The Reading List (2017, No. 28): Non-Compete Legislation Proposed in New Jersey and More Non-Compete Nonsense in Florida

Non-Compete and Trade Secrets News for the week ended November 24, 2017

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New Jersey Proposes Non-Compete Reform

New Jersey historically has been a strong non-compete enforcement state. In his terrific article Fifty Ways to Leave Your Employer: Relative Enforcement of Covenants Not to Compete, Trends, and Implications for Employee Mobility Policy, Norm Bishara concluded that New Jersey was the 7th strongest enforcement state.

As Russell Beck breaks down, though, pending legislation would alter New Jersey's place in the overall non-compete landscape. Russell runs through the particular changes that Senate Bill 3518 would make, comparing it to the annual non-compete debate in Massachusetts. I encourage you to jump to Russell's site and review the proposed list of changes.

Florida Court of Appeal Invalidates Non-Compete Injunction

Speaking of pro-enforcement states, Florida sits firmly atop the rankings. But employees are not without hope.

Last week, the Florida Second District court of Appeal in Salazar v. Hometeam Pest Defense, Inc., No. 2D16-4123 invalidated a non-compete injunction imposed on a "pest control technician." The employee's agreement prohibited him from engaging in "pest control, exterminating, fumigating, or termite control business" in five Florida counties after his termination. Salazar, it turns out, was fired. An apparently responsible, enterprising adult, he formed his own business after being tossed out of a job.

His employer sued and obtained an injunction in Florida state court. But the Court of Appeal vacated that injunction because the order failed to comply with clear procedural requirements for awarding this type of relief. It contained no findings at all. Whatever occurred in the trial court appears to be totally inexcusable. Leave aside the merits of this. If you represent an employer and seek injunctive relief, you must understand what the injunction order needs to say. I have had cases similar to Salazar. And it is shocking that this continues to occur.

On remand, I'd be interested to see how Hometeam Pest Defense articulates its legitimate business interest in preventing Salazar from working in his industry. The source of a potential client list for those in need of home pest control seems rather obvious...

You can link to the Salazar opinion by clicking here.

Confidentiality Agreements

Every day, we're witness to the unmasking of sexual harassment and misconduct charges leveled at media figures, politicians, and industry leaders. And the sad reality is that many claims are settled on the condition that the victim is muzzled by a confidentiality clause.

Elizabeth Tippett writes in the San Francisco Chronicle about the two principal uses of confidentiality agreements: ones signed at the start of employment and those signed as part of a settlement. And she rightfully questions how non-disclosure agreements (or NDAs) should not muzzle victims of abuse. I suspect we've reached the tipping point where these NDAs may face legislative scrutiny, at least when they relate to a public figure or use of public funds.

That subject matter is outside the scope of my expertise, but it's certainly an interesting and important one to follow as events unfold in near real time. I do think, however, there may be a spillover effect on the less newsworthy type of confidentiality agreement, the kind I tend to write about.

I have been writing for years that employment-based NDAs can operate like stealth non-competes. The general problem is three-fold:

1. The clauses contain open-ended, malleable terms that do less to define "Confidential Information" and more to reserve discretion for the company to label something confidential without repercussion.
2. Employees may have no way to monitor what information remains confidential and potentially protected once they are gone from a business.
3. The breadth of these clauses (including the lack of a durational limit) may enable an employer to state a colorable claim when competition arises and may open the door to expensive discovery.

Let me be clear: I am not subverting the current debate on sexual harassment-related NDAs in favor of this one. Both are important, but the use of NDAs in settlement agreements is far more troubling and deserves far more scrutiny. All I am saying is that practitioners should not just assume blindly that employment-based NDAs are perfectly legit. In many cases, they serve just as punitive of a restraint on fair competition as more overtly stated non-competes.

The Reading List (2017, No. 12): One Reason Florida Is So Non-Compete Friendly

Non-Compete and Trade Secrets News for the week ended March 24, 2017

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Florida Non-Competes and Evidentiary Presumptions

The Florida District Court of Appeal's decision last week in Allied Universal Corp. v. Given illustrates why Florida is the safest haven for non-compete enforcement. It further shows how employers have benefited from a statutory directive that entitles them to a presumption of irreparable injury upon the showing of a legitimate business interest. That irreparable-injury showing is an indispensable component of injunctive relief. The case also shows the uphill burden an employee faces in trying to rebut evidence of a legitimate business interest, here the relationships that enable a salesperson to generate business. Employees who do so face a high discovery burden in amassing that type of evidence. Typically, they'll need something like high turnover or customer attrition or a narrative that shows how the new company provides a different customer value-proposition than the old one. A link to the Allied Universal case is available here.

(Eric Ostroff also discusses this decision in a blog post.)

The "Cloud" as a "Protected Computer" under the CFAA

The employment-related claims that a company may have under the Computer Fraud and Abuse Act all have a common requirement, which often is just assumed to exist in litigation: the access of a "protected computer." The way the CFAA is worded, any computer connected to the internet falls within the definition.

A fair number of cases now do not deal with claims where sensitive information was removed from a workplace computer. Instead, they concern disputes over information stored on a cloud-based platform that employees from computers access. So what happens when an employee continues to access this same platform, wrongfully, following termination of employment? Is this access of a cloud-based device equivalent to a "protected computer"? In Estes Forwarding Worldwide, LLC v. Cuellar, a federal judge in the Eastern District of Virginia said yes. But the analysis was very thin and not particularly persuasive.

Prior decisions, such as the Hawaii case of Property Rights Law Group v. Lynch, suffer the same flaw: no real attempt to reconcile a cloud-based service with the definition of a "protected computer." They seem to pivot to the fact that the computer was connected to the internet and end it right there. To the extent this issue becomes a genuine dispute among district courts, it seems Congress could head off the problem by extending the jurisdictional hook to accessing information stored on a cloud-based platform. After all, what's one more amendment to the CFAA?

The Estes Forwarding decision is available here.

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.

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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.

The Reading List (2017, No. 4): Sergey Aleynikov is Back in the News

Non-Compete and Trade Secrets News for the week ended January 27, 2017

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Illinois Restrictive Covenants

Judge Amy St. Eve is among the very best of the judges on the Northern District of Illinois. In The Carlson Group, Inc. v. Davenport, she denied a preliminary injunction motion brought against former key employees on the basis that they violated non-disclosure and non-solicitation covenants. The opinion is notable for its discussion of a temporally unlimited confidentiality clause with a very broad definition of "confidential information." Since the non-solicitation covenant was tied to customers about which the employees had "confidential information," the overbreadth concerns spilled over onto that covenant as well. As usual, her opinions are very clear and informative. A copy of the injunction ruling is available here.

Aleynikov Conviction Reinstated

Sergey Aleynikov, the ex-Goldman Sachs coder who inspired Michael Lewis' Flash Boys, has had his New York state-law conviction for theft of "secret scientific material" reinstated by the Appellate Division. Aleynikov's legal troubles have been chronicled at length here and elsewhere, but this is the latest sobering chapter in multi-pronged journey through the civil and criminal justice system. After a jury convicted Aleynikov in 2015 on state-law theft charges, a State Supreme Court Justice (in New York, that means a trial court judge) threw out the conviction for failure to prove the material elements of the crime. The details of the appellate court's reasoning are somewhat murky and technical - not at all interesting like the actual back-story of this litigation.

The reinstatement means Aleynikov goes back for sentencing. However, since he already has served one year on a federal charge, which later was overturned by the Second Circuit Court of Appeals, he'll get credit for one year of time served. The state-law theft conviction is a Class E felony, with a sentencing range of 1 to 4 years. This means Aleynikov may not face additional jail time. He shouldn't. No one - no matter what they say - even understands what he took. Aleynikov's counsel, Kevin Marino, vows an appeal.

On a related matter, Goldman and Aleynikov are fighting over whether he is entitled to indemnification for defense-related fees from the invalid federal criminal conviction. The Bloomberg story concerning that separate fight is chronicled here.

Customer Lists as Trade Secrets

A very commonly alleged trade secret, particularly in the employment context, is the customer list. However, customer lists come in many different shapes and sizes so it's hard to make blanket statements about what is and isn't legally protected. A federal district court in Texas addresses this question under Ohio's trade-secret statute. The decision is illustrative in showing what level of detail may be required to vest a customer list with trade-secret status. The customer list in KeyCorp v. Holland contained only names and contact information, and the court held that wasn't enough.

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The Fairfield County Business Journal reports on a new non-compete suit brought by Sun Products and Henkel against a former Chief Technology Officer/Senior Vice-President for Research and Development, Carlos Linares. Judge Eginton signed a temporary restraining order that bars Linares from starting his new position at Church & Dwight. It appears that the parties are set to proceed to a preliminary injunction hearing on February 9. Of interest, one of the claims is brought under the Defend Trade Secrets Act and the Connecticut Uniform Trade Secrets Act. Connecticut courts have expressed a willingness to apply the "inevitable disclosure" doctrine, which is largely disfavored under the DTSA. Given that Linares appears to have a non-compete agreement, the potential divergence of the state and federal trade secrets act might not be a central point of contention in the case. But we shall see. A copy of the Amended Complaint is available here.

In a blog post by Tarter Krinksy & Drogin, the authors note that a New York appeals court decided a "Game-Changer on Enforcement of New York Non-Compete Agreements." The post discusses Buchanan Capital Markets, LLC v. DeLucca, 144 A.D.3d 508 (1st Dep't. 2016), and remarks on the case's comment that non-competes in New York are not enforceable unless the employer demonstrates a "continued willingness to employ the party covenanting not to compete." In reality, this case isn't much of a game-changer given the limited appellate analysis. It does remind us, however, that New York courts have issued many decisions that seem to create a per se rule against enforcement in a termination-without-cause scenario. Why a company would want to enforce in that circumstance, by the way, is beyond me.

South Florida's Daily Business Review reports on a case working its way through the Florida Court of Appeals, which concerns State Farm's efforts to protect as a trade secret certain information about where it's selling homeowners' policies. Insurers like State Farm often need to provide data about underwriting activities to state regulators. Depending on the state insurance codes' exemptions, such public disclosure of company-wide data can materially impact trade-secret claims. Insurers' obligations to disclose are similar to what we're starting to see in the fracking industry, which requires similar public disclosure of information but which also allows for certain narrow trade-secret exemptions. This will be an interesting case to watch when the Court of Appeals rules. The case is Office of Insurance Regulation v. State Farm Florida, No. 1D16-2301.

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:

1. The employee largely bears the burden of proof to show that enforcement is not necessary to protect an asserted business interest.
2. Courts many not consider hardship to the employee from the covenant's enforcement.
3. 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:

1. The legislature has spoken on the issue and declared the state's public policy, much like California has done.
2. 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.
3. 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.

New Ruling on Computer Fraud and Abuse Act Illustrates Division in Eleventh Circuit

The reach of the federal Computer Fraud and Abuse Act continues to divide courts and commentators. The friction spills over into statutory language that seemingly is pretty clear: one cannot access a protected computer to obtain information in a manner that exceeds the user's authorized access.

The phrase "exceeds authorized access" has yielded a split among many federal courts. On one side sits the pro-employer theory: that an employee cannot access information for reasons inconsistent with the employer's interest. On the other side, employees argue that the CFAA's definition does not turn on subjective intent as to use and that the statute only bars the accessing of information that the employer did not allow.

The Fifth and Seventh Circuits have pretty well-established rules that fall on the pro-employer side, though the rationales are not identical. The Fourth and Ninth are decidedly pro-employee and construe the CFAA much more narrowly.

The Eleventh Circuit's history on this is not straightforward.

Courts within the Eleventh Circuit (that is, district courts in Florida, Georgia, and Alabama) are divided on how to interpret and apply the CFAA. Some follow the pro-employee construction. Others disagree and side with the Fourth and Ninth Circuit line of authority. The problem seems to be a criminal case from the Eleventh Circuit itself, United States v. Rodriguez, which arguably requires a pro-employer construction of the CFAA.

Illustrating this divide is Enhanced Recovery Co., LLC v. Frady (opinion embedded below), which canvasses the law and decides not to follow Rodriguez - arguably binding precedent in the Eleventh Circuit. Frady involves perhaps the most common, ubiquitous CFAA fact pattern in employee mobility cases. The allegations hinged on an employee's act in preparing to compete by sending corporate documents from a company e-mail account to a personal web-based e-mail. Under the employer's theory, this transmission of e-mails is antagonistic to its business interests and constitutes the use of company information in an unauthorized manner.

As with many close CFAA cases, the fact pattern in Frady adds a twist because the employer had fairly clear policies against non-disclosure of information and a requirement to return company materials at the termination of employment. One reasonably could make the argument that these policies at least put the employee on notice that accessing corporate information for a prohibited use exceeded any authorization to use that information.

The district court in Frady was not persuaded and held this wasn't enough. In doing so, it seemed to tread a very narrow path through the Rodriguez case, which seems on first read to warrant a broader application of the CFAA.

My personal opinion is that something else must be going on here. I have seen judges walk this tightrope before, and I believe that regardless of any formal legal analysis, many remain troubled by the extension of the CFAA well beyond its intended purpose to punish hackers criminally. Courts, of course, acknowledge this but judges must default back to the statutory text to see whether conduct falls within the statutory proscription. And they are certainly bound by circuit law. In the CFAA arena, the distinctions that judges are drawing appear to be so fine and nuanced as to be meaningless.

This is not to say that the court in Frady got the result wrong as a normative matter, because the CFAA is overused. It is, to be sure, not a trade secrets law substitute - though many attorneys perceive that it is. And if the Obama Administration has its way, this divide over the meaning of authorized access will get cleaned up in a way that (surprisingly) favors the employer. Ultimately, I think this too is wrong. The existing legal framework under state law works just fine, and a federal trade secrets act may be okay too (though I am more lukewarm on that than others in my profession).

However, extending the CFAA and criminalizing conduct that doesn't even violate state trade secret law is not the right way to go about protecting intellectual property. In the employment realm, it remains a terrible fit. How judges get there is concerning, but if they agree, then I'm okay with a formal legal analysis that leaves me scratching my head.

Enhanced Recovery v. Frady (CFAA - Florida)

Georgia Case Demonstrates Importance of Addressing Choice of Venue and Law Clauses

Readers know from prior posts that Georgia is one of the "red-flag" states when it comes to non-compete disputes.

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.

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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

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."

Case Update...The Trade Secrets Edition

I've come up with a better way to differentiate between trade secrets (protected nearly everywhere by statute) and confidential information (somewhere protected by the common law; more often, by contract). I may be totally off-base on this, but here goes.

A trade secret is a form of intellectual property whose value can be monetized like a patent or trademark. Confidential information is information that generally is not available to outsiders but which lacks independent value as a firm asset.

(I actually thought of this yesterday while changing a diaper.)

We're in the dead of summer, but the law continues to churn out interesting cases for us nerds to ruminate over.

Inevitable Disclosure in Massachusetts

A preliminary injunction ruling out of the District of Massachusetts rejected a rather expansive view of the inevitable disclosure doctrine. U.S. Elec. Svcs., Inc. v. Schmidt, 2012 U.S. Dist. LEXIS 84272 (D. Mass. June 19, 2012), involved the departure of a national accounts manager who did not have a non-compete agreement with the plaintiff (he actually left to work for a subsidiary two years prior). When a project coordinator followed the manager to a competing electrical distributor, the distributor sued under a variety of theories. Surveying Massachusetts' interpretation of the inevitable disclosure rule, the district court held that the rule is best applied to establish irreparable injury - basically, a protectable interest - supporting a non-competition agreement. It did not approve of using the theory as the foundation for a trade secrets claim. Factually, the claim appeared to be a stretch since the manager had not dealt with the key customer at issue - Dollar Tree Stores - for over two years.

Royalty Damages for Misappropriation

Royalty damages are the back-up plan for victims of trade secrets theft who can't prove lost profits or gains the misappropriator realized. This is a derivative of patent law, and it seeks to figure out a hypothetical licensing price that the misappropriator would pay for the privilege of using the information taken from the owner.

An Arizona court has held that a trade secret owners license fees for other patents and investment costs in developing the trade secret can provide a basis for a royalty award. It also rejected the argument that because a product may never be brought to market - the product involved an intestinal sleeve to treat morbid obesity - damages were inherently speculative. Using corporate finance theory, the court stated that a risky future cash flow is simply discounted with a risk-adjusted rate. The case is W.L. Gore & Assocs., Inc. v. GI Dynamics, Inc., 2012 U.S. Dist. LEXIS 75055 (D. Ariz. May 30, 2012).

Attorneys' Fees In Non-Compete Agreements

What happens when an employee wins a non-compete case and tries to recover attorneys' fees he never was obligated to pay? In my experience, new employers pay the freight on non-compete suits about 1/4 of the time, depending on the employee's value and position within the company. (An executive, for instance, likely will be able to negotiate this as part of his employment agreement.)

In Rogers v. Vulcan Mfg. Co., 2012 Fla. App. LEXIS 8793 (Fla. Ct. App. June 1, 2012), the Court of Appeal of Florida reversed a $0 attorneys' fee award to the employee after he prevailed on the employer's non-compete claim. The fee-shifting clause provided the employee could recover fees "incurred to enforce any term, condition, or provision" of the contract. The court found the clear intent of the clause was that "the loser pays, and the winner does not." It did not matter who the source of the funds was, because the language in the fee provision was passive.

And who said never to use the passive voice??

Recent Decisions of Interest (No. 9): Bad Drafting Can Be Really Bad (And Avoidable, Too)

Poor contract drafting is the number one symptom of non-compete cases gone bad.

(Number two is poor decisionmaking made in the quick vacuum of a perceived threat to a business' competitive position.)

So my recent trial featured an example of a contract which was terribly drafted. How do you justify a nationwide restriction against an employee who worked solely in one county? An employer is begging for an adverse judgment by pursuing such a case with obvious flaws.

Another example can be found in the interesting Florida appellate decision of Heiderich v. Florida Equine Veterinary Svcs., Inc. In that case, a veterinarian had a non-compete (very common in the industry, by the way) which provided that she could not, upon termination, engage in a "veterinary practice within a thirty mile radius" of her former employer.

Heiderich opened her practice outside the 30-mile radius, but provided services (house calls) to clients within the restricted territory. Problem for the ex-vet? Nope.

The Court of Appeal, over a mild dissent, held that Heiderich's work providing services within the 30-mile territory was not a breach of contract because her office location was outside the radius. Florida has a statute which even goes against the common law in terms of contract construction, such that the court did not have to construe any ambiguities against the drafting party.

This was a case which easily could have been avoided with some actual thought to the drafting process. The employer should have known that this was a potential (glaring) loophole. To avoid the problem it created for itself, the employer could have drafted the non-compete to prohibit the veterinarian from "providing veterinary services within a thirty mile radius" of the ex-employer. How hard is that?

One of the challenges facing attorneys (your author included) is the client perception that we print off contracts. That is a flat-out abdication of our professional duty. True, drafting contracts costs money. For an extra few hours, a client can ensure it's done correctly. My guess is Florida Equine spent ten times more in legal fees at trial and on appeal trying to justify a bad contract than it would have simply to make sure it got a proper agreement in place at the start.

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Court: Court of Appeal of Florida, Fifth District
Opinion Date: 3/30/12
Cite: Heiderich v. Florida Equine Veterinary Svcs., Inc., 2012 Fla. App. LEXIS 4998 (Fla. Ct. App. Mar. 30, 2012)
Favors: Employee
Law: Florida

Recent Decisions of Interest (No. 1)

My regular Thursday column will survey recent decisions across the United States which touch upon non-compete or trade secret issues. The four cases I chose this week touch on a wide variety of issues, including those relevant to the corporate counsel drafting non-compete clauses.

AMG Nat'l Trust Bank v. Ries, 2011 U.S. Dist. LEXIS 149130 (E.D. Pa. Dec. 29, 2011). The court, applying Colorado law, found that a liquidated damages provision in a two-year non-compete, which called for payment of ten times the annual gross fees for each wrongfully solicited client, was voidable as a matter of law. I drafted two liquidated damages clauses this week for clients, and my advice is always the same: be able to justify the methodology you select under oath. The more random and arbitrary a clause looks, the more likely a court simply will strike it.

ISCO Indus., LLLC v. Erdle, 2011 U.S. Dist. LEXIS 148907 (E.D.N.C. Dec. 28, 2011). A North Carolina court denied entry of a preliminary injunction motion against a sales employee in the piping distribution business. The employee's covenant was not narrowly tailored to restrict him from selling only products or services competitive with those offered by the ex-employer. This further illustrates why attorneys must be careful in considering the scope of the non-compete restriction. Using hypothetical scenarios during the drafting process can help identify problems of overbreadth.

WIT Walchi Innovation Techs., GmbH v. Westrick, 2012 U.S. Dist. LEXIS 1847 (S.D. Fla. Jan. 6, 2012). A court issued an ex parte temporary restraining order against an employee who allegedly stole a laptop containing proprietary source code and programming for a software product. The court issued a broad evidence preservation order and ordered immediate return of the stolen laptop computer. No commentary necessary here. Firsthand evidence of outright theft of property warrants mandatory injunctive relief, even on an ex parte basis.

Pellerin v. Honeywell Int'l Inc., 2012 U.S. Dist. LEXIS 3781 (S.D. Cal. Jan. 12, 2012). A district court in California sustained a defense objection to the retention of a trade secrets expert on the basis that the expert was a former employee of the defendant. Such objections, usually made under the terms of protective order, are common when the expert may have had prior access to an adversary's confidential information. It may be impossible in such circumstances for the expert to provide legitimate, untainted opinion testimony.

Flat-Fee Liquidated Damages Award Upheld in Staffing Dispute (ProTherapy Assocs. v. AFS of Bastian)

Staffing agreements almost always have some sort of non-compete or (more commonly) non-solicitation covenant. Courts recognize that without such protections staffing companies could become an involuntary employment agency for their clients.

In recognition of this, many agreements don't prohibit solicitation but rather tie a monetary price to it. These arrangements are called "liquidated damages" clauses, and they basically set a pre-determined formula for solicitation or hiring of an employee. Liquidated damages clauses can be enforceable, but several procedural requirements must be met. Most commonly, the damages must not be readily ascertainable at the time of contracting. Additionally, the formula or pre-determined sum must not be grossly disproportionate to damages that might be expected to result from a breach.

A recent dispute in the skilled nursing staffing industry upheld a clause that provided for $10,000 per wrongfully solicited or hired employee. The case followed a familiar storyline. The staffing company was terminated in favor of a replacement. The nursing homes used the replacement company to hire the workers the homes could not themselves hire without paying the liquidated damages.

The court found the $10,000 sum to be reasonable and enforceable. The plaintiff introduced evidence showing that the replacement cost of skilled nurses was relatively close to the $10,000 figure and that nurses frequently received signing bonuses of $10,000. Employers who choose to utilize liquidated damages clauses should be prepared to justify them with actual figures showing why the preset number was reasonable and proportionate to likely harm. The number need not be perfect, but also it can't just be random and certainly can't be punitive.

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Court: United States District Court for the Western District of Virginia
Opinion Date: 5/3/11
Cite: ProTherapy Associates, LLC v. AFS of Bastian, Inc., 2011 U.S. Dist. LEXIS 47161 (W.D. Va. May 3, 2011)
Favors: N/A
Law: Florida

Florida Case Demonstrates Limits of Legitimate Business Interest Test (Southern Wine v. Simpkins)

Florida is known as a highly pro-employer state, largely because of a comprehensive and detailed statute that makes enforcement of non-compete agreements by way of injunction substantially easier than in other jurisdictions.

Like most states, however, Florida's basic test for enforceability revolves around two basic concepts. First, the employer must present evidence of a legitimate business interest supporting the non-compete. Second, the restraint must be reasonably necessary to protect that interest.

Florida's statute contains a non-exhaustive list of potentially assertable business interests. The usual suspects, provision of confidential information and client relationships, are contained in that list. Another interest that many states recognize, specialized training, is also found within Florida's statute.

The case of Southern Wine and Spirits of America v. Simpkins discusses several of these interests in the context of a preliminary injunction hearing. In that case, Simpkins - a high level executive - resigned from Southern Wine and joined a direct competitor in the wholesale beverage distribution business.

Southern Wine's effort to enjoin Simpkins failed, in part due to the court's discussion of the types of interests Southern Wine was trying to protect through the restraint. The court found that Southern Wine was able to establish that Simpkins received confidential business information through his employment with Southern Wine - particularly information about strategy, marketing, and personnel. Importantly, the court found that the utility or usefulness of such information was likely to be stale in 2 to 6 months.

The court rejected Southern Wine's efforts to assert a protectable interest in its vendor relationships - an interest not mentioned in Florida's statute. As with all distributors, Southern Wine's business model depended on strong relationships both with customers (presumably retail outlets that sell alcoholic beverages) and vendors. The court refused to find that Southern Wine could demonstrate a legitimate business interest in its vendor relationships. Based on the case discussion, it does not appear that Simpkins either was instrumental in developing customer relationships or that Southern Wine believed his new employment posed such a threat.

Finally, the court dismissed Southern Wine's effort to show that Simpkins received specialized or extraordinary training as an employee. In Florida, this interest requires an employer to show that the training went "beyond what is usual, regular, common, or customary in the industry in which the employee is employed." Based on this test, it would seem an employer in Florida must present evidence not just of its own training but also what other firms in the industry offer to their employees. This likely would entail testimony from headhunters or expert witnesses, or perhaps other employees that have worked for several different companies.

As a result of the court's lengthy discussion over what Southern Wine was trying to protect, the court declined to issue a preliminary injunction in its favor. The court noted that the confidential information to which Simpkins had access likely was stale already since he had been absent from Southern Wine for over 6 months.

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Court: United States District Court for the Southern District of Florida

Opinion Date: 1/14/11

Cite: Southern Wine and Spirits of America, Inc. v. Simpkins, 2011 U.S. Dist. LEXIS 5762 (S.D. Fla. Jan. 14, 2011)

Favors: Employee

Law: Florida

Fee Petition in Restrictive Covenant Case Approaches $500,000 (Marlite, Inc. v. Eckenrod)

Any reasonable client wants to know how much a project is going to cost. Some projects are fairly discrete and easy to budget. A contract review, negotiating a new employment agreement are a few that come to mind.

Budgeting for litigation, however, is a herculean task. What may start out as a reasonable budget may bear no semblance to reality if an adversary takes an unexpected course during a case.

In the world of trade secrets and non-compete disputes, the cost of legal services often times far outweighs the potential value of the claim. A recent Florida case, which dealt with little more than a breach of a no-hire agreement and relatively uncomplicated trade secrets misappropriation claim following a sale of business, resulted in a fee petition of $448,860.55. The plaintiff's counsel charged 2,265 hours of time to the case - about the same number of total hours (not billable) that I worked in 2010.

So why do these types of competition cases seemingly generate such large fees? Here is a non-exhaustive list:

(1) Raw emotion: Competitive disputes often result from a bad divorce among employee and employer. A pure economic analysis of whether litigation makes financial sense generally is not as critical of a factor as in other cases.

(2) Speed: By definition, unfair competition cases have to move fast, particularly from the plaintiff's perspective. A preliminary injunction trial can effectively decide many issues in the case, which sometimes results in efficiency. Often times, however, it results in mutliple evidentiary hearings and several layers of fact discovery.

(3) E-Discovery: Electronic discovery and the exploding volume of information available to attorneys has made commercial litigation extraordinarily expensive, especially for individual defendants. Projects such as document and privilege review and metadata searches consume far more time than clients expect.

(4) Proof of Damages: Proving liability is not nearly as difficult in competition cases as establishing a legal basis for damages. Lost profits are especially hard to prove, particularly in cases of indirect competition. Even cases of trade secrets misappropriation are hard to quantify. Normally, expert witness testimony is required for complicated damages analysis, resulting in higher fees and discovery costs.

(5) Number of Witnesses: In competition cases, there seem to be a lot of knowledgeable witnesses. Think about co-workers, customers, vendors, the new employer. Numbers add up quickly, and interviewing or deposing those witnesses is very costly.

As a final note, the court examining the nearly $500,000 fee petition cut back the award by 67%, reasoning that the level of success achieved against the individual defendant was limited. By contrast, the corporate defendant had no fee liability, but it clearly was the target of the plaintiff's case.

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Court: United States District Court for the Southern District of Florida
Opinion Date: 1/5/11
Cite: Marlite, Inc. v. Eckenrod, 2011 U.S. Dist. LEXIS 2268 (S.D. Fla. Jan. 5, 2011)
Favors: N/A
Law: Federal

Yes, Non-Compete Agreement Can Be Enforceable Against a Tattoo Artist (Atomic Tattoos v. Morgan)

Readers of this blog have become conditioned to seeing non-compete disputes in a range of sophisticated professional services industries. In fact, non-competes are the norm in fields such as insurance brokerage, technology services, veterinary services and many business-to-business industries that grow through long-term corporate client relationships.

But non-competes are prevalent in a wide range of businesses, even those that may be a surprise. I have counseled a fair number of health clubs who have personal trainers sign non-compete or non-solicit agreements. Case law reporters reveal a number of decisions that allow enforcement of restrictive covenant agreements against hair stylists. And the next exterminator to get sued for violating a non-compete won't be the first by a long stretch.

A recent Florida case even upheld the issuance of a temporary restraining order against an independent contractor tattoo artist, who violated a 15-mile covenant in his contract with Atomic Tattoos. The company developed a database that strongly suggested most of its customers lived within a short distance of the shop, and that many were repeat customers. (This should surprise absolutely no one.) Of course, Florida law concerning restrictive covenants is highly pro-business, as courts are not allowed to consider facts related to individual hardship and certain covenants are presumptively reasonable.

In many ways, non-competes in retail industries like those mentioned above are a bit easier to enforce. First, it is much easier to define the prohibited business. By way of example, most people understand a restriction that does not allow someone to perform "body piercing and tattoo artist services." Contrast this with trying to define a restriction in a complicated business-to-business technology field that changes every couple of months with new product offerings and niche marketing plans.

Second, a geographic restriction makes more sense in a consumer-centric retail business. Because individuals tend not to travel very far for personal services (how far would you drive to work out every day?), retail-oriented non-competes often contain a very tight prohibited area of competition and can be enforced fairly easily. In many business-to-business environments, a geographic restriction is much more difficult to enforce, since account executives may travel great distances to see clients and a home office location may mean very little in the sales process. In a retail business, the business' store location often has great value in and of itself.

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Court: Court of Appeal of Florida, Second District
Opinion Date: 9/10/10
Cite: Atomic Tattoos, LLC v. Morgan, 45 So. 3d 63 (Fla. Ct. App. 2d Dist. 2010)
Favors: Employer
Law: Florida

Geographic Restrictions Require Court to Consider Where Competition Takes Place (Concrete Surface Innovations v. McCarty)

It is less and less common these days for parties to fight over industry non-compete agreements, particularly when client non-solicitation covenants will do the trick. As readers of this blog know, the difference in the type of restriction is important when analyzing the reasonableness standard.

For client non-solicitation agreements, geographic restrictions are not necessary provided there is some discernible limit on the clients that are off-limits to the employee. (By way of example, a restraint prohibiting competition with past clients or prospective clients with whom the employee never developed a relationship are at risk of being struck down). But in the vast majority of industry non-compete arrangements (which limit work altogether), geographic restrictions are necessary and require careful analysis.

Measuring the scope of the geographic restraint requires some actual thought, however. Take for example a covenant that provides that an employee cannot compete within 10 miles of his former employer's office. Does this mean the employee cannot open an office or live within that restriction?

Generally, no. It is where the competition occurs that matters. Of course, if the employee is a doctor or provides services in that office, then the 10-mile restraint would apply and prohibit competition. But if the employee provides services to clients outside the 10-mile radius, then the location of his home or office is irrelevant.

A federal district court in Florida recently said as much, rejecting the employer's argument that the location of the employee's new office was the critical inquiry. Instead, the court looked at where the employee was actually providing services to clients. Since those services were not in the office and instead on-site at a client, the office location was irrelevant.

This analysis from Concrete Surface Innovations v. McCarty is useful for analyzing the scope of covenants when an employee solicits or services clients outside a prohibited geographic scope. It's the location of the client that matters, because that is where the competition is occurring.

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Court: United States District Court for the Middle District of Florida
Opinion Date: 5/13/10
Cite: Concrete Surface Innovations, Inc. v. McCarty, 2010 U.S. Dist. LEXIS 56045 (M.D. Fla. May 13, 2010)
Favors: Employee
Law: Florida

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

Temporary Restraining Order In Non-Compete Case Requires Showing of Immediate Harm (Ride-Away Handicap Equip. v. Tracey)

Employer seeking immediate redress from threatened competitive harm have to move fast. The preferred remedy in most non-compete disputes is an injunction, and for extreme emergencies, an employer can seek a temporary restraining order - in effect, a paper trial before the court hears live evidence.

TROs are important because the employer will be largely in control of the documents. At a preliminary injunction, the defense has the benefit of time - time to amass evidence, prepare witnesses and find helpful third-party testimony.

But TROs require exigency. Illustrating this key point is a decision from earlier in the week in Florida federal court. In Ride-Away Handicap Equipment v. Tracey, the employer waited four months after sending a "cease and desist" letter to two ex-employees (and its new employer) to file a TRO petition. It also appears the employer gave no notice of the TRO to the defendants. Notice is not required in some circumstances, but the moving party must show why irreparable injury would result from lack of notice.

The court was unimpressed with the employer's delay and denied the TRO petition without a response. There is no bright-line rule for when an employer must move for injunctive relief. Immediacy, in fact, can arise during the pendency of a dispute, for example if an ex-employee suddenly starts poaching other co-workers or discloses confidential information to a customer in violation of a contract. But in a case where the breach is known to the employer, and the employer waits a few months to seek an injunction to stop that breach, it risks losing a valuable equitable right.

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Court: United States District Court for the Middle District of Florida
Opinion Date: 11/10/09
Cite: Ride-Away Handicap Equipment Corp. v. Tracey, 2009 U.S. Dist. LEXIS 104984 (M.D. Fla. 2009)
Favors: Employee
Law: Federal Rules of Civil Procedure

Court Declines to Award Attorneys' Fees Against Employer Who Aided Breach of Restrictive Covenant (Bauer v. Dilib, Inc.)

Florida contains a highly favorable body of law that favors employers attempting to enforce non-compete agreements.

The statute, Section 542.335, significantly altered Florida law with regards to non-competes entered on or after July 1, 1996. Some of the significant changes included a fairly wide range of interests that can be protected by a non-compete, a presumption of reasonableness for non-competes lasting six months or less, a repeal of contract construction rules favoring narrow construction of a non-compete, and discretionary attorneys' fees awards even in the absence of a contractual provision.

At issue in the Fourth District's case of Bauer v. Dilib, Inc. was a novel issue pertaining to the statutory provision concerning attorneys' fees. Specifically, the court addressed the question of whether a third-party new employer could be held liable for attorneys' fees for aiding and abetting a breach of a non-compete. In this particular case, the circuit court in Broward County held the statute should be construed to permit recovery against the employer who interfered with the non-compete contract.

On appeal, the court reversed and held that Section 542.335(1)(k) could not be construed to permit such a recovery. According to the court, the employer was not a party to the non-compete agreement, and the only reasonable construction of the entire statute was that the plaintiff ex-employer could not enforce the non-compete against the new employer. Because of this, a discretionary grant of fees under the statute was inappropriate. The court rejected a number of arguments advanced by the plaintiff, ultimately reasoning that statutory fee-shifting provisions must be narrowly construed because they are in derogation of the common law.

Courts have always retained the ability to enjoin parties who are non-signatories from aiding or abetting a breach of a non-compete agreement. Statutes governing injunction procedure almost always provide for this specifically. Further, to fashion complete equitable relief, an injunction order logically must extend beyond mere contract parties. However, this does not mean other facets of relief will automatically be available to third-parties. In this case, the ex-employer's remedy for tortious interference could conceivably encapsulate claims for attorneys' fees as part of a punitive damage award. But the ex-employer has no statutory remedy for fees separate and apart from other relief.

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Court: Court of Appeal of Florida, Fourth District
Opinion Date: 9/16/09
Cite: Bauer v. Dilib, Inc., 16 So. 3d 318 (Fla. Dist. Ct. App. 2009)
Favors: N/A
Law: Florida

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.

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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