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.

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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.

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

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

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

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

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

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

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

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

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

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

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

Application of Non-Compete in Term Agreement Often a Matter of Contract Interpretation (St. Johns Investment v. Albaneze)

Term contracts (that is, those for a set period of time) containing non-compete claues often present interpretation questions vastly different than agreements for at-will employees. The problem, one which often leads to litigation, generally concerns when a non-compete expires.

A recent Florida appellate case dealt with a very common situation involving a non-compete in a term contract. In St Johns Investment Management v. Albaneze, an investment advisor entered into a four year employment agreement with a firm to which he sold his prior competing company. He had a two-year client non-solicitation covenant that provided: "in the event Employee is employed by Employer throughout the term, [the period shall be] twenty-four months following the date Employee resigns...or is terminated by Employer." The same clause provided the industry non-compete expired after the four-year term ended.

Albaneze, the business seller turned employee, continued as an at-will employee after his term contract ended in 2006. More than two years later, Albaneze quit and went to work for a competitor. He admitted to soliciting clients, which would have violated the client non-solicitation restriction. Albaneze claimed, however, that the term on his non-solicit expired in 2006 when the term contract ended.

The trial court agreed with him, but the appellate court reversed and entered a mandate for an injunction to issue. The court's rationale was that as a matter of contract interpretation, the non-solicitation covenant could be triggered even after the four-year term ended. In particular, the court seized upon the contract language which stated that the two-year term applied in the event Albaneze was employed throughout the Term. To do so, he had to be employed past the end of the term contract. Accordingly, the non-solicit could be, and was, triggered by a resignation after the contract expired.

This is curious contract language for St. Johns to choose, for it could be argued that had Albaneze quit during the four-year term, the non-solicitation period would not apply at all. That seems counterintuitive, but maybe his contract contained another provision dealing with this hypothetical. Based on what the parties' contract actually said, the court probably reached the correct result.

In any case involving a term contract, attorneys must be very careful to word the non-compete carefully. Illinois, unlike Florida, will strictly construe employment agreements against the employer, so that any ambiguity will be resolved in favor of the employee.

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Court: Court of Appeal of Florida, First District
Opinion Date: 11/13/09
Cite: St. Johns Investment Mgmt. Co. v. Albaneze, 2009 Fla. App. LEXIS 16873 (Fla. Ct. App. Nov. 13, 2009)
Favors: Employer
Law: Florida

Florida Court Holds Non-Compete Clause Cannot Survive Expired Employment Agreement (Zupnik v. All Florida Paper)

The second case of the year is just like the first, although this non-compete dispute concerned an employment agreement, rather than a sale-of-business transaction.

In Zupnik v. All Florida Paper, the defendant employee signed a two-year employment agreement to work as a sales representative for a janitorial products company. His non-competition clause provided he would not compete against All Florida "during the Employment Term and within twelve (12) months from the termination of said term...." At the end of the two-year term, Zupnik retained an option to remain at All Florida as an at-will employee, which he exercised properly. However, he signed no new non-compete agreement once he became an at-will employee.

More than two years later, Zupnik quit and formed his own paper products distribution company. All Florida sued on the non-compete and prevailed in the trial court. The Court of Appeal of Florida, however, reversed and held that the non-competition covenant lapsed once the two-year employment agreement ended.

All Florida easily could have avoided this problem with a properly drafted contract. Since it was well-aware Zupnik controlled his ability to remain an at-will employee, the non-compete agreement would have remained in effect indefinitely had the operative triggering language been expanded to include termination of his employment either at the end of his two-year term agreement or as an at-will employee.

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Court: Court of Appeal of Florida, Third District
Opinion Date: 12/31/08
Cite: Zupnik v. All Florida Paper, Inc., 997 So. 2d (Fla. Ct. App. 2008)
Favors: Employee
Law: Florida

Fifth Circuit Interprets Meaning of "Termination" In Non-Compete Dispute (Specialty Rental Tools & Supply v. Shoemaker)

The new year starts with a rare, published federal appellate court decision interpreting a non-compete agreement. This decision, rendered two weeks ago, comes from the State of Mississippi, and it opines on a fairly significant issue of contract interpretation.

The case of Specialty Rental Tools & Supply v. Shoemaker arose out of a sale of business transaction, and it concerned a rather common problem of separate non-compete clauses in the business purchase agreement and a corresponding employment agreement executed at the closing. As is common in many such transactions, the selling party - here, William Shoemaker - went to work for the buyer pursuant to a long-term employment agreement.

The Purchase Agreement contained a non-compete clause barring Shoemaker from working for a competitive business within two years from the date of the closing, or two years from the date his employment with SRT was "terminated", whichever was later. His employment agreement was for a five-year term and contained no non-compete clause. Shoemaker did, however, sign a third document at closing - a Non-Competition Agreement. However, that agreement purported to expire two years after closing.

Exactly five years after closing, SRT gave Shoemaker notice that it was not renewing his employment agreement. The notice delivered to him expressly stated that Shoemaker was not being "terminated." Within days, Shoemaker began working for a direct competitor, and SRT filed suit.

At the trial court level, Shoemaker prevailed on summary judgment, and the Fifth Circuit had no trouble affirming the decision. The court first dispensed with the Non-Competition Agreement, noting that it expired by its own terms - in March of 2004 - and was not tied to Shoemaker's employment. The Purchase Agreement's non-compete clause, therefore, was the only contract potentially applicable.

The key question became whether Shoemaker was "terminated." It was clear he served his entire five-year employment term with SRT, and SRT even admitted his contract expired. He was not terminated with cause, or without cause. Does expiration equal termination? Illinois appellate courts have addressed this issue twice, both times holding it does not. In this case, the Fifth Circuit agreed.

The court noted that the interplay of the closing documents showed the parties clearly did not intend for expiration to equal termination. Termination required an affirmative act to end Shoemaker's employment, not the mere lapse of his five-year contract. The court concluded by noting that SRT's notice of non-renewal was significant with respect to how the parties intended the word "terminate" to apply.

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Court: United States Court of Appeals for the Fifth Circuit
Opinion Date: 12/17/08
Cite: Specialty Rental Tools & Supply v. Shoemaker, 553 F.3d 415 (5th Cir. 2008)
Favors: Employee
Law: Mississippi