I often think of living in California.
The warm weather, the fact that the air just somehow feels different. The sand running through your toes as you soak it all. And of course, the punishing taxes and regulations...but still.
And of course I think of what it would be like to be a non-compete attorney in California, because man would it be weird. You'd almost have to reverse most of your instincts. You wouldn't have to hedge when you talk to clients. You could actually dispense advice without the maddening qualifiers like, "well maybe a court would do this, but hey maybe not. Good luck!"
The reason, of course, is that California is pretty hostile to most types of restraints on trade, due to Section 16600 of the Business and Professions Code, which states that "every contract" in which one is restrained from engaging in a lawful profession, trade, or business is void. That's strong stuff. But despite attorneys' ability to give somewhat clearer answers than we can give in say Illinois, some nuance still remains.
Take no-hire clauses, which bar employees from soliciting co-workers for a reasonable period of time post-employment. Those are often far less controversial than non-competes and customer non-solicitation covenants because they don't really tend to limit one from working. Except, though, recruiters.
Recruiters are basically salespersons, but they specialize in placing people (sometimes consultants, sometimes other employees) with clients. Their relationships, which restrictive covenants try to protect, thus cross over into two different areas of the distribution chain. And so recruiters more than any group of employees feel restrained by no-hire clauses.
The California courts haven't been as troubled by no-hire clauses as the more common and restrictive form of post-employment covenants, with some courts allowing them. But that rule now appears in doubt after AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. There, the Fourth District Court of Appeal held void under Section 16600 a garden-variety no-hire clause in the travel nurse staffing business.
The employees impacted by the no-hire were travel nurse recruiters of AMN Healthcare, who had signed no-hire clauses of either a year or 18 months that limited their ability to solicit co-workers to leave AMN. Those recruiters then left and contacted various travel nurses, who typically were placed at health care facilities on 13-week assignments.
The Court of Appeal found the no-hire clauses void as a matter of law, thus casting doubt about older case that lawyers typically relied upon to enforce those clauses. The gist is that those older cases pre-dated a significant Supreme Court of California decision in a case called Edwards v. Arthur Anderson LLP, which generally disapproved of a narrow-restraint exception to Section 16600. As a result of Edwards, Section 16600 still applied when a post-employment covenant restricts only a limited part of an employee's profession, such as solicitation of clients.
The Court of Appeal in AMN Healthcare found Edwards controlling. As applied to the travel nurse recruiter scenario, the court had little trouble concluding that the no-hire clause was a void restraint. In particular, it focused on the nature of the recruiting business (which makes no-hire clauses much more significant than in other industries), the impact on recruiters' compensation if restrained from soliciting nurses for work, and the temporary nature of the travel-nurse assignments.
Despite all that, it's hard not to see AMN Healthcare as a significant shift in how courts evaluate no-hire clauses. A copy of the decision is available here.
Showing posts with label No-Hire Agreement. Show all posts
Showing posts with label No-Hire Agreement. Show all posts
Monday, November 12, 2018
Wednesday, January 24, 2018
Wisconsin Supreme Court: No-Hire Provision is a Covenant Not to Compete
When they're not suing each other, the Wisconsin Supreme Court justices actually have some interesting stuff to say and some interesting cases to decide.
This past week, the Court held in Manitowoc Company v. Lanning that an employee non-solicitation clause is a covenant not to compete for purposes of the State's relatively strict non-compete statute, Wis. Stat. § 103.465.
To recap, an employee non-solicitation covenant (or no-hire clause) bars employees from inducing former co-workers to quit or join another company, usually a competitor. They are not litigated all that much, except when pied pipers try to build out sales teams beneath them.
The Court held that it has taken a flexible view of the term "restraint on trade" and that no-hire clauses fit within that term, given that they restrict an employee's "ability to engage in the ordinary competition attendant to a free market," specifically with respect to recruiting the "best talent in the labor pool."
What's the significance? The applicable Wisconsin statute requires an employer to clear a number of different hurdles to establish the validity of a restraint of trade. And just as importantly, the statute provides that any covenant that is unreasonable is void and illegal, even if some remaining portion of the restraint would be valid.
It is an all or nothing proposition.
Which is why Manitowoc Company lost on the merits of its claim, after the Court found that the governing statute applied.
What was wrong? Basically, the no-hire clause said the employee could not, for two years, solicit or encourage any company employee to leave. It's actually broader than that, but I'm trying to be brief.
The Court concluded that Manitowoc Company had no protectable interest in maintaining its entire workforce. The employee it sued had no knowledge of the 13,000+ employees the company had worldwide. The covenant, to be sure, was so broad that no protectable interest could support it. Under the statute, it was void. Plain and simple.
This is yet another opportunity to offer a lesson in contract drafting. Many non-competes get tossed out because counsel salivate at the mouth and want to appease their client. Drafting is not an exercise in chest-thumping, in which counsel gets to boast about how tough he was in writing a restrictive covenant. It's actually much more nuanced than that. Part of being a lawyer is being objective, knowing what makes sense, and then communicating that to the client.
Maybe I'm a dying breed.
This past week, the Court held in Manitowoc Company v. Lanning that an employee non-solicitation clause is a covenant not to compete for purposes of the State's relatively strict non-compete statute, Wis. Stat. § 103.465.
To recap, an employee non-solicitation covenant (or no-hire clause) bars employees from inducing former co-workers to quit or join another company, usually a competitor. They are not litigated all that much, except when pied pipers try to build out sales teams beneath them.
The Court held that it has taken a flexible view of the term "restraint on trade" and that no-hire clauses fit within that term, given that they restrict an employee's "ability to engage in the ordinary competition attendant to a free market," specifically with respect to recruiting the "best talent in the labor pool."
What's the significance? The applicable Wisconsin statute requires an employer to clear a number of different hurdles to establish the validity of a restraint of trade. And just as importantly, the statute provides that any covenant that is unreasonable is void and illegal, even if some remaining portion of the restraint would be valid.
It is an all or nothing proposition.
Which is why Manitowoc Company lost on the merits of its claim, after the Court found that the governing statute applied.
What was wrong? Basically, the no-hire clause said the employee could not, for two years, solicit or encourage any company employee to leave. It's actually broader than that, but I'm trying to be brief.
The Court concluded that Manitowoc Company had no protectable interest in maintaining its entire workforce. The employee it sued had no knowledge of the 13,000+ employees the company had worldwide. The covenant, to be sure, was so broad that no protectable interest could support it. Under the statute, it was void. Plain and simple.
This is yet another opportunity to offer a lesson in contract drafting. Many non-competes get tossed out because counsel salivate at the mouth and want to appease their client. Drafting is not an exercise in chest-thumping, in which counsel gets to boast about how tough he was in writing a restrictive covenant. It's actually much more nuanced than that. Part of being a lawyer is being objective, knowing what makes sense, and then communicating that to the client.
Maybe I'm a dying breed.
Monday, October 9, 2017
Much Overdue Case Law Update, Part I
It has been a while since I surveyed new reported decisions. So over the next few weeks, I'm going to summarize very briefly some of the cases I've seen that piqued my interest. The topics are varied, which is kind of the point.
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Non-Recruitment Clauses in Georgia
Georgia courts have proved to be tough venues when it comes to enforcing restrictive covenants. The prevailing rule of non-severability (for older agreements) generally means that an unenforceable restrictive covenant will void other similar covenants, even if they (standing alone) might be considered reasonable.
But as the Court of Appeals in Georgia recently noted, this non-severability rule does not apply to non-recruitment/no-hire provisions that bar employees from soliciting co-workers. Simply put, those types of restraints to do not rise to the upper tier of restrictive covenants. And so a void non-compete will not invalidate a reasonable no-hire clause. Other courts in other States seen to equate no-hire clauses with more restrictive covenants.
The case is CMGRP, Inc. v. Gallant, and it's written by Twitter star Chief Judge Stephen Dillard. A link to the opinion can be found here.
Seventh Circuit Discusses Sale of Business Non-Compete Dispute
The Seventh Circuit hears about one or two non-compete cases per year. They generally involve questions of Indiana, Illinois, or Wisconsin law. And those States have non-compete laws that are interesting and nuanced.
But E.T. Products, LLC v. D.E. Miller Holdings, Inc. did not require the court to delve much into substantive State law (here, Indiana) because the case hinged on whether certain activity amounted to a breach of the non-competition clause. The case involved a business acquirer's attempt to enforce a sale-of-business non-compete against the seller, after the seller rendered post-closing assistance to the acquirer's distributor. The court found that the seller's conduct did not amount to prohibited competition, saying that "a firm whose sole conduct in the relevant market consists of distributing one manufacturer's product plainly isn't that manufacturer's competitor." The court also noted the seller terminated its relationship with the distributor and rendered no assistance at all once the distributor began competing on some product lines. The facts, as the court recited them, amply demonstrated the defendant's good faith and intent to adhere to the non-compete. The pursuit of the case appeared to be vast overreach.
The opinion, written by Judge Diane Sykes, is available here.
The Protocol for Broker Recruiting and "Good Faith"
Those of us who represent advisory firms and financial advisors have a good deal of familiarity with the Protocol for Broker Recruiting. But many don't. The Protocol's design is to foster client choice, a recognition of the intensely personal nature of the advisory relationship. More broadly, the Protocol represents an industry solution to expensive, uncertain non-compete litigation - in effect, a contractual way around flexible legal standards being applied by judges who generally lack deep knowledge of particular industries.
The Protocol's basic tenets allow an advisor to avoid liability if she takes client information to her departing firm (generally, it must be related to those clients she serviced and the information must be provided to her firm on departure). If followed in good faith, the employee will not be bound by any contractual restrictive covenant or held liable under trade secrets law pertaining to the taken (and disclosed) client information and subsequent solicitation efforts of those clients.
The term "good faith" is a bit nebulous and fact-specific. If an employee engages in bad faith, the she cannot avail herself of the Protocol and courts default back to any signed agreement the employee has. The district court decision in UBS Financial Svcs., Inc. v. Fiore, No. 17-cv-993, 2017 WL 3167321 (D. Conn. July 24, 2017), contains a lengthy discussion of good faith in the context of advisor departures. Ultimately, it found that despite some wrongful behavior, the defendants did not forfeit the Protocol's protections since their notice was proper and they took only information pertaining to their client lists. The court focused on the fact that UBS still had all the information it needed to contact the same clients.
In the past, courts have found that the Protocol did not apply when employees took information beyond what was allowed, altered information in a client database, or deleted contact information in a work e-mail account. Like most good-faith inquiries, each case turns on its facts. The Fiore decision is interesting and well worth a read because it is not particularly clear cut factually. The departing defendants complied with the Protocol in the most crucial ways but still did some things that appeared designed to hinder UBS' ability to retain its wealth-management clients.
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Non-Recruitment Clauses in Georgia
Georgia courts have proved to be tough venues when it comes to enforcing restrictive covenants. The prevailing rule of non-severability (for older agreements) generally means that an unenforceable restrictive covenant will void other similar covenants, even if they (standing alone) might be considered reasonable.
But as the Court of Appeals in Georgia recently noted, this non-severability rule does not apply to non-recruitment/no-hire provisions that bar employees from soliciting co-workers. Simply put, those types of restraints to do not rise to the upper tier of restrictive covenants. And so a void non-compete will not invalidate a reasonable no-hire clause. Other courts in other States seen to equate no-hire clauses with more restrictive covenants.
The case is CMGRP, Inc. v. Gallant, and it's written by Twitter star Chief Judge Stephen Dillard. A link to the opinion can be found here.
Seventh Circuit Discusses Sale of Business Non-Compete Dispute
The Seventh Circuit hears about one or two non-compete cases per year. They generally involve questions of Indiana, Illinois, or Wisconsin law. And those States have non-compete laws that are interesting and nuanced.
But E.T. Products, LLC v. D.E. Miller Holdings, Inc. did not require the court to delve much into substantive State law (here, Indiana) because the case hinged on whether certain activity amounted to a breach of the non-competition clause. The case involved a business acquirer's attempt to enforce a sale-of-business non-compete against the seller, after the seller rendered post-closing assistance to the acquirer's distributor. The court found that the seller's conduct did not amount to prohibited competition, saying that "a firm whose sole conduct in the relevant market consists of distributing one manufacturer's product plainly isn't that manufacturer's competitor." The court also noted the seller terminated its relationship with the distributor and rendered no assistance at all once the distributor began competing on some product lines. The facts, as the court recited them, amply demonstrated the defendant's good faith and intent to adhere to the non-compete. The pursuit of the case appeared to be vast overreach.
The opinion, written by Judge Diane Sykes, is available here.
The Protocol for Broker Recruiting and "Good Faith"
Those of us who represent advisory firms and financial advisors have a good deal of familiarity with the Protocol for Broker Recruiting. But many don't. The Protocol's design is to foster client choice, a recognition of the intensely personal nature of the advisory relationship. More broadly, the Protocol represents an industry solution to expensive, uncertain non-compete litigation - in effect, a contractual way around flexible legal standards being applied by judges who generally lack deep knowledge of particular industries.
The Protocol's basic tenets allow an advisor to avoid liability if she takes client information to her departing firm (generally, it must be related to those clients she serviced and the information must be provided to her firm on departure). If followed in good faith, the employee will not be bound by any contractual restrictive covenant or held liable under trade secrets law pertaining to the taken (and disclosed) client information and subsequent solicitation efforts of those clients.
The term "good faith" is a bit nebulous and fact-specific. If an employee engages in bad faith, the she cannot avail herself of the Protocol and courts default back to any signed agreement the employee has. The district court decision in UBS Financial Svcs., Inc. v. Fiore, No. 17-cv-993, 2017 WL 3167321 (D. Conn. July 24, 2017), contains a lengthy discussion of good faith in the context of advisor departures. Ultimately, it found that despite some wrongful behavior, the defendants did not forfeit the Protocol's protections since their notice was proper and they took only information pertaining to their client lists. The court focused on the fact that UBS still had all the information it needed to contact the same clients.
In the past, courts have found that the Protocol did not apply when employees took information beyond what was allowed, altered information in a client database, or deleted contact information in a work e-mail account. Like most good-faith inquiries, each case turns on its facts. The Fiore decision is interesting and well worth a read because it is not particularly clear cut factually. The departing defendants complied with the Protocol in the most crucial ways but still did some things that appeared designed to hinder UBS' ability to retain its wealth-management clients.
Friday, June 30, 2017
The Reading List (2017, No. 22): The "Not Precedent Opinions Can Be Interesting" Edition
Non-Compete and Trade Secrets News for the week ended June 30, 2017
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LinkedIn "Solicitations"
From the Appellate Court of Illinois this week, we got treated to a non-precedential Rule 23 order that addresses a fertile area of non-compete litigation. What effect should courts make of LinkedIn invitations to a former employee's co-workers and do those invitations amount to improper "solicitation"?
The court in Bankers Life and Casualty Co. v. American Senior Benefits LLC, 2017 IL App (1st) 160687-U, says no. Justice Simon's order gives a nice summary of similar cases from various jurisdictions and notes that the issue of "solicitation" really turns on the content of the social media post, communication, or invitation to connect. In this particular case, the LinkedIn e-mails were "generic" and mentioned nothing about either the employee's past or current employer. Nor did the e-mails invite former co-workers to leave their job or view an employment opportunity posting.
UPDATED (Aug. 8, 2017): The Appellate Court has now published the Bankers Life opinion, apparently agreeing that it sets forth a new rule of law or helps clarify an existing one. The link to the published opinion can be found here.
The Defend Trade Secrets Act and "Inevitable Disclosure"
John Marsh of Bailey Cavalieri has a very insightful post on the Third Circuit's non-precedential order in Fres-Co Systems USA, Inc. v. Hawkins. The case was a typical one in the non-compete field. Sales executive with influence over key accounts bolts for a competitor and then gets sued.
After the district court entered a preliminary injunction in favor of the employer, the Third Circuit reversed and remanded for it to consider the injunction standard more fully. As John notes, however, some of the language in the Third Circuit's order was a little loose (at best) concerning the threat of "irreparable harm" posed by the employee's move to a competitor. In particular, some of the order's reasoning implicitly suggests "inevitable disclosure" may be grounds for enjoining conduct under the Defend Trade Secrets Act. But it never comes right out and says that.
I think there's a danger of reading too much into this non-precedential order. For starters, the court lumped together its irreparable harm analysis for all the substantive legal claims, appearing never to appreciate the limits on injunctive relief under the DTSA. (The court never cites or quotes the limitation at all.) It could have instructed the district court to reconsider the irreparable harm factor in light of the DTSA, but failed to do so. Opportunity missed. That said, the plaintiff moved as well under the Pennsylvania Uniform Trade Secrets Act, which does not contain any DTSA-like limits on injunctive relief. And to be sure, the employee's non-compete would provide a separate grounds on which to analyze irreparable harm.
The Hawkins order is available here.
Trade Secrets Damages
Quantlab Financial prevailed in the Fifth Circuit Court of Appeals, which upheld a jury verdict of $11.2 million stemming from a claim of trade-secrets misappropriation. The case arose before the financial crisis and concerned the then-nascent business of high-frequency trading. The facts sounded a familiar refrain, with the evidence demonstrating large-scale copying and appropriation of trading technology source code and improper computer access by insiders.
The Fifth Circuit's unpublished disposition is located here.
Nevada Changes Non-Compete Statute
Last year, the Nevada Supreme Court in the case of Golden Road Motor Inn v. Islam held that courts could not modify overbroad non-competes, a decision I analyzed at some length. The analysis endures; the rule doesn't. Effective June 3, 2017, Nevada has a new non-compete statute that requires courts to modify overbroad non-competition covenants - a wholesale abrogation of Golden Road Motor Inn. The new law seems to strike a more employee-friendly balance, however, in that it specifically provides that a covenant cannot restrict a former employee if a customer "voluntarily chose to leave and seek services from the former employee." That's a gaping carve-out, sure to invite fact disputes about whether the customer voluntarily left. In other words, Nevada places customer choice above any countervailing employer interest.
Russell Beck's Fair Competition Law blog has an analysis of the new law here.
The Non-Compete PR Crisis
The firm Butzel Long released a Client Alert (really, a white paper) that deconstructed a number of problematic non-compete cases involving low-wage or mid-tier employees. This terrific publication addresses the Jimmy John's, Amazon.com, and Goldfish Swim School cases and offers practical guidance about how these companies could have avoided the nightmare public-relations fallout. I highly recommend this release for any practitioner who works in the non-compete and trade secrets field.
Non-Compete Crackdown in Australia?
The Guardian reports on concerns that the use of non-competes is stifling innovation in Australia, noting the concentration of market power in select industries. The report notes the same general concerns that reform advocates in the United States have, with the most compelling concern being the declining number of start-ups. This concern is all the more acute as the large technology companies continue to expand their reach into non-traditional markets - Amazon's pending acquisition of Whole Foods simply the latest example.
Uber's "Reason to Know" of Trade-Secret Theft
Android Headlines reports that members of Uber's board saw evidence of trade-secret theft concerning Anthony Levandowski's alleged appropriation of LiDAR technology from Google/Waymo. Uber was required to file an accounting with the court disclosing the names of people who may have had access to the files at the heart of Waymo's case. Uber has resisted disclosing a critical due diligence report authored by a firm before it acquired Levandowski's start-up, which likely will color Waymo's theory that Uber had "reason to know" that Levandowski was using Waymo's materials on behalf of Uber. That "reason to know" standard is crucial if Waymo is going to hold Uber liable. This discovery dispute appears to be the make-or-break moment in the biggest trade-secret action of the past several years.
***
I will be taking a few weeks off from updating this blog. See you in mid-July!
***
LinkedIn "Solicitations"
From the Appellate Court of Illinois this week, we got treated to a non-precedential Rule 23 order that addresses a fertile area of non-compete litigation. What effect should courts make of LinkedIn invitations to a former employee's co-workers and do those invitations amount to improper "solicitation"?
The court in Bankers Life and Casualty Co. v. American Senior Benefits LLC, 2017 IL App (1st) 160687-U, says no. Justice Simon's order gives a nice summary of similar cases from various jurisdictions and notes that the issue of "solicitation" really turns on the content of the social media post, communication, or invitation to connect. In this particular case, the LinkedIn e-mails were "generic" and mentioned nothing about either the employee's past or current employer. Nor did the e-mails invite former co-workers to leave their job or view an employment opportunity posting.
UPDATED (Aug. 8, 2017): The Appellate Court has now published the Bankers Life opinion, apparently agreeing that it sets forth a new rule of law or helps clarify an existing one. The link to the published opinion can be found here.
The Defend Trade Secrets Act and "Inevitable Disclosure"
John Marsh of Bailey Cavalieri has a very insightful post on the Third Circuit's non-precedential order in Fres-Co Systems USA, Inc. v. Hawkins. The case was a typical one in the non-compete field. Sales executive with influence over key accounts bolts for a competitor and then gets sued.
After the district court entered a preliminary injunction in favor of the employer, the Third Circuit reversed and remanded for it to consider the injunction standard more fully. As John notes, however, some of the language in the Third Circuit's order was a little loose (at best) concerning the threat of "irreparable harm" posed by the employee's move to a competitor. In particular, some of the order's reasoning implicitly suggests "inevitable disclosure" may be grounds for enjoining conduct under the Defend Trade Secrets Act. But it never comes right out and says that.
I think there's a danger of reading too much into this non-precedential order. For starters, the court lumped together its irreparable harm analysis for all the substantive legal claims, appearing never to appreciate the limits on injunctive relief under the DTSA. (The court never cites or quotes the limitation at all.) It could have instructed the district court to reconsider the irreparable harm factor in light of the DTSA, but failed to do so. Opportunity missed. That said, the plaintiff moved as well under the Pennsylvania Uniform Trade Secrets Act, which does not contain any DTSA-like limits on injunctive relief. And to be sure, the employee's non-compete would provide a separate grounds on which to analyze irreparable harm.
The Hawkins order is available here.
Trade Secrets Damages
Quantlab Financial prevailed in the Fifth Circuit Court of Appeals, which upheld a jury verdict of $11.2 million stemming from a claim of trade-secrets misappropriation. The case arose before the financial crisis and concerned the then-nascent business of high-frequency trading. The facts sounded a familiar refrain, with the evidence demonstrating large-scale copying and appropriation of trading technology source code and improper computer access by insiders.
The Fifth Circuit's unpublished disposition is located here.
Nevada Changes Non-Compete Statute
Last year, the Nevada Supreme Court in the case of Golden Road Motor Inn v. Islam held that courts could not modify overbroad non-competes, a decision I analyzed at some length. The analysis endures; the rule doesn't. Effective June 3, 2017, Nevada has a new non-compete statute that requires courts to modify overbroad non-competition covenants - a wholesale abrogation of Golden Road Motor Inn. The new law seems to strike a more employee-friendly balance, however, in that it specifically provides that a covenant cannot restrict a former employee if a customer "voluntarily chose to leave and seek services from the former employee." That's a gaping carve-out, sure to invite fact disputes about whether the customer voluntarily left. In other words, Nevada places customer choice above any countervailing employer interest.
Russell Beck's Fair Competition Law blog has an analysis of the new law here.
The Non-Compete PR Crisis
The firm Butzel Long released a Client Alert (really, a white paper) that deconstructed a number of problematic non-compete cases involving low-wage or mid-tier employees. This terrific publication addresses the Jimmy John's, Amazon.com, and Goldfish Swim School cases and offers practical guidance about how these companies could have avoided the nightmare public-relations fallout. I highly recommend this release for any practitioner who works in the non-compete and trade secrets field.
Non-Compete Crackdown in Australia?
The Guardian reports on concerns that the use of non-competes is stifling innovation in Australia, noting the concentration of market power in select industries. The report notes the same general concerns that reform advocates in the United States have, with the most compelling concern being the declining number of start-ups. This concern is all the more acute as the large technology companies continue to expand their reach into non-traditional markets - Amazon's pending acquisition of Whole Foods simply the latest example.
Uber's "Reason to Know" of Trade-Secret Theft
Android Headlines reports that members of Uber's board saw evidence of trade-secret theft concerning Anthony Levandowski's alleged appropriation of LiDAR technology from Google/Waymo. Uber was required to file an accounting with the court disclosing the names of people who may have had access to the files at the heart of Waymo's case. Uber has resisted disclosing a critical due diligence report authored by a firm before it acquired Levandowski's start-up, which likely will color Waymo's theory that Uber had "reason to know" that Levandowski was using Waymo's materials on behalf of Uber. That "reason to know" standard is crucial if Waymo is going to hold Uber liable. This discovery dispute appears to be the make-or-break moment in the biggest trade-secret action of the past several years.
***
I will be taking a few weeks off from updating this blog. See you in mid-July!
Friday, February 10, 2017
The Reading List (2017, No. 6): Surprise Result on Blue-Penciling Rule in Georgia
Non-Compete and Trade Secrets News for the week ended February 10, 2017
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Georgia Blue-Penciling of Restrictive Covenants
Last December, a federal district court in Georgia limited courts' ability to modify overbroad restrictive covenants. More on this significant case in my end-of-the-month column, but LifeBrite Labs. v. Cooksey, No. 1:15-cv-4309, merits a brief mention this week.
The court held that Georgia's relatively new state statute concerning non-competes, which permits courts to "modify a covenant that is otherwise void and unenforceable," allowed it only to excise language that rendered the agreement overbroad. In other words, courts could not rewrite the contract, or supply it with any new terms, as part of its statutory ability to modify agreements. The court relied principally on Georgia's existing case law in the sale-of-business context and the rule that it must construe statutes in derogation of the common-law narrowly. Put simply, "modify" means blue-penciling. The opinion and order, with its very insightful analysis, is available here.
(FordHarrison also comments on this case in its Non-Compete News.)
Military Contractor Trade Secrets
The Eleventh Circuit Court of Appeals has reversed a summary judgment of a trade-secrets claim between military contractors, Advantor Systems of Florida and DRS Technical Services, Inc. The disputed technology involved intrusion detection systems that Advantor originally sold certain United States Air Force bases. When the Air Force elected to consolidate its security systems across all AF bases, Advantor was left out in the cold. DRS won the contract and dumped Advantor as a potential sub-contractor during negotiations. The parties had signed a transactional confidentiality agreement and a one-year "no direct hire" agreement that precluded either from directly soliciting the other's employees.
The ruling is rather lengthy (53 pages) and since it's unpublished, it does not merit an extended discussion. However, it is worth reading the passage where the court of appeals reverses summary judgment on the trade-secrets claim based on the Air Force's disclosure of technical manuals and drawings to DRS. Those manuals were necessary for DRS' continued service of Advantor equipment previously sold to the AF (recall that Advantor used to supply systems to several, but not all, AF bases). The analysis discusses a rarely litigated question concerning the term "misappropriation": whether the defendant (DRS) had "reason to know" that a third-party (AF) had some limitation on its ability to disseminate information obtained in confidence (from Advantor).
A copy of the Eleventh Circuit's unpublished opinion is available here.
Choice-of-Law Clauses
California courts have continued a trend of invalidating choice-of-law clauses with regard to employee restrictive covenants. The general principle is that courts will enforce such clauses unless the contractually chosen law is "contrary to the fundamental policy of the forum state." In Stryker Sales Corp. v. Zimmer Biomet, No. 1:16-cv-01670, a California federal district court found a public-policy rift between Michigan and California law concerning non-competes. No surprise there. Michigan is a fairly typical state when it comes to non-compete law, employing a reasonableness test to restrictive covenants. But California bars them almost entirely, which led the court to invalidate the choice-of-law clause in Stryker Sales.
This case illustrates why obtaining the proper forum, and enforcing forum selection clauses, is so crucial to non-competes directed at parties with some California connection. The original action was brought in Michigan, but venue wasn't proper there. A copy of the decision is available here.
Restoration Hardware Trade Secrets Suit
Multiple outlets have reported on a trade-secrets suit between Restoration Hardware and Crate and Barrel. The Complaint, filed in California state court, alleges that Crate and Barrel CEO and former Restoration Hardware employee Doug Diemoz tried to hire other RH executives in violation of a no-hire agreement. According to the Chicago Tribune, Diemoz is alleged to have used Gmail to communicate with RH employees, stating in one such e-mail "that damn non solicitation!" Diemoz' supposed recruitment allegedly ties into another employee's downloading of confidential information about RH's food and beverage operations in Chicago.
The crux of the trade-secret allegation is a little odd. RH seems to be claiming that Crate and Barrel is attempting to replicate its "model" of providing food-and-beverage services in conjunction with its other retail offerings. I suppose that something about the roll-out of those operations could be secret, but it seems like an allegation primed for a reverse-engineering defense. RH's pilot program was launched at the Three Arts Club in Chicago. Before its conversion (it was badly rundown), I lived at the Three Arts Club for a summer in my early 20s and consumed an untold number of alcoholic beverages - not the coffee drinks RH is now peddling to its shoppers.
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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.
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Georgia Blue-Penciling of Restrictive Covenants
Last December, a federal district court in Georgia limited courts' ability to modify overbroad restrictive covenants. More on this significant case in my end-of-the-month column, but LifeBrite Labs. v. Cooksey, No. 1:15-cv-4309, merits a brief mention this week.
The court held that Georgia's relatively new state statute concerning non-competes, which permits courts to "modify a covenant that is otherwise void and unenforceable," allowed it only to excise language that rendered the agreement overbroad. In other words, courts could not rewrite the contract, or supply it with any new terms, as part of its statutory ability to modify agreements. The court relied principally on Georgia's existing case law in the sale-of-business context and the rule that it must construe statutes in derogation of the common-law narrowly. Put simply, "modify" means blue-penciling. The opinion and order, with its very insightful analysis, is available here.
(FordHarrison also comments on this case in its Non-Compete News.)
Military Contractor Trade Secrets
The Eleventh Circuit Court of Appeals has reversed a summary judgment of a trade-secrets claim between military contractors, Advantor Systems of Florida and DRS Technical Services, Inc. The disputed technology involved intrusion detection systems that Advantor originally sold certain United States Air Force bases. When the Air Force elected to consolidate its security systems across all AF bases, Advantor was left out in the cold. DRS won the contract and dumped Advantor as a potential sub-contractor during negotiations. The parties had signed a transactional confidentiality agreement and a one-year "no direct hire" agreement that precluded either from directly soliciting the other's employees.
The ruling is rather lengthy (53 pages) and since it's unpublished, it does not merit an extended discussion. However, it is worth reading the passage where the court of appeals reverses summary judgment on the trade-secrets claim based on the Air Force's disclosure of technical manuals and drawings to DRS. Those manuals were necessary for DRS' continued service of Advantor equipment previously sold to the AF (recall that Advantor used to supply systems to several, but not all, AF bases). The analysis discusses a rarely litigated question concerning the term "misappropriation": whether the defendant (DRS) had "reason to know" that a third-party (AF) had some limitation on its ability to disseminate information obtained in confidence (from Advantor).
A copy of the Eleventh Circuit's unpublished opinion is available here.
Choice-of-Law Clauses
California courts have continued a trend of invalidating choice-of-law clauses with regard to employee restrictive covenants. The general principle is that courts will enforce such clauses unless the contractually chosen law is "contrary to the fundamental policy of the forum state." In Stryker Sales Corp. v. Zimmer Biomet, No. 1:16-cv-01670, a California federal district court found a public-policy rift between Michigan and California law concerning non-competes. No surprise there. Michigan is a fairly typical state when it comes to non-compete law, employing a reasonableness test to restrictive covenants. But California bars them almost entirely, which led the court to invalidate the choice-of-law clause in Stryker Sales.
This case illustrates why obtaining the proper forum, and enforcing forum selection clauses, is so crucial to non-competes directed at parties with some California connection. The original action was brought in Michigan, but venue wasn't proper there. A copy of the decision is available here.
Restoration Hardware Trade Secrets Suit
Multiple outlets have reported on a trade-secrets suit between Restoration Hardware and Crate and Barrel. The Complaint, filed in California state court, alleges that Crate and Barrel CEO and former Restoration Hardware employee Doug Diemoz tried to hire other RH executives in violation of a no-hire agreement. According to the Chicago Tribune, Diemoz is alleged to have used Gmail to communicate with RH employees, stating in one such e-mail "that damn non solicitation!" Diemoz' supposed recruitment allegedly ties into another employee's downloading of confidential information about RH's food and beverage operations in Chicago.
The crux of the trade-secret allegation is a little odd. RH seems to be claiming that Crate and Barrel is attempting to replicate its "model" of providing food-and-beverage services in conjunction with its other retail offerings. I suppose that something about the roll-out of those operations could be secret, but it seems like an allegation primed for a reverse-engineering defense. RH's pilot program was launched at the Three Arts Club in Chicago. Before its conversion (it was badly rundown), I lived at the Three Arts Club for a summer in my early 20s and consumed an untold number of alcoholic beverages - not the coffee drinks RH is now peddling to its shoppers.
***
In other news, Holland & Hart reports on a $5.175 million trade-secrets verdict it obtained in Utah on behalf of Hydro Engineering, Inc. against Riveer Environmental. The case stemmed from Riveer's hiring of a key salesperson who had a non-compete with Hydro. The verdict summary illustrates, once again, that e-mail communications among the defendant's employees were central to the plaintiff's proofs.
Friday, February 3, 2017
The Reading List (2017, No. 5): Plaintiffs and Courts Avoid the DTSA's Ex Parte Seizure Order
Non-Compete and Trade Secret News for the week ended February 3, 2017
***
Defend Trade Secrets Act
I alluded to this case in my prior post.
But we have another federal district court case that discusses the Defend Trade Secrets Act and the ex parte seizure order. In Magnesita Refractories Co. v. Mishra, the court found that a temporary restraining order issued under Federal Rule of Civil Procedure 65, which mandated the seizure of a defendant's laptop, did not require the plaintiff to follow the process outlined in Section 1836(b)(2) of the DTSA.
This is about as in-the-weeds as you can get, but it reaffirms the much larger point: courts are going to issue TROs that have the same effect as the seizure order. And if that's the protocol, then the seizure order may - as I predicted - be more bark than bite. A copy of Judge Simon's ruling, which is truly for nerds like me, is available here.
Non-Recruitment Clauses
Tesla Motors has sued a director of its Autopilot program, Sterling Anderson, claiming misappropriation of "hundreds of gigabytes" of confidential information and improper solicitation of Tesla employees. The Complaint reads like a typical bad divorce between a key employee and a jilted employer, with some fairly serious allegations related to efforts to conceal electronic evidence and pre-termination "cloak and dagger" meetings to plan a competing venture. In California, where the suit is based, post-employment restrictions on soliciting employees are enforceable. That's the centerpiece of the contract claim.
The case is pending in Santa Clara Superior Court. A copy of the Complaint is available here. For a detailed news account, see this article in The Verge.
Sixth Circuit Appeal
The Sixth Circuit Court of Appeals this week heard oral argument in the case of Stryker Corp. v. Ridgeway, No. 16-1654. A jury in the Western District of Michigan entered a verdict in favor of Stryker in the amount of $745,000, which was based in part on Ridgeway's breach of a non-compete agreement. Among other things, the appeal raises a very important choice-of-law/choice-of-forum issue concerning Louisiana law. That state's law is very favorable to employees, but the district court did not apply it. (The district court ruling on the choice-of-law issue is at 2015 WL 5682317.)
***
Russell Beck discusses in his Fair Competition blog post the renewed efforts at non-compete reform in Massachusetts. This has become an annual rite of passage. Seyfarth Shaw discusses the same proposals floating around the Massachusetts house and senate.
IPWatchdog has posted an article entitled How to Write Enforceable Non-Compete Agreements. This is a very nice, concise summary of employers' considerations in deciding whether and how to use restrictive covenants. A number of helpful quotes from some of my colleagues...
Other colleagues of mine, from Seyfarth Shaw, have posted their Top Developments/Headlines in Trade Secret, Computer Fraud, and Non-Compete Law in 2016. This post is notably longer than my year-end list and gives a few more illustrative cases - particularly on non-competes and federal computer fraud claims.
***
Defend Trade Secrets Act
I alluded to this case in my prior post.
But we have another federal district court case that discusses the Defend Trade Secrets Act and the ex parte seizure order. In Magnesita Refractories Co. v. Mishra, the court found that a temporary restraining order issued under Federal Rule of Civil Procedure 65, which mandated the seizure of a defendant's laptop, did not require the plaintiff to follow the process outlined in Section 1836(b)(2) of the DTSA.
This is about as in-the-weeds as you can get, but it reaffirms the much larger point: courts are going to issue TROs that have the same effect as the seizure order. And if that's the protocol, then the seizure order may - as I predicted - be more bark than bite. A copy of Judge Simon's ruling, which is truly for nerds like me, is available here.
Non-Recruitment Clauses
Tesla Motors has sued a director of its Autopilot program, Sterling Anderson, claiming misappropriation of "hundreds of gigabytes" of confidential information and improper solicitation of Tesla employees. The Complaint reads like a typical bad divorce between a key employee and a jilted employer, with some fairly serious allegations related to efforts to conceal electronic evidence and pre-termination "cloak and dagger" meetings to plan a competing venture. In California, where the suit is based, post-employment restrictions on soliciting employees are enforceable. That's the centerpiece of the contract claim.
The case is pending in Santa Clara Superior Court. A copy of the Complaint is available here. For a detailed news account, see this article in The Verge.
Sixth Circuit Appeal
The Sixth Circuit Court of Appeals this week heard oral argument in the case of Stryker Corp. v. Ridgeway, No. 16-1654. A jury in the Western District of Michigan entered a verdict in favor of Stryker in the amount of $745,000, which was based in part on Ridgeway's breach of a non-compete agreement. Among other things, the appeal raises a very important choice-of-law/choice-of-forum issue concerning Louisiana law. That state's law is very favorable to employees, but the district court did not apply it. (The district court ruling on the choice-of-law issue is at 2015 WL 5682317.)
***
Russell Beck discusses in his Fair Competition blog post the renewed efforts at non-compete reform in Massachusetts. This has become an annual rite of passage. Seyfarth Shaw discusses the same proposals floating around the Massachusetts house and senate.
IPWatchdog has posted an article entitled How to Write Enforceable Non-Compete Agreements. This is a very nice, concise summary of employers' considerations in deciding whether and how to use restrictive covenants. A number of helpful quotes from some of my colleagues...
Other colleagues of mine, from Seyfarth Shaw, have posted their Top Developments/Headlines in Trade Secret, Computer Fraud, and Non-Compete Law in 2016. This post is notably longer than my year-end list and gives a few more illustrative cases - particularly on non-competes and federal computer fraud claims.
Monday, November 14, 2016
No-Poaching Agreements, Antitrust Guidance...and DJT
A few years back, the Department of Justice launched an antitrust action against several technology giants, including Apple, Google, Intel, Pixar, and others. The action was based on the Sherman Act and alleged that these employers committed a "per se" violation of the antitrust law when they agreed not to cold-call each other's employees.
These so-called no-poaching agreements were bilateral agreements that, according to the DOJ, eliminated a form of competition - the market to retain and hire employees. Those agreements reduced employee mobility and deprived workers of the opportunity to achieve higher wages and benefits. The particulars of the restraints were embarrassing for a number of big names in the technology industry (and featured a couple of famous e-mails from the late Steve Jobs). The significance of the horizontal no-poaching agreements was particularly acute for many workers (who later filed a civil class action), since California bars vertical non-competition agreements between employer and employee.
In October of this year, the Department of Justice's Antitrust Division, in conjunction with the Federal Trade Commission, released its Antitrust Guidance for Human Resource Professionals. That document clarified the DOJ's intent to criminally investigate "allegations that employers have agreed among themselves on employee compensation or not to solicit or hire each others' employees." The DOJ's guidance also makes repeated reference to "naked" agreements not to poach employees, meaning those that "are separate from or not reasonably necessary to a larger legitimate collaboration between the employers." Those naked restraints are per se invalid, a violation of antitrust law, and will be deemed so "without any inquiry into [their] competitive effects."
So what does this mean in practice? While the parameters of the DOJ's guidance are not set in stone, I think it's possible to glean a few guiding principles for typical no-poaching scenarios.
These so-called no-poaching agreements were bilateral agreements that, according to the DOJ, eliminated a form of competition - the market to retain and hire employees. Those agreements reduced employee mobility and deprived workers of the opportunity to achieve higher wages and benefits. The particulars of the restraints were embarrassing for a number of big names in the technology industry (and featured a couple of famous e-mails from the late Steve Jobs). The significance of the horizontal no-poaching agreements was particularly acute for many workers (who later filed a civil class action), since California bars vertical non-competition agreements between employer and employee.
In October of this year, the Department of Justice's Antitrust Division, in conjunction with the Federal Trade Commission, released its Antitrust Guidance for Human Resource Professionals. That document clarified the DOJ's intent to criminally investigate "allegations that employers have agreed among themselves on employee compensation or not to solicit or hire each others' employees." The DOJ's guidance also makes repeated reference to "naked" agreements not to poach employees, meaning those that "are separate from or not reasonably necessary to a larger legitimate collaboration between the employers." Those naked restraints are per se invalid, a violation of antitrust law, and will be deemed so "without any inquiry into [their] competitive effects."
So what does this mean in practice? While the parameters of the DOJ's guidance are not set in stone, I think it's possible to glean a few guiding principles for typical no-poaching scenarios.
- M&A Due Diligence. No-poaching agreements are fairly common when an acquirer begins its due diligence of a potential target. Term sheets, letters of intent, and even transactional non-disclosure agreements often contain some form of no-hire clauses. These should be outside the DOJ's antitrust framework. However, the better approach is to limit the scope of these no-hire arrangements to key employees who play a material role in the due diligence process and to a reasonable period of time - say, 6 to 9 months past the time the deal falls apart.
- Litigation Settlements. No-poaching agreements very frequently arise during litigation (or threatened litigation) between competitors, usually over trade-secret theft allegations or a dispute over a group of employees' non-compete agreements. Nearly all of those cases settle before trial. In many settlement agreements, a plaintiff demands that the defendant employer agree not to hire the plaintiff's employees for a period of time. These types of agreements likely are unlawful. Nothing in the DOJ guidance contemplates that this type of restraint is "reasonably necessary to a larger legitimate collaboration," and indeed it would seem to be the very type of horizontal agreement with a vertical impact - on non-party employees.
- Business-to-Business Transactions. Somewhere in between these two paradigms are more run-of-the-mill contractual arrangements between companies who aren't necessarily competitors. Many technology staffing contracts feature some iteration of no-hire/no-poaching clauses. Others do as well, including some service-oriented relationships that look like a poor-man's joint venture. A number of my clients, for instance, provide professional consulting services that require their employees to work closely with a manufacturer or supplier to enhance or develop new products. Because of the close relationship developed among the two companies' employees (and their exposure to each other's business), the perceived need for a no-poaching agreement becomes obvious. I think these will likely be okay, but again a narrow scope with a short time limit is essential. Moreover, each beneficiary of a no-poaching agreement will need to illustrate why the no-poaching agreement is critical to the relationship. That these agreements are usually not between competitors is helpful to, but not dispositive of, the antitrust analysis, since the relevant market is the employment marketplace - quite broad indeed.
Tuesday, October 20, 2015
Lost Profits and No-Hire Clauses
A common feature of employment contracts these days is the no-hire clause. This is a form of a non-solicitation covenant and specifically precludes an employee from encouraging other employees to leave the firm.
I estimate that 9 out of 10 employee clients of mine are unconcerned with this type of covenant. They simply don't care to recruit fellow co-workers to join them at a new job. For the ten percent of clients that do care, they tend to be upper-level managers or lead a sales team. Their value to a new employer may depend on replicating that sales team.
The enforceability of no-hire clauses is not something that is widely litigated. One certainly can argue with exactly what kind of legitimate business interest the clauses protect. But for the most part, I've been content to assume that an employer at least can demonstrate some kind of an interest, even if it seems to vague and ephemeral.
The question of damages, though, presents a much more confounding problem. If one employee solicits another to leave - in violation of a covenant prohibiting that solicitation - what is the employee's monetary exposure?
A couple of possible damage theories immediately come to mind:
I estimate that 9 out of 10 employee clients of mine are unconcerned with this type of covenant. They simply don't care to recruit fellow co-workers to join them at a new job. For the ten percent of clients that do care, they tend to be upper-level managers or lead a sales team. Their value to a new employer may depend on replicating that sales team.
The enforceability of no-hire clauses is not something that is widely litigated. One certainly can argue with exactly what kind of legitimate business interest the clauses protect. But for the most part, I've been content to assume that an employer at least can demonstrate some kind of an interest, even if it seems to vague and ephemeral.
The question of damages, though, presents a much more confounding problem. If one employee solicits another to leave - in violation of a covenant prohibiting that solicitation - what is the employee's monetary exposure?
A couple of possible damage theories immediately come to mind:
- The employer's cost to replace the wrongfully solicited employee. These costs might include recruitment expenses, headhunter fees, signing bonuses, and incremental pay differentials between the former and replacement employee.
- Liquidated damages, if provided for by contact. Some employment agreements attempt to define the agreed-upon damages for breach of a no-hire covenant. I have seen these clauses expressed as a percentage of the solicited employee's last-prevailing rate of pay.
- Lost profits. The conventional form of contract damages, this would measure the loss to the employer associated with the breach of the no-hire covenant.
But as to this last category, how would one prove that? Assume that the employee who was wrongfully solicited then began contacting or soliciting customers of the former employer. Is any lost income properly attributable to the no-hire violation? This would seem to be a step removed from the underlying breach, particularly if the employee who solicited the customer had no restrictive covenant agreement prohibiting that sales activity.
This is roughly the fact-pattern of Acadia Healthcare Co. v. Horizon Health Corp., 2015 Tex. App. LEXIS 7683 (Tex. Ct. App. July 23, 2015). To be sure, the case involved a great deal of facts that supported more serious charges of conversion, trade secret theft, and breach of contract against other employees. But the case is certainly crucial for how the plaintiff was unable to use expert testimony to render a lost-profits opinion arising from a no-hire breach.
The plaintiff's expert looked at two sets of facts and gave separate damages opinions on each. As to the first, he identified a specific prospect that a former Horizon employee solicited for Acadia (the new employer). The employee himself had signed no employment agreement, but his superiors solicited him to join Acadia in violation of their own no-hire covenants. The court found that the expert's opinion on lost profits concerning the solicited account was too speculative, in that the expert assumed that Horizon would have retained the account for 15 years. The expert's inability to identify specific information supporting a 15-year contract duration was fatal to this opinion.
The other fact concerned the solicited employee's "lost production," In essence, Horizon had claimed damages from the wrongful solicitation of this employee under the assumption that, but for the solicitation, he would have produced profit for Horizon into the future. The problem with Horizon's theory was that Horizon assumed the employee, who was at-will, would have remained with Horizon, would have been offered a new sales position, and would have accepted it. And the expert again assumed that the employee would have signed hypothetical contracts with 15-year contract terms.
Acadia Healthcare illustrates how difficult it is to prove damages in competition cases. As it relates to no-hire clauses, the damages analysis becomes attenuated because the recruitment usually precedes the proximate cause of any loss. And even assuming a plaintiff can tie those causes together, the assumptions underlying any future damages projection inherently become problematic and attenuated.
Friday, January 30, 2015
No-Hire Provisions Are, For Some Reason, Drafting Nightmares
In the course of reviewing, say 5,000 restrictive covenants (the job can be a wee bit tedious at times), one drafting problem continually amazes me.
Restrictions imposed on employees from hiring away fellow employees appear to vex and confound those who draft contracts.
I've never quite understood this, but it's true. While it seems easy enough to draft non-compete restraints, for some reasons the same doesn't hold true for no-hire covenants.
Here's how I draft no-hire covenants in my model employment contract:
The Employee agrees that during the Restricted Period he will not solicit, hire, or induce a Restricted Employee to leave his or her employment with the Company to join a person or entity that provides similar products or services as the Company offers to others at the time of the Employee's departure.
I then define the terms "Restricted Period" as the duration of employment plus a reasonable post-termination period (say, a year). I define "Restricted Employee" as someone with management, sales, or product development responsibility (or as the client otherwise may choose in the proper case).
The bold-faced clause above is really important, or the covenant protects activity that is innocuous or could not lead to competitive harm. This is the piece I often see missing.
Below is a real beauty from a dispute I am negotiating right now for an employee (I am taking editorial liberties by deleting or revising the unnecessary legal jargon and the misspellings of commonly used words):
During Employee's employment and for two years after the end of employment, Employee shall not accept employment of any employee of Employer.
Worded terribly, this restriction only could apply in a very narrow fact-pattern. But it is not tethered to any competing work, so it's both underinclusive and overinclusive - a real achievement, if you ask me.
Reading, as I sometimes am apt to do, through recent non-compete decisions, I stumbled upon Base One Techs., Inc. v. Ali, 2015 U.S. Dist. LEXIS 5821 (D.D.C. Jan. 20, 2015). The district court dismissed a no-hire claim against two employees who the employer accused of soliciting each other to quit. (Pause to consider how to prove damages or even liability on that one.) The court confronted a covenant similar to the example I just gave, and it read (again, modified for my readers' ease):
Employee agrees not to solicit, contact, represent or offer to represent the Company's Full-Time Employees or Independent Contractors, whether or not such solicitation, contact, or offer was initiated, prompted, or in any other way developed by the Employee...
(?)
People draft agreements like this. They really do. The court was unimpressed and found that a vague and ambiguous restrictive covenant was, on its face, unenforceable. The court's particular concern was that the contract never said what conduct the employee could not solicit: "Is the employee prohibited from contacting another employee about health insurance? From soliciting another employee to attend a political fundraiser." When a court asks rhetorical questions in an opinion, that usually is a bad sign.
I believe that when attorneys start drafting contracts, every good and normal human instinct they have disappears. They are flummoxed by how to convey a relatively simple thought. They cram 75 words into one sentence. They liberally use subordinate clauses. They feel the need to use a series of three verbs for the exact same thing ("...solicit, entice, or take away..." or my favorite "...give, devise, and bequeath."
A judge once told me that a restrictive covenant should be understandable to a mildly intelligent 7th grader. I cannot say it any better than that.
Restrictions imposed on employees from hiring away fellow employees appear to vex and confound those who draft contracts.
I've never quite understood this, but it's true. While it seems easy enough to draft non-compete restraints, for some reasons the same doesn't hold true for no-hire covenants.
Here's how I draft no-hire covenants in my model employment contract:
The Employee agrees that during the Restricted Period he will not solicit, hire, or induce a Restricted Employee to leave his or her employment with the Company to join a person or entity that provides similar products or services as the Company offers to others at the time of the Employee's departure.
I then define the terms "Restricted Period" as the duration of employment plus a reasonable post-termination period (say, a year). I define "Restricted Employee" as someone with management, sales, or product development responsibility (or as the client otherwise may choose in the proper case).
The bold-faced clause above is really important, or the covenant protects activity that is innocuous or could not lead to competitive harm. This is the piece I often see missing.
Below is a real beauty from a dispute I am negotiating right now for an employee (I am taking editorial liberties by deleting or revising the unnecessary legal jargon and the misspellings of commonly used words):
During Employee's employment and for two years after the end of employment, Employee shall not accept employment of any employee of Employer.
Worded terribly, this restriction only could apply in a very narrow fact-pattern. But it is not tethered to any competing work, so it's both underinclusive and overinclusive - a real achievement, if you ask me.
Reading, as I sometimes am apt to do, through recent non-compete decisions, I stumbled upon Base One Techs., Inc. v. Ali, 2015 U.S. Dist. LEXIS 5821 (D.D.C. Jan. 20, 2015). The district court dismissed a no-hire claim against two employees who the employer accused of soliciting each other to quit. (Pause to consider how to prove damages or even liability on that one.) The court confronted a covenant similar to the example I just gave, and it read (again, modified for my readers' ease):
Employee agrees not to solicit, contact, represent or offer to represent the Company's Full-Time Employees or Independent Contractors, whether or not such solicitation, contact, or offer was initiated, prompted, or in any other way developed by the Employee...
(?)
People draft agreements like this. They really do. The court was unimpressed and found that a vague and ambiguous restrictive covenant was, on its face, unenforceable. The court's particular concern was that the contract never said what conduct the employee could not solicit: "Is the employee prohibited from contacting another employee about health insurance? From soliciting another employee to attend a political fundraiser." When a court asks rhetorical questions in an opinion, that usually is a bad sign.
I believe that when attorneys start drafting contracts, every good and normal human instinct they have disappears. They are flummoxed by how to convey a relatively simple thought. They cram 75 words into one sentence. They liberally use subordinate clauses. They feel the need to use a series of three verbs for the exact same thing ("...solicit, entice, or take away..." or my favorite "...give, devise, and bequeath."
A judge once told me that a restrictive covenant should be understandable to a mildly intelligent 7th grader. I cannot say it any better than that.
Monday, June 10, 2013
Oklahoma Legislation Impacts Employee Non-Solicitation Covenants
Hat-tip to Josh Salinas at Seyfarth Shaw for his fine analysis of new Oklahoma legislation that chips away at some prohibitions on restrictive covenants.
Oklahoma is one of three red-flag states that generally prohibit non-competition agreements. And while true non-compete arrangements are void like they are in North Dakota and California, Oklahoma statutory law allows for agreements under which an employee agrees not to solicit the sale of goods or services "from the established customers" of the employer.
Therefore, Oklahoma courts will enforce reasonable restraints that fall short of broad non-compete restrictions.
The new legislation, Senate Bill 1031, affects another type of restraint - employee non-solicitation covenants. As readers know, those types of covenants impact an employee's ability to solicit fellow employees to leave and join a competitor. They're commonly referred to as "Pied Piper" clauses and can work significant hardships on employees who are looking to build a team of sales or information technology professionals for a new company.
SB 1031, embedded below, allows for contractual covenants that prohibit an employee's ability to entice away other employees. Josh makes the point in his blog post that this new legislation may permit only clauses restricting active recruitment or enticement away of current employees. Put another way, is a clause prohibiting an employee from hiring those employees who may seek out alternative employment on their own enforceable under Oklahoma law? Josh says likely not.
I agree and think the answer is found in Inergy Propane, LLC v. Lundy. This is an Oklahoma case from 2009 where the same issue was at play, except the case involved a customer (not employee) non-solicitation covenant. As Oklahoma law has developed, a prohibition on diverting clients "where no active solicitation has occurred" runs afoul of state statutory law and is an illegal restraint on trade. I think it's likely Oklahoma courts would find that the same rationale applies to employee non-solicitation agreements, particularly since (as Josh notes) recent Oklahoma cases have frowned upon broad "no-hire" covenants.
The best argument for making the distinction is that a restraint on soliciting customers is much more likely to impact an employee's value to potential new employers and therefore limit his or her right to earn a living. The same hardly can be said for Pied Piper clauses, which shouldn't impede one individual's ability to sell his or her services on the open market.
Unfortunately, this legislative and judicial hair-splitting and word-play does no one any good. It is exceedingly difficult for an employer to determine who solicited whom. And in the absence of a mistakenly sent e-mail or a customer who is exceedingly loyal to the company, an employer is unlikely to find out except through the discovery process which party initiated the contact.
These statutes may be intended to discourage litigation, but only invite it, as they fail to create objective rules.
Oklahoma is one of three red-flag states that generally prohibit non-competition agreements. And while true non-compete arrangements are void like they are in North Dakota and California, Oklahoma statutory law allows for agreements under which an employee agrees not to solicit the sale of goods or services "from the established customers" of the employer.
Therefore, Oklahoma courts will enforce reasonable restraints that fall short of broad non-compete restrictions.
The new legislation, Senate Bill 1031, affects another type of restraint - employee non-solicitation covenants. As readers know, those types of covenants impact an employee's ability to solicit fellow employees to leave and join a competitor. They're commonly referred to as "Pied Piper" clauses and can work significant hardships on employees who are looking to build a team of sales or information technology professionals for a new company.SB 1031, embedded below, allows for contractual covenants that prohibit an employee's ability to entice away other employees. Josh makes the point in his blog post that this new legislation may permit only clauses restricting active recruitment or enticement away of current employees. Put another way, is a clause prohibiting an employee from hiring those employees who may seek out alternative employment on their own enforceable under Oklahoma law? Josh says likely not.
I agree and think the answer is found in Inergy Propane, LLC v. Lundy. This is an Oklahoma case from 2009 where the same issue was at play, except the case involved a customer (not employee) non-solicitation covenant. As Oklahoma law has developed, a prohibition on diverting clients "where no active solicitation has occurred" runs afoul of state statutory law and is an illegal restraint on trade. I think it's likely Oklahoma courts would find that the same rationale applies to employee non-solicitation agreements, particularly since (as Josh notes) recent Oklahoma cases have frowned upon broad "no-hire" covenants.
The best argument for making the distinction is that a restraint on soliciting customers is much more likely to impact an employee's value to potential new employers and therefore limit his or her right to earn a living. The same hardly can be said for Pied Piper clauses, which shouldn't impede one individual's ability to sell his or her services on the open market.
Unfortunately, this legislative and judicial hair-splitting and word-play does no one any good. It is exceedingly difficult for an employer to determine who solicited whom. And in the absence of a mistakenly sent e-mail or a customer who is exceedingly loyal to the company, an employer is unlikely to find out except through the discovery process which party initiated the contact.
These statutes may be intended to discourage litigation, but only invite it, as they fail to create objective rules.
Friday, February 1, 2013
IBM Suit Over Corporate Raiding Illustrates Use of Social Media Evidence
The Complaint, filed in the Southern District of New York, alleges that Greiner was the de facto recruiter for CSC in its attempt to shore-up its finance department, allegedly wounded in the wake of an SEC investigation into financial reporting.
IBM alleged a detailed set of facts that illustrate just how prevalent issues of social media and electronic evidence have become in proving liability in non-compete cases. Greiner's agreement not to solicit his fellow IBM co-workers (a covenant contained in an equity incentive plan) is of obvious importance to IBM, because an executive employee who leaves can use his or her goodwill and knowledge of an employee base to recruit away a stable of management level employees. Similar covenants are of less value to lower-level sales employees.
Greiner was allegedly caught using an internal IBM messaging system that demonstrated his contact with IBM employees about job opportunities outside IBM. Those communications - copied verbatim into the Complaint - can have a powerful impact on a judge considering injunctive relief. The relative informality of social media communications often leads to flippant remarks that go over poorly when a third-party reads them.
Greiner also allegedly sent a LinkedIn communication with another IBM employee in an attempt to lure him to CSC. Such in-mail contacts are more and more common, as employees seem to think that such communications simply won't be discovered.
The Complaint, embedded below, is worth a read - if for nothing else in that it establishes how to lay out a factual story about a corporate raid. True, many poaching cases don't seem to involve the number of actors that are laid out here, in fairly compelling detail. But a judge would be hard-pressed not to issue an injunction after reading a pleading like this.
And that's pretty much what happened. Greiner submitted an Affidavit stating he wouldn't solicit or hire IBM employees for almost two years. So the Court had little trouble enjoining him.
One other fact is important.
IBM alleged that Greiner and other CSC employees signed similar non-solicitation agreements. What IBM was trying to indicate was that such agreements are standard among skilled executives and that they, therefore are reasonable post-termination restrictions. Evidence of an industry standard is perhaps the most compelling evidence for a court to consider when examining whether a restraint is consistent with, or against, public policy.
The difficult part for IBM with this case may be establishing damages. There is little case law out there that discusses how to quantify business losses when an employee breaches a no-hire restriction. IBM certainly would be in a position to hire qualified talent. And its most tangible loss may be recruiting and incentive pay it would have to shell out to get them on board.
Friday, January 25, 2013
EBay Moves to Dismiss DOJ Antitrust Complaint
Last November, I posted about the Department of Justice suit against eBay for its alleged illegal hiring pact with Intuit. The DOJ contended that the eBay-Intuit agreement not to poach each other's employees violated both the rule of reason and a per se analysis under Section 1 of the Sherman Act.
Predictably, eBay struck back, filing on Tuesday a broad motion to dismiss the case. The motion sets forth a three basic problems with the DOJ theory: (1) the Complaint did nothing more than allege a conspiracy between eBay officers and directors, which is not actionable; (2) the DOJ never attempted to establish any economic harm or anticompetitive impact from the hiring pact; and (3) the pact does not meet the test for a per se Sherman Act violation.
The last point is the most relevant as it relates to non-compete law. EBay's point seems to be that traditional no-hiring pacts have to be judged by a reasonableness standard, and that there is no precedent to equate them with price-fixing or bid-rigging schemes. Essentially, eBay is saying that a no-hiring pact is akin to a non-compete arrangement (though, in fact, it's narrower and rarely subject to marketwide abuse). Non-competes are judged according to whether they're reasonable. And that should be the standard in the DOJ's case. It's pretty clear under the Complaint the DOJ is bypassing any sort of market analysis for why the hiring pact was impermissibly anticompetitive.
A copy of eBay's motion is embedded below.
Predictably, eBay struck back, filing on Tuesday a broad motion to dismiss the case. The motion sets forth a three basic problems with the DOJ theory: (1) the Complaint did nothing more than allege a conspiracy between eBay officers and directors, which is not actionable; (2) the DOJ never attempted to establish any economic harm or anticompetitive impact from the hiring pact; and (3) the pact does not meet the test for a per se Sherman Act violation.
The last point is the most relevant as it relates to non-compete law. EBay's point seems to be that traditional no-hiring pacts have to be judged by a reasonableness standard, and that there is no precedent to equate them with price-fixing or bid-rigging schemes. Essentially, eBay is saying that a no-hiring pact is akin to a non-compete arrangement (though, in fact, it's narrower and rarely subject to marketwide abuse). Non-competes are judged according to whether they're reasonable. And that should be the standard in the DOJ's case. It's pretty clear under the Complaint the DOJ is bypassing any sort of market analysis for why the hiring pact was impermissibly anticompetitive.
A copy of eBay's motion is embedded below.
Thursday, December 6, 2012
Pennsylvania Court Rejects Sherman Act Challenge to Non-Solicitation Agreement
A recent decision out of Pennsylvania demonstrates that such an argument is difficult for a court to accept.
The agreement at issue was between a staffing company, Select Medical, and its client, Consol Energy. The agreement contained a fairly common no-poaching clause that precluded Consol from hiring Select's employees during the term of the staffing agreement and for a trailing period of 18 months.
Though the Amended Complaint was less than clear, it appears the plaintiff - Molinari - was employed by Select Medical and impacted by the no-poaching clause when he sought to work at Consol in a safety coordinator position through another staffing company.
Molinari claimed that the Select Medical/Consol agreement was illegal under the Sherman Act because it produced anticompetitive effects within the following relevant market:
"...labor and services for sale to any employer who provides, or who may provide, services to Consol, directly or indirectly."
And that ended up being fatal to Molinari's attempt to claim a Sherman Act violation.
Molinari couldn't define the relevant market in a way that allowed him to state a plausible antitrust claim. In essence, Molinari made two mistakes:
(1) he never alleged what his skills were and how they were impacted by the agreement; and
(2) he claimed the market was a single entity - those who may work or provide "services to Consol."
Under federal law, a plaintiff must show that an agreement produces anticompetitive effects "within the relevant product and geographic markets." Molinari may have been right that the Select Medical/Consol agreement produced such effects as it pertained to his ability to work at Consol.
But he couldn't - indeed, didnt try to - demonstrate that the agreement precluded him from applying his general skills and knowledge elsewhere, even to companies that may provide energy services like Consol. Instead, he defined the relevant services market in a narrow, unrealistic way that didn't match up with the allegations of his complaint.
He also couldn't - again, didn't try to - allege that the Select Medical/Consol agreement precluded companies from hiring safety coordinators generally, or that the agreement made it unreasonably difficult for companies to find and retain such workers.
Molinari v. Consol Energy - Opinion
Tuesday, November 20, 2012
Department of Justice Sues EBay Over No-Poaching Agreement With Intuit
Last week, the Department of Justice filed another suit against one of the nation's tech giants for entering into horizontal no-hire agreements. This time the suit is against EBay, and it generally alleges that EBay and Intuit engaged in an informal and formal contract not to hire each other's key employees.
The DOJ has sued under the Sherman Act, claiming that the no-hire agreement is both illegal under a per se and rule of reason analysis. Though the suit is pending in California - a state with a well-known and broad policy against enforcement of non-competes - the California law receives only one passing mention in the complaint. And the state public policy would appear not to have any impact on the Sherman Act analysis.
It is not clear what the imminent harm is, or whether EBay and Intuit have continued their understanding not to hire each other's people, however informal that understanding may have been. The DOJ had obvious access to e-mail communications and probably gained them from another suit that it brought in California federal court against other tech companies.
Intuit is not a defendant, as it is under an agreed order in a similar case. A copy of the Complaint is contained below.
US v. eBay, Inc.
The DOJ has sued under the Sherman Act, claiming that the no-hire agreement is both illegal under a per se and rule of reason analysis. Though the suit is pending in California - a state with a well-known and broad policy against enforcement of non-competes - the California law receives only one passing mention in the complaint. And the state public policy would appear not to have any impact on the Sherman Act analysis.
It is not clear what the imminent harm is, or whether EBay and Intuit have continued their understanding not to hire each other's people, however informal that understanding may have been. The DOJ had obvious access to e-mail communications and probably gained them from another suit that it brought in California federal court against other tech companies.
Intuit is not a defendant, as it is under an agreed order in a similar case. A copy of the Complaint is contained below.
US v. eBay, Inc.
Friday, January 14, 2011
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.
--
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
Friday, February 5, 2010
Staffing Contracts, Work Restrictions and Paternalistic Legislation
It is no secret that in services agreements between staffing companies and their clients, no-hire provisions are common and essential to maintaining a long-term relationship. Often times, however, these provisions are not known to the staffing agency's contractors or employees. For those workers who ingratiate themselves to the end-user client, a long-term employment relationship may be a very realistic possibility.
The clients, at whom laborers are placed, also have a financial interest in employing valuable workers directly, as they may be able to cut out the placement firm's profit margin. No-hire clauses, however, may eliminate this possibility and effectively restrain a client's ability to hire workers placed on-site by an agency.
The question arises, then, whether an agreement between third-parties (i.e., the staffing agency and the client) legitimately can restrict the rights of workers to accept work or employment outside the staffing relationship. In Illinois, the Supreme Court held in H&M Commercial Driving Leasing, Inc. v. Fox Valley Containers, Inc. that third-party no-hire restrictions were in fact restraints of trade.
This does not mean, however, that a traditional non-compete analysis applies to determining the validity of the restraint. To the contrary, all a court will do is examine whether the restraint is reasonable. The Supreme Court of Illinois has left open the question of whether a restraint (i.e., a no-hire clause) that is unknown and undisclosed to the affected worker satisfies the reasonableness test. As Justice Thomas noted in the H&M Commercial Leasing case, "two employers should not be able to contract away an employee's future employment opportunities without the employee's knowledge or consent."
Illinois, being the paternalistic state that it is with an array of bizarre industry-specific laws, has intervened on the legislative side. Under the relatively new Day Labor Services Act, a "day and temporary labor service agency" cannot restrict the right of a laborer to accept a permanent position with a third-party client. The agency can charge a placement fee, however, something akin to liquidated damages. That placement fee, though, is capped at a 60-day net commission rate.
In its infinite wisdom, the Illinois General Assembly provided that the DLSA does not apply to labor of a "professional or clerical nature." Whatever that means...
The bottom line is any entity in Illinois engaged in the placement of labor ought to be very careful about third-party no-hire restrictions in its master services contract. At a minimum, any restrictions ought to be disclosed in writing to impacted employees or contractors of the agency, so as to eliminate the open legal question from H&M Commercial Leasing. That case seems to indicate such undisclosed restraints may be invalid.
Wednesday, October 7, 2009
Anti-Raiding Clause Narrowly Interpreted Following Stock Sale (Cenveo Corp. v. Diversapack, LLC)
In 2007, Cenveo purchased the outstanding stock of Commercial Envelope Manufacturing from the Kristel family for roughly $230 million. As is customary in business sale transactions, the sellers had to agree to certain restrictions on competitive activity. The agreements signed by the Kristel shareholders restricted them from recruiting or hiring away employees for a period of five 
years.
About a year later, the Kristels purchased an equity interest in Diversapack and hired at least 12 Cenveo employees. Cenveo sued, seeking to enjoin Diversapack from hiring its employees given the anti-raiding provisions contained in the stock sale documents.
But the court noted a basic problem with Cenveo's case: Diversapack is not a competitor of Cenveo. The anti-raiding provisions provided the selling shareholders could not recruit away employees to work for a competing business. Cenveo appeared to make a half-hearted attempt to bring Diversapack within the agreements' definition of competing business by alleging that Diversapack planned to install some specialized equipment that was similar to that used by the Kristel family in the business it sold to Cenveo. In addition to being vague, this allegation was hardly convincing.
Cenveo also had another problem: New York courts construe anti-raiding (also called "no-hire") clauses under the same standards as a non-compete agreement, meaning they are considered restraints of trade and are examined under a reasonableness test. The court found that, not only did the sale agreements not prohibit the hiring at all, but also that no legitimate business interest could support the anti-raiding covenants. Hiring ex-Cenveo employees did not threaten the disclosure of confidential information since Diversapack was not a competitor. And nothing indicated that the employees offered "unique services" to Cenveo, an interest recognized by New York courts.
In view of all that, the court had little trouble concluding that Cenveo was unlikely to succeed on enforcing the anti-raiding provisions. Aside from the rather obvious question of why Cenveo filed suit in the first place, the case demonstrates that no-hire provisions must be drafted and examined carefully. Not all states treat them as classic restraints of trade (probably because they aren't). But some states like New York will look at them under the same test - meaning counsel must tailor them narrowly to protect an employer's business interest.
--
Court: United States District Court for the Southern District of New York
Opinion Date: 10/1/09
Cite: Cenveo Corp. v. Diversapack, LLC, 2009 U.S. Dist. LEXIS 91535 (S.D.N.Y. Oct. 1, 2009)
Favors: Employee
Law: New York
years.About a year later, the Kristels purchased an equity interest in Diversapack and hired at least 12 Cenveo employees. Cenveo sued, seeking to enjoin Diversapack from hiring its employees given the anti-raiding provisions contained in the stock sale documents.
But the court noted a basic problem with Cenveo's case: Diversapack is not a competitor of Cenveo. The anti-raiding provisions provided the selling shareholders could not recruit away employees to work for a competing business. Cenveo appeared to make a half-hearted attempt to bring Diversapack within the agreements' definition of competing business by alleging that Diversapack planned to install some specialized equipment that was similar to that used by the Kristel family in the business it sold to Cenveo. In addition to being vague, this allegation was hardly convincing.
Cenveo also had another problem: New York courts construe anti-raiding (also called "no-hire") clauses under the same standards as a non-compete agreement, meaning they are considered restraints of trade and are examined under a reasonableness test. The court found that, not only did the sale agreements not prohibit the hiring at all, but also that no legitimate business interest could support the anti-raiding covenants. Hiring ex-Cenveo employees did not threaten the disclosure of confidential information since Diversapack was not a competitor. And nothing indicated that the employees offered "unique services" to Cenveo, an interest recognized by New York courts.
In view of all that, the court had little trouble concluding that Cenveo was unlikely to succeed on enforcing the anti-raiding provisions. Aside from the rather obvious question of why Cenveo filed suit in the first place, the case demonstrates that no-hire provisions must be drafted and examined carefully. Not all states treat them as classic restraints of trade (probably because they aren't). But some states like New York will look at them under the same test - meaning counsel must tailor them narrowly to protect an employer's business interest.
--
Court: United States District Court for the Southern District of New York
Opinion Date: 10/1/09
Cite: Cenveo Corp. v. Diversapack, LLC, 2009 U.S. Dist. LEXIS 91535 (S.D.N.Y. Oct. 1, 2009)
Favors: Employee
Law: New York
Thursday, August 27, 2009
Lack of Proximate Cause Fatal to Damages Claim in Breach of No-Hire Clause (Overland Solutions v. Christensen)
No-hire clauses, or those which prohibit ex-employees from enticing away former co-workers, are generally viewed as a less problematic restraint of trade in most states. In Louisiana, they do not even fall under the state'e non-compete statute.
The appropriateness of damages for breach of a no-hire clause, however, is a more vexing problem for employers. In Overland Solutions v. Christensen, the court found that the general manager of a premium audit services company violated a no-hire clause which prohibited him from enticing away co-workers for a year following his termination of employment. The defendant offered jobs to eight Overland employees and hired five of them within a year after he resigned from Overland.
At trial on the issue of damages, Christensen acted pro se and defeated the damage claims against him entirely. The problem for Overland was its presentation of the evidence: it simply could not show that the costs it claimed as damage components were incurred as a result of Christensen's solicitation of former employees.
Most notably, Overland claimed as damages the costs of training and replacing the solicited employees. However, it included in its damage calculation an array of fixed costs it would have incurred regardless of whether the solicitation ever occurred. On the issue of training pay, Overland's presentation of evidence was unconvincing because the costs it incurred in expending training pay was less than the salaries that would have been paid to the five employees who left as a result of Christensen's wrongful solicitation.
As a result, the court simply held the evidence was too speculative to support any kind of lost profits damage award. In cases involving breach of no-hire covenants, injunctions against further solicitation of employees seems to be the most widely available remedy. On this score, courts likely won't apply the injunctive relief to require a defendant from terminating someone who was wrongfully solicited and started work before the order of injunction is entered. So for that category of employees, a damage award would seem to be the most practical remedy.
But proving it is a different matter. Practitioners always must consider the exacting standards required by courts to satisfy an award of lost profits. The presence of multiple intervening causes and speculative evidence often reduce, or eliminate, lost profits awards in competition cases. For this reason, reasonable liquidated damages clauses should be considered to provide a remedy for breach of a no-hire clause.
--
Court: United States District Court for the Middle District of Louisiana
Opinion Date: 8/21/09
Cite: Overland Solutions, Inc. v. Christensen, 2009 U.S. Dist. LEXIS 74601 (M.D. La. Aug. 21, 2009)
Favors: Employee
Law: Louisiana
Wednesday, April 15, 2009
Louisiana Court: No-Hire Covenants Do Not Fall Within Non-Compete Statute (CDI v. Hough)
Though frequently a target of derision, the Louisiana courts actually have churned out some interesting non-compete decisions of late. The latest construed a fairly typical no-hire clause, a covenant generally barring employees from soliciting co-workers for a period of time after termination. Courts have been all over the map with respect to these types of covenants. One example is Missouri, where an appellate court held that such covenants were invalid as a matter of law because they did not support a recognized business interest, namely that of maintaining a stable workforce. The legislature acted expeditiously to overturn that decision. Illinois, by way of example, is all over the board on these types of covenants.
In CDI v. Hough, the Court of Appeal had occasion to apply a no-hire clause to an amended statute of general applicability governing non-compete agreements. The employee contended it was an invalid restraint under the statute; the employer felt the statute was not applicable by its terms to a no-hire clause.
The employer came out ahead and was able to enforce the covenant.
Louisiana's statute generally prohibits contracts "by which anyone is restrained from exercising a lawful profession, trade or business of any kind." There are exceptions for reasonable non-competes, but those aren't relevant here. The italicized language is the key to analyzing a no-hire.
According to the court, a no-hire clause does not prevent anyone from exercising a lawful profession. It merely places a restriction on who that individual can solicit to join him. Though the dissent disagreed, the wording of the statute seemingly does not apply at all to no-hire clauses, which are generally the least troubling type of employment covenant (according to most courts, at least).
--
Court: Court of Appeal of Louisiana, First Circuit
Opinion Date: 3/27/09
Cite: CDI Corp. v. Hough, 2009 La. App. LEXIS 457 (La. Ct. App. Mar. 27, 2009)
Favors: Employer
Law: Louisiana
Sunday, January 18, 2009
Louisiana Appellate Court Affirms Finding That No-Hire Clause Is Overbroad (Bell v. Rimkus Consulting Group)
The Louisiana case of Bell v. Rimkus Consulting Group has a long and tortured history, and generally speaking, appears to substantially favor the departing employees who sued their former firm seeking to have their rights under a customer non-solicitation clause declared invalid.
A recent ruling by the Court of Appeal of Louisiana further favors the employees and strictly applies an employee non-solicitation, or "no-hire" clause. These types of restraints of trade are receiving increased judicial scrutiny as employers attempt to prevent the poaching away of key employees. Courts have taken a number of different approaches in analyzing no-hire clauses. The general rule appears to be that, while the same are restraints of trade, they are not necessarily subject to the same rigorous analysis as customer non-solicitation or general non-compete covenants.
In the Bell case, the court upheld a trial court ruling, however, that a no-hire clause was invalid due to its overbreadth. The clause provided that Bell, following his termination, "will not, directly or indirectly, solicit, employee, or in any other fashion, hire persons who are, or were, employees, officers, or agents of the Company, until such person has terminated his employment with the Company for a period of eighteen (18) months."
The overbreadth of the no-hire clause was fairly obvious: it had no temporal limitation at all on Bell's conduct. As an illustration, if Bell waited ten years to approach a Rimkus employee for a new position, he would be barred from soliciting that person until he or she had left Rimkus' employment and was gone for at least 18 additional months. Put another way, the temporal limit was tied not to Bell, the party seeking to hire the employee, but rather to the employee being solicited.
The Louisiana court appeared to apply a conventional restrictive covenants analysis to the no-hire clause.
--
Court: Court of Appeal of Louisiana, Fifth Circuit
Opinion Date: 1/13/09
Cite: Bell v. Rimkus Consulting Group, Inc., 2009 La. App. LEXIS 48 (Ct. App. La. Jan. 13, 2009)
Favors: Employee
Law: Louisiana
A recent ruling by the Court of Appeal of Louisiana further favors the employees and strictly applies an employee non-solicitation, or "no-hire" clause. These types of restraints of trade are receiving increased judicial scrutiny as employers attempt to prevent the poaching away of key employees. Courts have taken a number of different approaches in analyzing no-hire clauses. The general rule appears to be that, while the same are restraints of trade, they are not necessarily subject to the same rigorous analysis as customer non-solicitation or general non-compete covenants.
In the Bell case, the court upheld a trial court ruling, however, that a no-hire clause was invalid due to its overbreadth. The clause provided that Bell, following his termination, "will not, directly or indirectly, solicit, employee, or in any other fashion, hire persons who are, or were, employees, officers, or agents of the Company, until such person has terminated his employment with the Company for a period of eighteen (18) months."
The overbreadth of the no-hire clause was fairly obvious: it had no temporal limitation at all on Bell's conduct. As an illustration, if Bell waited ten years to approach a Rimkus employee for a new position, he would be barred from soliciting that person until he or she had left Rimkus' employment and was gone for at least 18 additional months. Put another way, the temporal limit was tied not to Bell, the party seeking to hire the employee, but rather to the employee being solicited.
The Louisiana court appeared to apply a conventional restrictive covenants analysis to the no-hire clause.
--
Court: Court of Appeal of Louisiana, Fifth Circuit
Opinion Date: 1/13/09
Cite: Bell v. Rimkus Consulting Group, Inc., 2009 La. App. LEXIS 48 (Ct. App. La. Jan. 13, 2009)
Favors: Employee
Law: Louisiana
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