies sections incorporating the holdings in Prairie Eye Center and Stenstrom Petroleum.

***

I generally don't have much of a problem with options 2 or 3. Option 1 brings squarely into play the law of unintended consequences. In those jurisdictions that endorse a rigid mootness rule, the law encourages employers to adopt longer covenants so as to give them a fair chance of litigating the case, while at the same time preserving appeal rights.

In this respect, a rule that appears employee-friendly at first actually may not be. Employers will tend to compensate for the common law and "bargain" for longer post-termination covenants, knowing the mootness rule reduces the value of litigating a short non-compete in the first place.

Case Law Update: The Remedies and Civil Procedure Edition

This is a much overdue case law update, so it's a little lengthy. But on the upside, it touches on a number of different subjects from around the country.

Lost Profits

A federal district court in Indiana excluded significant parts of an expert's lost profits testimony in the hotly contested case of CDW, LLC v. NETech Corp. The case arose out of an allegation that NETech lifted out CDW's Indianapolis branch office and suffered millions in losses in "advanced technology" revenue. On a Daubert motion, the district court excluded a financial expert's "yardstick" methodology for predicting what CDW's Indianapolis branch would have earned but for the alleged wrongful conduct by the ex-employees. The ruling effectively excluded opinions that would have established lost profits of over $17,000,000. The district court allowed an alternative formulation of lost profits in a much lower amount to go to the jury.

Equitable Extension

The extension of non-competes past their expiration date (as measured from the date of termination of employment) is one of the most controversial, hotly contested remedies in litigation. As a federal district court in Idaho noted a few weeks ago, judges normally impose this remedy - when it's available - after a jury finding of breach or after a favorable ruling on summary judgment for the enforcing party. But in unusual cases, like that in MWI Veterinary Supply Co. v. Wotton, 2012 U.S. Dist. LEXIS 131784 (D. Idaho Sept. 14, 2012), the court can issue an extension remedy at a TRO or preliminary injunction phase. That finding was important in the Wotton case since the court had to find extension was appropriate to determine likelihood of success on the merits of the case. The non-compete, which arose out of the sale of a business, expired by the time the court addressed the preliminary injunction motion.

Temporary Restraining Orders

An Ohio court refused to grant a temporary restraining order against a departed sales executive in Chart Industries, Inc. v. Spagnoletti, 2012 U.S. Dist. LEXIS 140102 (N.D. Ohio Sept. 28, 2012), because the non-competition covenant contained no geographic or job-scope limitations. Though careful to note that such covenants were not per se unenforceable, the court stated it was important that the employer did not ask the court to impose any sort of limitation on the covenant at the TRO stage that would make it reasonable. The case demonstrates the continued difficulty courts have enforcing non-competes that contain no limiting language whatsoever. Delaware law applied.

Necessary and Indispensable Parties

In non-compete cases, the plaintiff sometimes will elect to forego suing the new employer and will proceed simply against the employee. There are a number of strategic and substantive reasons why this may be the case. The ruling in OneCommand, Inc. v. Beroth, 2012 U.S. Dist. LEXIS 122587 (S.D. Ohio Aug. 29, 2012), shows that a new employer is not a necessary party who must be part of the litigation under Federal Rule of Civil Procedure 19. Even if the plaintiff has potential claims against a new employer (for interference, trade secrets theft and the like), it is not necessary to make that company a party to a breach of contract suit with the employee.

Jury Trial Waivers

The right to a jury trial can be waived by contract if the waiver is knowing and voluntary. Generally, such waivers are strictly construed, however. One question that frequently arises is how far the contractual waiver extends to non-contract claims, like trade secrets misappropriation. A Delaware court concluded that a jury waiver provision in an asset purchase agreement encompassed related tort claims of trade secrets theft, conversion, and common-law unfair competition - reasoning that the "arising out of" language in the agreement was sufficiently broad to include torts intrinsically related to the contract action. The case is Coface Collections North Am., Inc. v. Newton, 2012 U.S. Dist. LEXIS 124342 (D. Del. Aug. 31, 2012).

Attorneys' Fees

Non-compete litigation can sometimes perpetuate itself solely because of fees that are incurred. An illustration of this problem comes from the case of Cumulus Broadcasting v. Okesson, 2012 U.S. Dist. LEXIS 124836 (D. Conn. Sept. 4, 2012). After the parties settled, they left it to the district judge to award attorneys' fees under a provision of the employment agreement that enabled the plaintiff to recover fees enforcing the non-compete.

The court, seemingly none-too-pleased (particularly since it was not allowed to see the terms of the parties' settlement agreement (?)), significantly pared back what the plaintiff thought it was owed. It essentially limited its fees to those incurred to obtain a preliminary injunction. And even that apparently gave the plaintiff only a small slice of what it wanted. The court ripped about $10,000 in fees off what it cost to take the matter to hearing.

The fee award was $80,317 (inclusive of some $21,000 in costs) - about 1/4 of what the plaintiff incurred and claimed it was entitled to. If nothing else, the case highlights for clients what a preliminary injunction can cost. And it further shows that weak non-compete cases can cost a lot more than the value of the benefit received.

Missouri Among States Which Disapproves of Equitable Tolling (Whelan Security Co. v. Kennebrew)

One of the most important procedural issues in non-compete disputes is the idea of equitable tolling. This doctrine essentially allows a court to toll, or stay, the time remaining on a non-compete agreement during the period in which the employee is in breach.

There is a problem, however, with this doctrine. It's not always available, and the remedy is highly dependent on what state's law governs the agreement.

Lawyers need to look at two primary issues. First, does the agreement expressly provide for equitable tolling? If so, then basic principles of contract law should allow a court the power to toll the time remaining on a non-compete if an employee is found in breach. Second, if the agreement is silent on this issue, does the state common law allow for tolling as a default rule?

Ohio, for instance, is a state which allows equitable tolling. In Illinois, it seems as if the courts will not approve of it absent a clear contract provision, but at least one older case suggests the remedy might be available in certain circumstances. Many states simply hold the doctrine is not available.

Missouri is one of the states falling into this last category. The Court of Appeals of Missouri recently reaffirmed this principle in Whelan Security Co. v. Kennebrew, and cited several prior cases as support for its holding. The case, incidentally, also involved the reversal of a summary judgment in favor of the employee on the grounds that the non-compete was facially overbroad. Since the court had to consider the merits of the case, including the protectable interest at stake and the reasonableness of the agreement, the issue of injunctive relief came up in the court's opinion.

The court found that the employer still had a claim for damages, but that injunctive relief was not available given the lapse of the non-compete period. The court noted the equities of its reasoning: "This would avoid the injustice of penalizing Kennebrew by effectively terminating the security guard business that he has established and built since 2009."

For employers, it is essential to seek injunctive relief, if at all, right away. Waiting until a defendant has established its business raises numerous equitable issues, not the least of which is the potential harm to third-parties and the specter of a double recovery.

--

Court: Court of Appeals of Missouri, Eastern District, Division One

Opinion Date: 11/29/11

Cite: Whelan Security Co. v. Kennebrew, 2011 Mo. App. LEXIS 1590 (Mo. Ct. App. Nov. 29, 2011)

Favors: Employee

Law: Missouri

Justice Souter Discusses Equitable Tolling Policy in EMC Case (EMC Corp. v. Arturi)

I have written frequently about the equitable tolling rule, which is one the more significant procedural issues in non-compete law. In a nutshell, the rule provides that a party who contracts for a non-compete clause should gain the full benefit of it, and the time period should be tolled during the period of breach. States have different views on it.

Readers here know my view on this by now: if employers want to use the equitable tolling rule, put it in the contract. It's not that difficult. About one sentence will suffice. I represent plenty of employers and I am no apologist for employees who willingly violate their non-compete contracts. But on the other side, I have little sympathy for employers (particularly sophisticated ones) who draft lousy contracts.

Massachusetts is one of those states where courts have indicated that, to use the equitable tolling doctrine, the contract must be clear. Last December, EMC Corporation was not able to deploy the doctrine when it sought to enforce a non-compete after the contracted-for covenant expired. I wrote about the district court opinion here. On appeal to the First Circuit, retired Associate Justice David H. Souter authored an opinion that spoke to why EMC was out of luck on its effort to impose injunctive relief:

"Like any contracting party, EMC makes its agreements subject to the rules of equity governing specific enforcement; rules, moreover, that were clearly in place in the governing federal and state cases well before the company required [the employee] to sign. Being forewarned, EMC could have contracted, as the district judge noted, for tolling the term of the restriction during litigation, or for a period of restriction to commence upon preliminary finding of breach. But it did not."

When there is contractual uncertainty in non-compete cases, the employer bears responsibility. Because an equitable tolling clause is easy to draft and a common remedy, it is not too much to ask of an employer to include it specifically so that the parties are fully aware of what rights and remedies are on the table at the start of a dispute. This is particularly so because equitable tolling can have the effect of allowing an employer a double recovery for damages (during the period of breach) and injunctive relief (extending the non-compete for more time).

--

Court: United States Court of Appeals for the First Circuit

Opinion Date: 8/26/11

Cite: EMC Corp. v. Arturi, 655 F.3d 75 (1st Cir. 2011)

Favors: Employee

Law: Massachusetts

Equitable Tolling of Non-Compete Not Available In Massachusetts Absent Contract Provision (EMC Corp. v. Arturi)

A federal district court has held that, under Massachusetts law, a non-compete restriction cannot be extended beyond the terms of the contract.

The case involved a suit filed by EMC Corporation against Chris Blotto. EMC originally filed suit in March of 2010, about 4 months after Blotto left EMC to join Knowledgent Group. It did not pursue injunctive relief until August, and at that time, it only sought to enforce a customer non-solicitation provision given evidence that Blotto was soliciting an EMC customer.

In November, EMC filed a second preliminary injunction motion, this time seeking, among other things, to prevent Blotto from working with Knowledgent for one year from the date of the order. The court denied the motion on the grounds that extending the restriction past December 4, 2010 was not allowed under Massachusetts law.

The court declined to endorse a broad application of the equitable tolling rule and indicated that EMC could easily amend its employment agreement to give it the right to toll the non-compete period during the period of an employee's breach. The court did not find that the reason for delay in seeking injunctive relief was important to its holding.

--

Court: United States District Court for the District of Massachusetts
Opinion Date: 12/15/10

Cite: EMC Corp. v. Arturi, 2010 U.S. Dist. LEXIS 132621 (D. Mass. Dec. 15, 2010)

Favors: Employee

Law: Massachusetts

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.

Citadel's Appeal Proves Unsuccessful In Extending Non-Compete Period (Citadel Investment Group v. Teza Technologies)

As I wrote last year, the dispute between Citadel Investment Group and a cadre of ex-employees in its high-frequency trading unit provided one of the year's most high-profile and interesting non-compete disputes.

Though Citadel has a strong case factually, the scope of the remedy it sought presented it with more challenging issues of law. Specifically, Citadel argued at a preliminary injunction hearing for equitable extension of the defendants' non-compete period for the length of time correspondent to their respective breach. The trial court did enforce the non-compete, but because so much time had passed after the wrongful competition started, Citadel did not gain much in the way of a remedy. In fact, Citadel elected a nine-month non-compete, and ended up with about 1 month in the way of an injunction.

The appellate court ruled that the trial court properly refused to extend the non-compete period. As with other cases in Illinois that have addressed this issue, the key to obtaining and equitable tolling remedy is the presence of a clear contractual provision allowing for extension of the non-compete period. The court did not hold that implied equitable tolling could never be ordered, but it declined to elaborate on when this might be available.

Because the preliminary injunction expired in November, the court did not address the merits of the defendants' cross-appeal.

--

Court: Appellate Court of Illinois, First District
Opinion Date: 2/24/10
Cite: Citadel Investment Group, LLC v. Teza Technologies, LLC, 924 N.E.2d 95 (Ill. App. Ct. 1st Dist. 2010)
Favors: Employee
Law: Illinois

Mintel Case Addresses Breadth of Non-Compete, Equitable Extension Remedy (Mintel Int'l v. Neergheen)

The litigation saga involving Mintel International and Meesham Neergheen has finally concluded. The case reads as a primer for modern-day unfair competition litigation and in the process of demonstrating how difficult it can be to obtain meaningful recovery under both the Trade Secrets Act and the Computer Fraud and Abuse Act, the judgment entered by Judge Dow highlighted a couple of important issues under non-compete law.

First, the issue of reasonableness. By now, most people are aware that non-competes are judged under an overarching rule of reason. Geography is less important now than it used to be, particularly for services businesses like Mintel. But the type of activity that is off-limits under a contract generally yields some interesting rulings.

In Neergheen, the court refused to prohibit the defendant from working for a competitor during the non-compete period and instead limited his activities more narrowly to what Neergheen and his new employer agreed upon when he was hired: he was barred from working with customers he formerly had contact with at Mintel and could not work in the consumer product goods or retail sectors at his new company. Mintel had the rather obvious problem to overcome that it could not prove it lost clients as a result of Neergheen's post-employment activity.

The court also extended the non-compete obligation under the equitable tolling (or equitable extension) doctrine. This issue has not been developed particularly well by Illinois courts, though a 2007 decision from the Second Appellate District would seem to suggest that the remedy is only available if provided for by contract. Judge Dow did not cite this case in approving an extender remedy for Mintel.

--

Court: United States District Court for the Northern District of Illinois
Opinion Date: 1/12/10
Cite: Mintel Int'l Group, Ltd. v. Neergheen, 2010 U.S. Dist. LEXIS 2323 (N.D. Ill. Jan. 12, 2010)
Favors: Employer
Law: Illinois

Equitable Extension Remedy Approved Under Maryland Law (TEKsystems, Inc v. Bolton)

The equitable extension remedy is a device that allows a court to give an employer the full benefit of the bargain if an employee is found to violate a valid restrictive covenant. In many non-compete cases, particularly those where no immediate restraining order is sought, an employee may continue to violate the non-compete covenant while the litigation is pending.

Employers seeking to enforce the agreement therefore will usually have to live with some actual competition until a court orders the employee not to work in a certain capacity or not to cultivate certain accounts. The extension remedy is a means to correct the period of time during which an employee is in actual breach.

In many states, like Illinois, the extension remedy must appear in the contract. From the employer's perspective, it is far more preferable to have a bargained-for remedy that gives it the ability to extend the non-compete for any period of time in which the employee is in breach. However, in the absence of a contractual clause specifically empowering the courts to extend the non-compete term, employers often argue for such an extension under the courts' inherent power to achieve equity.

In TEKsystems v. Bolton, a federal district court determined that Maryland law allowed for such an equitable extension, even in the absence of a contract provision granting the employer this remedy. That case, which involved the technology staffing industry, held that an 18-month, 50-mile industry non-compete covenant was valid and enforceable against a Jonathan Bolton, a Director of Strategic Accounts who developed a strong reputation and successful track record with financial services firms in New York.

The court therefore imposed an 18-month injunction against him following entry of summary judgment.

--

Court: United States District Court for the District of Maryland
Opinion Date: 2/4/10
Cite: TEKsystems, Inc. v. Bolton, 2010 U.S. Dist. LEXIS 9651 (D. Md. Feb. 4, 2010)
Favors: Employer
Law: Maryland

Utah Refuses to Imply Equitable Tolling Remedy (Systemic Formulas v. Kim)

A federal district court in Utah has denied an employer's request to extend the time of a non-compete agreement past its expiration date based on the theory of equitable tolling. That remedy provides that a post-employment covenant can be extended past its stated term for a period of time in which an employee actually was in breach. So, for instance, if an employee violated a covenant for six months and was subsequently enjoined prior to trial, a term of six months could be added on to the covenant to give the employer the benefit of its bargain.

However, the remedy is not automatic. Courts largely do not have a problem with the remedy in concept but consider it a drafting issue. Illinois is one such jurisdiction; unless the contract confers on the employer the right to extend the non-compete for a period of breach, a court will not imply the remedy. This is not much of a surprise, since it amounts to a rewrite of a contract that already is supposed to be strictly construed against an employer. This was the essence of the Utah court's holding. Drafting an equitable tolling clause is simple and should be part of a corporate counsel's form document.

--

Court: United States District Court for the District of Utah
Opinion Date: 12/14/09
Cite: Systemic Formulas, Inc. v. Kim, 2009 U.S. Dist. LEXIS 116038 (D. Utah Dec. 14, 2009)
Favors: Employee
Law: Utah

Defection At Citadel's High-Frequency Trading Unit Warrants Injunction - To A Degree (Citadel Investment Group v. Teza Tech.)

One of the most high-profile non-compete disputes in the Chicago area has resulted in a victory for Citadel Investment Group and a set-back for two executives who defected to start their own high-frequency trading firm.

In a 36-page memorandum opinion and order Judge Mary K. Rochford enjoined Mikhail Malyshev and Jace Kohlmeier from violating non-compete restrictions contained in their Citadel employment agreements for the balance of the nine-month term. Effectively, this means that both Malyshev and Kohlmeier may be free to compete as soon as February of 2010, since the court refused to extend the non-compete term on an equitable basis for the period in which the defendants were in breach.

The case involves a shadowy, but highly profitable business known as high-frequency trading (HFT). In essence, HFT relies on powerful computers to enter trade orders (often without human intervention), with algorithms deciding on specific aspects of the trade such as how much to buy, when, and at what price. HFT is a relatively new phenomenon, but it yields enormous profits. A disproportionate amount of equity trading volume is conducted by HFT firms.

Citadel itself invested heavily in HFT. It paid off - Citadel's HFT unit reaped earnings of $1.15 billion in 2008. Malyshev and Kohlmeier were instrumental, key employees for Citadel's HFT group. Neither had HFT experience prior to joining Citadel. For quite some time, each considered leaving to start his own proprietary trading firm. And each had a non-compete agreement, barring employment with a "Competitive Enterprise" for a period to be selected by Citadel upon departure, ranging from 0 to 9 months.

Upon their departure, Citadel elected the maximum 9-month period and paid Malyshev and Kohlmeier to sit on the sidelines. No surprise, there, given their access to proprietary information and involvement in recruiting R&D talent to Citadel. However, both ex-employees formed Teza Technologies and hired 15 employees, essentially daring Citadel to file suit.

It did.

Citadel pursued each aggressively and sought preliminary injunctive relief. The court dispatched with a number of the arguments raised by the defense. Given that one of the defendants deleted a fair amount of Citadel information (despite a court order not to do so), the court really did not have to address whether a legitimate business interest supported the non-compete. The adverse inference it could draw about the document deletion was more than enough to demonstrate the defendants had access to and attempted to use Citadel's confidential information.

The defendants also seemed to challenge the non-compete due to the fact that they really weren't actively trading, but merely preparing the firm's trading infrastructure to compete eventually. However, nothing in the non-compete allowed the defendants to wash their hands of liability based on this "preparing to compete" theory, and the theory itself ignored the fact that HFT firms depend heavily on building infrastructure. By getting a headstart in developing a trading platform, the defendants were essentially entering the market much faster than they agreed to under their employment contracts.

The most important feature of the decision, though, concerned the length of the injunction. And it is here where the defendants probably were able to take some solace in defeat. The court refused to extend, or equitably toll, the non-compete period for the time in which the defendants were in breach. The court looked at the Second District Appellate Court's decision from two years ago to hold that, under Illinois law, a contract must specifically provide for an equitable tolling, or extension, remedy. Otherwise, the court will not imply the term under the contract.

This, of course, does nothing to mitigate the defendants' damages during the non-compete period. But it does serve as a cautionary tale for counsel in drafting non-compete clauses. Unless an equitable tolling remedy is clearly contained in the contract, the court will not agree to extend it even if the defendants were in breach leading up to the injunction order.

UPDATE X1: Both parties have filed a notice of appeal with the Circuit Court.

--

Court: Circuit Court of Cook County, Chancery Division
Opinion Date: 10/16/09
Cite: Citadel Investment Group, LLC v. Teza Technologies, LLC, 09 CH 22478 (Cook Cty. 2009)
Favors: Employer
Law: Illinois

North Carolina Court Upholds Equitable Tolling Provision (Philips Electronics v. Hope)

The concept of equitable tolling is simple: for any period of time in which an employee is found to be in violation of his non-compete agreement, that is added on to the length of the restriction. In other words, an employee cannot run out the clock during litigation and escape an order of injunctive relief. Tolling provisions, though, are rarely the subject of judicial interpretation. In most states, they appear to be valid. Often times, courts just simply default to the language of the contract.

The recent case of Philips Electronics v. Hope addressed a contractual tolling provision and held that it extended the non-compete period for 11 months. The case involved a dispute in the MP3 accessory equipment business between Philips and its former Vice-President of Sales, Jason Hope. Hope was employed by Digital Lifestyle Outfitters, prior to the time it was acquired by Philips. During the course of Hope's employment with DLO, he executed a letter agreement guaranteeing him $180,000 in exchange for a non-compete covenant. The restriction applied during his employment term with DLO and for 2 years thereafter.

Not long after that, Philips purchased all of the stock of DLO and accepted Hope's resignation as Vice-President of Sales in May of 2007. He remained on the DLO payroll, but as an at-will employee. The court found that the two-year non-compete term began to run as of the date of his May 2007 resignation from DLO, which was compelled by the terms of the business sale, and not the time he resigned as an at-will DLO employee some 18 months later. The impact of this finding potentially eliminated Philips' ability to obtain an injunction.

The court, however, found that Hope was in violation of the non-compete agreement from April 2008 (before his second resignation) through May 2009 when Hope voluntarily ceased competitive activity. During this time (and while still employed by DLO), Hope appropriated a company business plan for competitive purposes, met with potential investors to start up a competing firm, and prepared a power-point presentation using market data that DLO regarded as confidential. Following his resignation, Hope began working with Riot Outfitters in violation of his non-compete and developed relationships with some of DLO's top accounts, ones he himself was responsible for managing while at DLO.

The court interpreted Hope's non-compete agreement and specifically the tolling provision to extend the term an additional 11 months. The tolling provision stated that "the periods of protection...shall not be reduced by any period of time during which [Hope is] not in compliance therewith." The court found this language, awkward though it may be, was enough to extend the term of the non-compete by the amount of time it found Hope to be in violation of his covenant.

--

Court: United States District Court for the Middle District of North Carolina
Opinion Date: 6/30/09
Cite: Philips Electronics North America Corp. v. Hope, 631 F. Supp. 2d 705 (M.D.N.C. 2009)
Favors: Employer
Law: North Carolina