Back from Hiatus (Part I): Illinois Case Law Update

I've been uncharacteristically quiet about the subject of restrictive covenants, consumed (somewhat mercifully) by other cases in other areas of the law.

But the flow of non-compete decisions does not stop for those who venture astray, and so it appears I have some catchin' up to do.

I'll start with my home State (for now) of Illinois, where we have high taxes and a high output of non-compete cases. The federal district courts in Illinois churn out a lot of interesting non-compete cases. Those decisions, too, tend to be influential. For instance, most Illinois courts have decided to break from appellate case law on the employee at-will consideration rule that has generated some buzz (and some appellate work for yours truly).

Non-Competition Covenants and Motions to Dismiss

One example of this independence from the federal bench is the case of Medix Staffing Solutions Inc. v. Dumrauf. Judge Sara Ellis granted a motion to dismiss a non-compete claim that Medix brought again a former Director of Business Operations. The decision was notable - and fairly bold - since Illinois courts have suggested that enforceability and overbreadth questions generally are unsuitable for motions to dismiss. True, you see these teed up more often at summary judgment or even through preliminary injunction rulings. But infrequently, the propriety of a motion to dismiss in the context of non-competes appears in the case law.

The court in Dumrauf found that the employer's non-compete was extreme and facially unenforceable when it barred the employee from working within 50 miles of any Medix office for any business that competed with Medix or that offered a product or service in competition with Medix. Of central concern to the court was the non-compete's prohibition on Dumrauf's work in any capacity for a competing enterprise. The case demonstrates the importance of drafting non-competition agreements with a reasonable scope limitation that is roughly commensurate with the type of job the employee performed at the company (or perhaps one that, if not comparable, would threaten the same type of legitimate business interest).

Judge Ellis lastly declined to modify, or blue-pencil, the non-compete, as is typical of most (but not all) Illinois courts. The deciding factor is usually how close the employer came to being reasonable. But here, the non-compete failed terribly so Judge Ellis said no to rewriting it.

Non-Solicitation Covenants and Motions for Summary Judgment

The employer didn't fare a whole lot better in Call One, Inc. v. Anzine, but the case does show that blue-penciling is not always a pipe dream.

The non-solicitation covenant in Anzine had all the hallmarks of a crapshow. It was (a) not limited to the employee's particular accounts, and (b) included something called "prospective" customers, which unhelpfully covered accounts the company solicited or "had plans to solicit."

Judge Matthew Kennelly found the covenant unenforceable, noting along the way that Illinois precedents in the non-compete field are of "less than usual value." This could mean either that the cases are too fact-specific to be helpful in a subsequent case, or that Illinois state appellate courts are not helpful as a general proposition. Or both.

But Judge Kennelly looked to a reformation clause in the underlying agreement, which contemplated that a court could make an invalid clause valid. Many changes skim over that clause for reasons that are obvious. As a result, he fixed some (but in my opinion not all) of the problems in the non-solicitation clause, such that Anzine was still barred from soliciting company customers (and active prospects as of the date she was terminated) and customers for which she had sales responsibility.

One other observation on this case. Anzine sent a couple of work spreadsheets to her personal email account, but Judge Kennelly found that no jury could find that this rose to the level of "misappropriation" of a trade secret. The self-emailing phenomenon is not new, but in and of itself it is no panacea for a trade secrets claim. Here, Anzine appeared to have plausible reasons for what she did, and the e-mailing didn't occur under suspicious circumstances (like, for instance, a forwarding of documents after notice and before departure). The court's discussion of this is worth a read for practitioners who've dealt with this set of facts before.

Non-Competition Covenants, Non-Solicitation Covenants, and Motions to Dismiss (Redux)

And on the opposite end of the spectrum (somewhat), we have American Transport Group v. Power. There, the court denied the defendant's motion to dismiss a restrictive covenants claim even when problems with those covenants were clearly apparent. The theme running through this case was nearly the opposite of Dumrauf, as Judge Virginia Kendall repeatedly noted that the employer must have the opportunity to develop the record on the question of reasonableness.

The non-compete precluded a freight broker's salesman from working for any competitor for three months, regardless of geographic location. I have a lot to say about the freight brokerage business, but that's beyond the scope of this. It is true, however, that geography seems to matter very little for sales people who work the phones contacting shippers (that is, customers) and arranging carriers. So I wasn't terribly bothered by the three-month clause or the lack of a geographical limit, as much as I am bothered by the use of non-competes in this industry entirely.

The non-solicitation clause though was a problem, and I think Judge Kendall should have found it unenforceable. It barred Power, for one year, from soliciting or diverting any customer or carrier of his employer. The court provided little analysis here, but I am uncertain how ATG ever could restrict the employee's use of a carrier (in effect, a supplier) when freight brokers all deal with the same carriers. Seems gratuitous.

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So what lessons did we learn today? Judges reach different holdings on similar facts. Companies still have a lot to learn when drafting agreements. Lawyers will keep getting business because this stuff ain't going away. And your author can't take a month off again, because the cases keep piling up.

"Solicit," in a Non-Solicit, May Not Mean First to Solicit

Clear?

Didn't think so.

Much ink has been spilled over the term "solicit," since it's obviously a flash-point in non-compete litigation. That is, not all non-competes are true non-competes. Some restrict customer, or employee, solicitation. This is especially true for salespersons, who often have more limited restrictive covenant agreements concerned only with client contact.

For 20 years, I've dealt with clients who come to me with some variation of this question: What if the customer calls me first?

In other words, is that a "solicitation" that violates a restrictive covenant?

(Short digression.

The first layer of analysis is to look at the contract itself. Many non-solicitation covenants actually are broader, despite their customer-centric focus. They may prohibit an ex-employee from working with or accepting business from a group of clients. If that's the case, then an employee who wants to work with former customers needs to shift her focus away from the breach question to either contract formation or reasonableness.

Now back to the main point of this post.)

The meaning of "solicit" is pretty fact-specific. If a client contacts the employee about a project or ongoing work, then the employee likely hasn't solicited anything and may be free to work with the client on competitive business. But what if the client's initial contact is preliminary, vague, and just a precursor to eventual work? What if the discussions, in other words, contemplate that something else will happen?

There are a fair number of cases that give some color to the type of conduct that qualifies as "solicitation." But I haven't seen one quite like Quality Transportation Services, Inc. v. Mark Thompson Trucking, Inc., 2017 IL App (3d) 160761, which effectively answers my rhetorical questions.

The court there found that the client's initial contact was not dispositive of the solicitation question, and that the court needed to evaluate other circumstances. In particular, the factual question concerned the "large gaps of time that followed [the client's] initial phone call." Since the restrained party--it was a corporation, not an employee--appears to have made "multiple and arguably separate contacts" with the client, the "solicitation" question was not clear-cut. The case is definitely worth a read for anyone who wants to deconstruct the meaning of solicitation and get a sense of how courts look at customer contact.

A copy of the opinion is available here.

So what to draw from this. Employees bound by a true non-solicitation covenant, and who claim they didn't initiate client contact, need to keep detailed records of text messages, e-mails, and phone calls received. Those also should describe the nature of the conversation and whether the contact was preliminary or concrete enough to protect further communications as incidental follow-ups, and not renewed efforts to win business.

Remember: when an employer has a non-solicitation covenant, it has no real means of assessing who called whom. These clauses are ripe for litigation because the movement of business itself will trigger a reasonable assumption that the employee made first contact, not the client. But that isn't always the case. Proving that, however, is often really, really hard.

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.

The Reading List (2017, No. 23): The "Welcome Back, Ken" Edition

Non-Compete and Trade Secrets News for the week ended August 4, 2017

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This week, I welcome myself back!

I'm happy to be here, really I am. The time away from blogging was great, a much-needed break. What did I do? I went camping (in the rain). I ran a race (the Bix7 in the lovely Quad Cities), and - oh yea - I tried a case in Chicago. Eventful. Not as eventful as Anthony Scaramucci's month, but eventful nonetheless.

Speaking of my trial, it was a doozy. A replevin trial over a stolen shipment of Mexican cheese, which the Chicago Tribune reported on. And, you know your case is good when it merits discussion in Food & Wine magazine. Just so you know, cheese heists appear to be a thing. But I'll take the set of facts I tried over any of these half-baked schemes. And it turned out great a - a replevin judgment about three weeks after we filed the case.

It did get me thinking about remedies, because you know I'm always looking to relate something to non-compete and trade-secrets law. Readers of this blog know that I've written a lot about the ex parte seizure order available under the Defend Trade Secrets Act. That procedure allows for an early court hearing, without notice, through which a federal court can empower a U.S. Marshall to seize stolen items containing protected trade secrets.

This replevin remedy is kind of similar, though there's process afforded. A replevin is simply an interim order that directs the seizure of property. In my case, cheese. But it could in theory be the replevin of a trade secret, too, depending on the facts. In Illinois, at least, replevin is only available for chattels or tangible goods. Again, cheese would be an example. Most trade secrets exist electronically, making the statute in Illinois a somewhat poor fit. Also, most items that a plaintiff would want back are legitimate in and of themselves (a computer, a thumb drive). In a replevin case, the plaintiff must show a superior possessory right to the thing itself - not what may reside on it.

Depending on the facts, a replevin order could issue on an ex parte basis. But in the main, a replevin claim really is an early trial that is akin to a mandatory injunction proceeding, which if successful results in a sheriff seizing property. All that said, don't overlook replevin as a potential remedy in a trade secrets case.

Anyway, on to news and updates.

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Consideration for Non-Competes in Illinois

Illinois courts continue to debate and discuss the so-called Fifield rule of continued employment. Generally, that case suggests two years of continued employment is required to serve as adequate consideration for a restrictive covenant. The case, however, is more a result of sloppy legal writing than it is a bold pronouncement of what amounts to lawmaking.

In reality, the facts of Fifield weren't particularly compelling and the case wasn't that close. The employee had been working only for a few months before leaving, meaning his tenure was far short of the rough two-year guidepost old Illinois cases had established. And there certainly was no indication he received anything more than the job itself.

The Appellate Court of Illinois (Second District) weighed in somewhat in Paul Joseph Salon & Spa, Inc. v. Yeske in affirming the grant of a temporary restraining order. There, the defendant resigned two days before the expiration of the two-year employment period. The court held that, at least when reviewing a TRO, the court did not abuse its discretion in finding the consideration adequate even if it fell just short of the two-year mark. The case is not particularly useful since it's an unpublished decision and given the "quick-look" review afforded TROs. And in fact, the Second District in prior cases never has embraced a bright-line rule of two years' continued employment. It appears the reason why is that the two-year rule only sort of exists and stems from an unforced error in the drafting of the Fifield decision.

A link to the case is available here.

From the Southern District of Illinois, we received another district court memorandum order that rejects any bright-line rule concerning continued employment. This follows a trend of cases from Illinois federal courts. In Apex Physical Therapy, LLC v. Ball, No. 17-cv-119, 2017 WL 3130241 (S.D. Ill. Jul. 24, 2017), the court noted the problem with bright-line rules and inequitable results which could occur. Interestingly, the court stated that "consideration can be comprised of benefits beyond continued employment." As with many of the federal decisions, it is not clear what the employee's agreement said about consideration or what else the employer might have alleged in addition to continued employment.

Injunction Bonds

One overlooked aspect of injunction practice in competition cases is the need for a bond. A bond generally provides the defendant some security in case the court was wrong in issuing a preliminary injunction. To be sure, those orders can inflict economic harm on the defendant. And to complicate the equation, courts must issue those orders on a relatively undeveloped record.

In my experience, plaintiffs who seek an injunction treat the bond requirement as an afterthought. It's one thing to ask for a low or nominal bond. It's quite another to be totally unprepared in contacting a broker, filling out a surety application, and getting the bond issued. Assuming a plaintiff does secure a bond, however, it must recognize that it has responsibilities to continue with the litigation responsibly. Or else, the bond may provided the defendant with a ready source of damages.

Against this backdrop, I was interested by the North Carolina Court of Appeals' opinion in Van-Go Transportation, Inc. v. Sampson County. This is not a non-compete case, but it's about the closest analogue and certainly relevant for the bond discussion. It involved a public contract for the transportation of Medicaid patients seeking health-care services. The incumbent, Van-Go, obtained a temporary restraining order against a competing ride company that prevailed in a request-for-proposal process with a municipality. As a condition of the TRO, the court required Van-Go to post a bond.

After the defendant filed a motion to dismiss, Van-Go voluntarily dismissed its case but also sought a release of the TRO bond. The trial court denied that effort and awarded the bond proceeds among the defendants. The Court of Appeals affirmed that decision, holding that a voluntary dismissal is equivalent to an admission that the TRO was wrongfully obtained in the first instance. The ruling is obviously defense-friendly, and it forces the plaintiff to take a long-view of litigation. In rejecting Van-Go's argument that it discontinued the litigation for "responsible financial business practices," it effectively tells plaintiffs that they must continue a case in which they have secured an injunction at pain of forfeiting a bond.

Depending on the amount of the bond (and the damages a defendant can prove), that may be an acceptable risk for the plaintiff to take. But it's crucial to understand that getting an early injunction comes at a price. The plaintiff may not be able to abandon its case free of charge.

A link to Van-Go Transportation can be found here.

Independent Contractors

The enforcement of non-competes against consultants and independent contractors raises a host of tough questions. After all, the essence of being an independent contractor is freedom and, importantly, freedom to control your own work. Non-competes, by definition, stifle freedom and seem to be at odds with an independent contractor relationship. Still, many companies use non-competes with consultants or sales representatives much as they would with ordinary W-2 employees.

A pair of cases reveals the limitations, though, of shoehorning consultants into the typical employment non-compete framework. The first comes from the Eighth Circuit, where a panel concluded that a company could not restrict an outside sales representative from engaging in competing crop management and fertilizer sales since he had developed his customer contacts through his own labor and without support from the company. The case, Ag Spectrum v. Elder, is a great read on the reasonableness inquiry through its analysis of the company's protectable interest. In particular, the opinion emphasized the resources that the sales representative invested and the absence of any specialized training or assistance that the principal provided. In those circumstances, a customer non-solicitation covenant was unreasonable as applied.

The opinion from the Eighth Circuit panel is available here.

In a similar case, an Ohio federal district court denied an injunction brought by a company that sells, among other things, office chair mats against a former consultant. The non-compete entered into between the company and the consultant broadly prohibited him from competing in the sale of chair mats and other products. The problem for the company is that the consultant's work, following the end of the relationship, involved those other products. And the consultant's services had nothing to do with them. Put another way, the company was trying to prevent competition for work related to products over which its consultant had no involvement.

The opinion, written by Judge Edmund Sargas, reflects a terrific example of judicial engagement - a perspective I often find lacking in non-compete cases. Judge Sargas credited the consultant's prior history in developing the same type of products that he was offering after the end of the relationship, concluding that the consultant in fact did not try to capitalize on anything confidential he learned through his contract arrangement.

Together, both cases demonstrate the difficulty of enforcing non-competes in a more arms-length relationship where the employer simply cannot demonstrate a protectable interest - that is, an interest that stems from a significant investment of time, resources, or information.

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Much more next week, including an update on the big Wal-Mart trade secrets case and more non-compete coverage in the New York Times.

The Reading List (2017, No. 8): An Example of How Differently Courts Treat Non-Competes

Non-Compete and Trade Secret News for the week ended February 24, 2017

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Overbroad Non-Competes in Virginia

This week's first two updates could be called a Tale of Two Non-Competes.

A federal district court in Virginia ruled that an employee's non-compete agreement, ancillary to a stock option award, was unenforceable because of its overly broad geographic scope. This case illustrates the perils of linking a restrictive covenant to customers or markets about which an employee has "confidential information." For starters, that may require a court to assess how the agreement treats that defined term - a notorious plot of unruly thatch.

But additionally, a restrictive covenant that is drafted this way often lacks objective parameters. In NVR, Inc. v. Nelson, the covenant's geographic term extended to areas "from which [the employee] received...Confidential Information." Because he received information digitally and since there was no way to tell from where the information originated, the non-compete was overbroad. A copy of the opinion denying the employer's temporary restraining order motion is available here.

Preliminary Injunction in New Jersey

The employer fared better with pursuing injunctive relief in Menasha Packaging Co. v. Pratt Industries, a New Jersey case in which the district court applied Illinois law. This dispute stems from the movement of three ex-Menasha employees to Pratt Industries during the period in which Menasha's client, Mondelez, had put up a packaging contract for bid. Unlike the NVR case, the competition and the immediate threat to Menasha were more tangible and apparent from the record. Menasha also sought very limited enforcement of the restrictive covenant, despite some dispute about whether the contract was facially overbroad. The court enjoined the employees' work with Mondelez, on Pratt's behalf, for the 18-month non-solicit term. The case illustrates the wisdom of narrowing the dispute and seeking relief that is directly tailored to the conduct in question. A copy of the New Jersey' court's preliminary injunction opinion is available here.

Non-Competes in Bankruptcy

The United States Bankruptcy Court for the Northern District of Illinois held in United Providers, Inc. v. Pagan that a claim for intentional breach of contract is dischargeable in bankruptcy. The breach arose from the debtor's alleged violation of an employee no-hire agreement in the medical billing field.

The nondischargeability provision of the Bankruptcy Code for "willful and malicious" injuries, Section 523(a)(6), requires that the breach of contract also give rise to an independent tort claim (e.g., breach of fiduciary duty, trade secrets misappropriation). And even then, a court's finding of nondischargeability is not guaranteed. The court's opinion makes sense because many breach-of-contract scenarios give rise to an economically efficient result, regardless of whether the employer likes it or feels as if it has been the victim of a maliciously designed plot. Only if the underlying conduct is intended to produce a harmful result will a viable nondischargeability argument arise. The opinion is available here.

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One of the more interesting trade-secret filings in a long time comes from the Central District of California, where Songkick has amended its suit against Live Nation Entertainment and Ticketmaster to allege trade secrets theft. The 91-page Complaint is quite a read, but the pertinent allegations of trade-secret theft appear to rest on a departed executive's misappropriation of thousands of documents in order to benefit Ticketmaster's "Artist Services" division, which is now known as OnTour. Consumers may be familiar with this type of service, since it promotes ticket pre-sales, fan clubs, and more direct fan engagement. Songkick's trade-secret theft allegations bolster a more robust antitrust claim against Live Nation, which vigorously has disputed the veracity of the accusations.

For those interested in exploring the data concerning non-competes' impact on wages and mobility, please see the University of Michigan Working Paper entitled Locked In? The Enforceability of Covenants not to Compete and the Careers of High-Tech Workers. The paper details a number of interesting conclusions, including that technology workers in higher enforcement states (think Florida) earn lower wages than their counterparts in lower enforcement states (think California). This at least seems to support the notion that employers do not share the marginal gains from non-compete regimes with their existing employees, a theoretical justification many on the pro-enforcement side frequently offer.

Non-Competes Gone Wrong: The Unneeded Belt-and-Suspenders Approach

When you have reviewed as many non-competes as I have, it doesn't take long to spot major red flags. They often times arise in the context of at-will employment contracts for regular, average, run-of-the mill employees who do not serve in an executive capacity. Indeed, the oddity is that this group of contracts for people who pose the lowest threat tends to be the most oppressive and poorly drafted.

Here are the 7 most common red flags associated with unreasonable non-compete contracts:

1. A broad non-compete clause that prohibits work in an entire industry, with no limiting condition narrowing the covenant to a specified group of jobs.
2. A vague definition of a "competitive business," which is sometimes nominally used to define the scope of the non-compete restriction.
3. A broad geographic scope that may be commensurate with the employer's line of business, but not with where the employee has developed her sphere of influence.
4. A non-solicitation covenant that contains a broad, untethered definition of "customer."
5. A non-solicitation covenant that extends to prospective customers who never developed a relationship with the employer.
6. A confidentiality clause with no time limit.
7. A confidentiality clause that contains an overbroad definition of "confidential information," suggesting it can be a backdoor non-compete clause that extends in perpetuity.

These covenants - particularly when applied to mid-tier employees - are frequently not litigated because the cost of doing so is prohibitively high for the employee. To be sure, most employees will make a rational economic choice to incur those costs only if (a) the new employer is willing to subsidize the effort (rare), or (b) the potential long-term gain from invalidating the agreement exceeds the sum of (i) litigation costs and (ii) discounted risk of a non-indemnifiable damages judgment (more rare). Frankly, the economics often just don't work.

When these agreements do make their way into court, judges will notice the seven red flags I identified above. My experience is that they're willing to overlook one or two as the work product of an overzealous attorney. However, when several (or sometimes) all of these factors are present, courts are inclined to strike the agreement and view it as a blatant overreach on the employer's part.

Sometimes this occurs at the earliest stages of litigation before the expensive discovery process begins. This is what occurred in Seneca One Finance, Inc. v. Bloshuk, No. 16-cv-1848, 2016 U.S. Dist. LEXIS 138866 (D. Md. Oct. 6, 2016), a case in which 6 of the 7 red flags were present in an employee's non-compete agreement. The Maryland court had little trouble tossing the case after the employee sought an early dismissal.

One of the structural impediments to non-compete litigation is the relative unwillingness of many judges (the Maryland court being an exception) to dismiss cases early. I have been an advocate of "quick-look" proceedings in non-compete litigation as a means to tease out facially overbroad agreements and those where consideration is sorely lacking. This process cuts against the design of our adversarial system where, for better or worse, the civil discovery process weeds out cases through sheer attrition.

The problem, in my mind, is that discovery attrition can work in cases where the parties are on a level playing field to litigate (many patent cases), or where the party with a relative lack of resources has the ability to recover monetary damages (discrimination or personal injury cases). In a non-compete dispute, neither of those fact patterns is usually present. And if we're to maintain a system where the freedom to compete and the freedom to contract stand in equipoise, then a quick-look system may be the only route to achieve that.

Deconstructing the Trump Campaign's Non-Compete Agreement

The inspiration for this post comes from Donna Ballman's terrific blog and her latest post today, titled "Trump Campaign Noncompete Agreements May Break Multiple Laws."

It probably comes as no surprise that Trump's noncompete agreement sucks and is woefully inadequate. Once you wade past the grammatical errors, the contract contains the typical, rote litany of promises not to disclose any "confidential information," not to disparage Trump, not to solicit anyone associated with Trump, and not to provide "competitive services. Absolutely no one is shocked that he has campaign workers sign these.

But given that this is not really a business agreement, and really a political one, let's try to apply some of the utterly inane provisions in this contract to the general legal principles we've come to understand.

1. The non-disclosure covenant. The longest provision of Trump's contract is a non-disclosure clause, which surprises absolutely no one. It has no time limitation, which is a red flag in many states and would render it unenforceable, for instance, against a campaign worker/volunteer in Illinois. (Incidentally, not sure who in the Trump campaign exactly signs this piece of paper, but given what we know, presume everyone.) The definition of "Confidential Information" is truly rich since it is circular in that it applies to all information of a "private, proprietary or confidential nature." Then it goes further and applies to information "that Mr. Trump insists remain private or confidential." With that qualifier, the mind truly reels. As you might expect, it gets better. If Mr. Trump so elects, confidential information can extend to "any information with respect to the personal life, political affairs, and/or business affairs of Mr. Trump." There are no carve-outs for information that is within the public domain so it may be hollow, but it is worth noting that Mr. Trump includes as non-exclusive examples of "Confidential Information" such idiotic categories like his relationships (a voter interviewed on Comedy Central?), alliances (Sarah Palin?), decisions (to build a wall?), strategies ("....."), and meetings ("Sept. 26 Debate against H. Clinton"). Unenforceable.
2. Non-disparagement. Predictably, this too is a real beauty. Trump requires that anyone working on his campaign never "disparage publicly" Mr. Trump. Hypothetically, if he is elected President and it's a disaster, a former campaign worker could not criticize his term in office. It also applies to any Family Member of Trump, including his children. So if you work on Trump's campaign, and Tiffany Trump's singing career does not go great, you cannot criticize her on Twitter. Unenforceable and non-sensical.
3. Non-solicitation. This one, actually, is hard to read. The Trump campaign has no customers, unless you consider a voter a customer. So it smartly leaves that term out. But a campaign worker may not solicit another worker "for hiring" until the campaign is over. So if you're a Trump campaign worker and meet another campaign worker, you cannot hire him/her for any type of work until the campaign is over, even if that work has nothing to do with politics. Unenforceable and almost incoherent.
4. Non-compete. The best for last. A Trump campaign worker cannot assist anyone for federal or state office besides Trump, whether for compensation or as a volunteer. Therefore, a campaign worker cannot contribute to a candidate for state representative. He or she cannot host an event for that person. He or she cannot put out a yard sign for that person. And he or she cannot seek to encourage another voter to vote for that person. Unenforceable and just plain idiotic.

On the upside, you get an arbitration clause, a favorable New York choice-of-law clause, and the possibility of fee-shifting if you prevail. Plus, and this is truly priceless, you get a piece of paper with the signature of the one and only "Donald J. Trump, President." Presumably, of his campaign and not the entire United States.

A copy of the Trump non-compete is available on my Scribd site here.

Personal Clients/Firm Clients

In 1999, the New York Court of Appeals decided BDO Seidman v. Hirshberg and said this:

"...it would be unreasonable to extend the covenant to personal clients of defendant who came to the firm solely to avail themselves of his services and only as a result of his own independent recruitment efforts, which BDO neither subsidized nor otherwise financially supported as part of a program of client development."

Which raises the question...

...what's a "personal client" and what's a "firm client"? The particular facts and context of BDO Seidman aren't the point of this post. Rather, the larger issue is the construct of rules in non-compete law that can have unintended consequences for the very parties those rules are intended to aid - employees bound by restrictive covenants.

The difference between a personal client and a firm client is not straightforward. An employer will no doubt contend that an employee's affiliation with it is an extension of its goodwill, branding, reputation in the marketplace, and particular product or service offering. That may be true. Or, as the employee will retort, "I did everything and got no help." That also may be true. The truth may lie somewhere in between.

Rules like that in BDO Seidman are easy to state and hard to apply. Take Marsh USA, Inc. v. Schruhriemen, a New York district court case decided earlier this month. There, Judge Jed Rakoff applied this personal client/firm client rule and entered a limited injunction that basically told the employee "I have no idea, so you're on your own." Of course, Judge Rakoff would never say just that, but he did say that "the Court cannot, without further factual development, provide a definitive ruling on whether [the subject client] falls within the scope of the 'personal clients' exemption" from BDO Seidman so "Mr. Schuhriemen acts at his own peril" if he services the client.

Rules like that announced in BDO Seidman are meant to be objective and place sensible limits on the use of restrictive covenants. But too often, these very rules (expressed objectively) invite further disputes, subject parties to immense litigation risk, and (most noticeably) increase litigation expense on the parties least able to bear them.

The personal clients/firm clients rule from New York is not alone. Disputes about non-compete consideration, the scope of legitimate business interests, and blue-penciling of overbroad agreements all deal with limiting unfair agreements. But only infrequently do these rules solve anything. And in too many cases like Marsh USA, they leave everyone twisting in the wind.

A Tale of Two Non-Competes

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness...

--"A Tale of Two Cities," by Charles Dickens (1859).

Perhaps (er, certainly) this is a little dramatic, but this is what I thought of after reading two recent preliminary injunction rulings in non-compete disputes. One comes from Ohio, the other from Minnesota. And they produce results you might not expect given the facts.

The first is Independent Stave Co. v. Bethel, in which the district court partially enforced a broad non-compete agreement against a log buyer, who made less than $100,000 per year. The agreement contained a geographically unlimited non-compete restriction. The court found the employee inherently credible. There was no evidence the plaintiff lost any business, or that the employee misappropriated anything. Yet, the court issued a broad injunction, even if it was not quite what the employer sought.

The second case is Wells Fargo Ins. Svcs. v. King, where a federal court in Minnesota addresses a narrow customer non-solicitation covenant, finds that the employee solicited all his largest accounts, and determines he was in blatant breach of his contract. And in that case, the court refuses to enforce the restrictive covenant, finding money damages adequate and that an injunction would do nothing to cause the "stolen" clients to revert to the employer.

***

So what to make of this? Non-compete disputes are inherently fact-specific and are not susceptible to easy classification. What may be important to one judge is not necessarily of interest to another. In the King litigation, the judge may have been convinced that the presence of the new employer in the case would provide the plaintiff a deep-pocket in which to satisfy a money judgment. Perhaps in the Bethel case, the court felt it was narrowing the agreement in such a way to craft a middle-ground option for the employee while protecting the ex-employer.

***

Although this list is not complete, here are a number of A-list factors that may influence a court's decision to award an injunction in a non-compete dispute:

1. Witness credibility (and in particular the employee's good-faith conduct apart from the issue of "breach).

2. Constructing a compelling narrative during an evidentiary hearing, so that the presentation is a story rather than an accumulation of evidence.

3. Whether the degree and impact of competition within the relevant market is explained and understood.

4. The ability to describe actual, as opposed to speculative, harm.

I have written on each of these topics many times, and no doubt there are many more. And it also bears repeating that in about 60 percent of cases that go to an evidentiary hearing, the plaintiff ends up prevailing on at least one of the major issues in the case. But at a micro level, as King and Bethel show, reconciling the outcomes can be awfully difficult.

2013: The Top 10 List (Part I)

And so ends Year 5, my fifth full year writing this blog. Sometime during the first quarter of next year, I will be penning my 500th post. I guess that qualifies as a milestone, but I'm not exactly sure how to celebrate. Perhaps a guest column? We'll cross that bridge later.

For now, we'll have to make do with what has become an annual tradition - a countdown to the Top 10 most significant developments for the past year. Some on this list will be familiar, some perhaps not. And as usual, I have my own reasons (which I'll try to explain) for why I think a development is signficant.

This year, I am breaking the post into two parts. Not so much to speed-up the countdown to Post No. 500, but to continue on with the suspense-building tradition of bifurcating Top 10 lists (see Pitchfork's Top Albums list, for instance).

So here goes Part I, in which I'll summarize 10 through 6. Tomorrow, we'll conclude the year with Part II, in which I outline the five most important developments of 2013.

10. State Legislatures Continue Examining Non-Compete Agreements. Every January we see legislatures consider a host of new bills - many of which are unpassable sops to constituents. It has become commonplace to see the introduction of bills regulating non-compete agreements. This year was no different, as legislatures in Minnesota, Illinois, New Jersey, Connecticut, and Oklahoma all considered regulating various aspects of non-compete law. For a take on the Oklahoma bill, read my post from June 10.

9. First Circuit Addresses Scope of "Solicitation." One of the year's more interesting circuit opinions comes from Massachusetts and the always-reliable Judge Selya. The case of Corporate Techs. v. Hartnett addressed a frequent problem posed by non-solicitation covenants: just what is a "solicitation" anyway? The case pragmatically concludes that there is no real viability to a "first contact" rule, and that business realities must play some role in assessing whether an employee has impermissibly solicited a client in violation of a contractual restriction. For a summary of Hartnett, read my October 17 post.

8. Fracking Bills Intersect Public Policy with Trade Secret Rights. For those of you interested in our country's continuing debate over energy independence, the very word "fracking" can invoke a visceral reaction. It is beyond dispute, however, that the renewed interest in fracking as a means of energy production has led to job creation, particularly in areas hard-hit by the recession (including my state of Illinois). As a result, state legislatures are considering or enacting bills to allow (and heavily regulate) this method of energy production. But in doing so, states are having to consider how to protect the trade secret rights of oil and gas producers. Understandably, many environmental groups want to know what kinds of chemicals the producers are using in their fluid compositions (which is critical to the fracking method). And this leads to an explosive intersection of public policy and private ordering of trade secret rights. For my take on the issues likely to come up time and again in fracking cases, read my May 2 post.

7. Supreme Court Validates Use of Forum Selection Clauses. It is near-sacrilege on this blog to discuss matters related to venue and jurisdiction, if only to prevent internet-induced boredom. But there is no doubt for practitioners that these issues are important to understand. For the second straight year, the Supreme Court has issued an opinion that will be critical for those attorneys who deal with the enforceability of non-compete agreements. While last year's decision dealt with arbitrability, this year, the Court reaffirmed the notion that forum selection clauses are presumptively enforceable. As it stands right now, the only real method of shifting venue when the underlying contract contains a forum selection clause is to argue third-party inconvenience. For my summary of the Atlantic Marine case, read my post from last week.

6. Courts of Appeal Affirm EEA Convictions. The Economic Espionage Act continues to generate much discussion among commentators, particular given the importance of trade secrets in our economy. This year, we saw two courts of appeal affirm EEA convictions arising out of theft of trade secrets. In one case, the Seventh Circuit affirmed Hanjuan Jin's conviction arising from her misappropriation of technology from Motorola (though the technology is now somewhat dated). In the more interesting case, the Sixth Circuit affirmed the convictions of Clark Roberts and Sean Howley for misappropriating Goodyear's tire-assembly machine technology. But it reversed the sentences the district court imposed, particularly given Goodyear's inability to describe adequately the economic loss it incurred from the theft. For my discussion of the Goodyear case, read my February 6 discussion in USA v. Roberts.

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Stay tuned for Part II (5 through 1) tomorrow afternoon, featuring proposed federal legislation, criminal convictions under the Computer Fraud and Abuse Act, and developments in Illinois.

Georgia Court of Appeals Discusses Anti-Severability Rules

One of the defining characteristics of a state's non-compete law is its application of the blue-pencil rule. Although several variations of the rule exist, states generally fall into one of two camps: those that readily modify overbroad covenants to make them reasonable, and those that generally frown on modification or blue-penciling.

Georgia historically has been one of the states that enforces only those agreements that are reasonable as written. That is to say, courts cannot modify overbroad agreements to make them enforceable. In essence, Georgia judges will decline to force the parties to accept a contract they could have, but didn't, make.

Georgia law continues to evolve, and a new statute governs contracts entered into after May of 2011. However, it doesn't impact contracts signed before the effective date, and courts will continue to apply the old common law for many years to come.

The Court of Appeals discussed at length the state's anti-severability rule in Lapolla Industries, Inc. v. Hess. As the Court described, the anti-severability rule applies to the following types of restrictive covenants:

• covenants restricting employment or competition generally in a relevant market;
• covenants restricting the solicitation of business from actual or potential customers; and
• covenants restricting the acceptance of business from actual or potential customers.

(There was another type of restrictive covenant at issue in Hess, which I still don't understand after reading it several times and which the Court of Appeals intelligently glided over. Lapolla (the ex-employer) had a non-solicitation covenant that prohibited the employee from soliciting or accepting business from a business competitive with or similar to Lapolla. In other words, the employee could not vend any kind of product or service to a Lapolla competitor. Silly.)  

However, the anti-severability rule does not apply to covenants that either:

• restrict solicitation or hiring of certain employees or independent contractors; and
• restrict disclosure of trade secrets or confidential information.

Like many states, Georgia historically has frowned upon so-called market-based restraints, which contain broad prohibitions on working for a competitor in any capacity. Georgia's case law, however, also has applied strict scrutiny to lesser restrictive customer-based restraints, such that a number of appellate decisions strike down clauses that many other states would deem enforceable. For instance, Georgia courts have frowned upon customer-based restraints that prevent an employee from accepting, instead of soliciting, a customer's business. This distinction never has made much sense to me, since it's virtually impossible without the aid of legal process to determine who solicited whom.

The Court also discusses at length in Hess Georgia's reluctance to enforce choice of forum and choice of law clauses in contracts when application of a foreign state's law would lead to a result contrary to Georgia's public policy. In keeping with one of my sacrosanct rules to limit discussion of venue and jurisdiction disputes to an absolute minimum, I will say no more regarding this subject.

So, What Is a "Solicitation"?

One of the most frequently asked questions I get when advising clients is deceptively complex:

What does it mean to solicit a client?

On its face, this probably sounds like it should be an easy question to answer. However, it's really not. Since courts are hesitant to enforce broad non-compete agreements (particularly as to sales persons), many disputes hinge on the applicability of a customer non-solicitation covenant. The scope of those covenants can range from the very broad to the much narrower, both in terms of the type of activity prohibited and the customers covered by the prohibition.

A broad non-solicitation covenant reads something like this:

Employee agrees for a period of one year not to solicit, contact, or provide services to a Restricted Customer for the purpose of providing Competitive Products.

A narrow non-solicitation covenant usually reads this way:

Employee agrees for a period of one year not to solicit or entice away a Restricted Customer for the purpose of providing Competitive Products.

The difference between the two is that the narrow covenant does not prohibit so-called "passive" solicitation, where a client reaches out to the employee. As a practical matter, these more narrow covenants lead to just as much litigaton because most times an employer won't know who contacted who. But it will justifiably be concerned about the fact the employee is continuing to work with the client. It only will be able to discover what actually happened through the litigation process.

In these cases involving narrower covenants, the issue of breach often hinges on whether the employee actually solicited the customer, or whether the customer sought out the employee. The First Circuit's recent opinion in Corporate Techs., Inc. v. Harnett illustrates a common fact-pattern and rejected a bright-line "initial contact" test. In that case, the ex-employee's new company sent out a blast announcement that piqued the curiosity of a targeted group of customers that happened to fall within the terms of the employee's non-solicitation covenant. Upon receiving that announcement, customers started contacting the ex-employee.

The court specifically noted that "initial contact" is somewhat amorphous and "can easily be manipulated" depending on the facts of a particular case. This is particularly so with businesses where the selling cycle is long, such that the initial contact would be "unlikely to bear fruit in the absence of subsequent solicitation." It had little trouble affirming a preliminary injunction that enforced the non-solicitation covenant.

The takeaway from cases like Harnett is that employees must understand that the issue of "solicitation" is intensely fact-laden and that it's awfully hard to play cute and end-run the contract. Courts will need to consider how employees typically communicate with customers, and whether the employee set in motion a chain of events designed to lead to contact by the customers themselves. Targeted announcements are an obvious invitation to cause a customer to contact the employee and present a fairly easy case for determining that a solicitation has occurred. Even more problematic are personal e-mails, LinkedIn invitations to connect, and other one-on-one activity that suggests an effort to continue a business relationship.

Corporate Techs v. Hartnett - Opinion by Ken Vanko

Old Georgia Law Still Invalidates Many Restrictive Covenants

When the Georgia General Assembly passed the Restrictive Covenant Act in 2009, it substantially changed the playing field between employers and employees. Under the common law, it was exceedingly difficult for employers to enforce anything but the most perfectly worded and narrowly tailored covenant. Cases repeatedly failed on the facial ambiguity or overbreadth of the covenant, leading to judicial invalidation. And the blue-pencil rule was not available to save overbroad (even slightly overbroad) contracts.


But the new Act did not become effective until 2010 and only applies to contracts entered into after November 3, 2010. A great many employees and independent contractors signed agreements well before that, and their enforceability continues to be subject to the old common law.

A recent district court summary judgment decision illustrates how strict this old common law actually is.  The case involved a dispute in the credit-card merchant processing industry. This is a rapidly growing market where companies provide merchants - often, retailers - a wide range of credit-card processing services. Those services range from simple payment processing to mobile processing to "tokenization" (a fancy way of saying that the processing company will enable merchants to store credit card data safely and securely).

The defendant was an independent contractor who marketed the processor's services to merchants for a fee. In his Independent Contractor Agreement, he agreed to two broad covenants:

(1) An in-term non-compete restriction that prohibited him, during the term of his relationship with the plaintiff, from entering into agreements to solicit merchants for the merchant-acquiring program of any bank or third-party financial institution, or from entering "into any relationship with any organization...that would effect an indirect relationship with any" organization.

(2) A 5-year, post-termination non-solicitation restriction that prevented him from calling on the plaintiff's customers, regardless of whether he had a relationship with those customers.

The district court had little trouble under Georgia common law striking down both clauses. The ruling on the non-solicitation covenant was not much of a surprise, since Georgia law (like some other states) generally does not look favorably upon non-solicitation covenants that extend to customers the employee did not serve - particularly when there is no geographic restriction. And the 5-year term was well beyond the 2-year rule Georgia courts long have advocated.

The more surprising aspect of the ruling is the fact the court struck down the in-term non-compete arrangement. It held the general rules pertaining to non-compete agreements apply, even though it did not prohibit any post-termination activity. In-term covenants rarely are litigated because in an at-will environment, employees (or, as here, independent contractors) simply terminate the relationship before leaving to compete.

The court, though, struck the non-compete and held that its activity scope was unreasonable - mainly due to the quoted, italicized language above. The court found that the prohibition on the defendant from entering "into any relationship" with a bank was ambiguous and ill-defined. In reality, it didn't appear to be as broad as the court held. Rather, it seems the clear intent of the covenant was to prohibit the defendant from entering into a similar arrangement with another credit-card processor while he was soliciting merchants for the plaintiff. The language of the non-compete which the court deemed problematic only appeared to further restrict the plaintiff from circumventing this fairly clear covenant in a more indirect manner.

Still, the ruling indicates that courts often are troubled by restrictive covenants and their impact on competition as a whole. I've written before about how judges sometimes will gloss over a contract's intent to find an ambiguity, even though it's questionable such an ambiguity exists. That seems to be what happened here as well.

You Can't Reverse Blue-Pencil a Non-Compete

By now, I hope readers of this blog would be aware that the title of this post simply reinforces the obvious.

For background, the "blue-pencil" rule is intended to allow a court to enforce the reasonable parts of non-competition agreements, while deleting those portions that render the covenant overbroad. Its cousin, the "equitable modification" rule gives a little more discretion to a trial court judge, such that he or she can make substantive changes to the clause (as opposed to deletions) when narrowing it up.

What neither rule allows is expansion of the covenant to include a broader range of competitive activity. Lawyers and clients need to understand, though, that judges are generalists and aren't as accustomed to examining this issues with the kind of depth that nerds like me are. So they make mistakes.

A perfect illustration comes from the Appellate Court of Illinois, which issued an opinion this week that addressed this reverse blue-penciling issue. The non-solicitation covenant at issue in that case was similar to what many provide: the employee (a physician) could not "solicit, divert or take away business or patronage" of the medical practice for three years following termination of employment.

The case, which is embedded below, is yet another primer on "How Not to Leave Your Employer" and follows the same basic fact pattern as I've written about on prior occasions. The trial court in Chicago issued a preliminary injunction which enforced the agreement and restrained the defendants (including one not bound to any non-compete) from "treating any current or former patients of" the medical practice.

This is more extensive than the terms of the non-solicitation covenant because "treating" is broader than the operative triggering language in the contract - "solicit, divert or take away." The Appellate Court held such an expansion of the terms was improper given the relatively clear language of the contract.

Counsel drafting non-solicitation covenants should always consider whether the terms are broad enough to include "passive" solicitation (that is, a client approaches the ex-employee) as opposed to mere "active" solicitation (affirmative efforts to lure clients away). Because it is almost impossible for an employer to assess objectively the difference between the two (it only knows the client has left), there are few business reasons why a non-solicitation covenant should be drafted to exclude passive solicitation.

Northwest Podiatry v. Ochwat - Opinion

When a Restriction on Soliciting "Prospective" Customers Is Unreasonable (and How to Fix It)

One of the most common drafting errors in non-solicitation covenants - clauses that limit customers to whom competitive services may be offered - is the reach to whom it applies.

In concept, the idea of a customer non-solicitation covenant is not that offensive to most judges. Companies often make convincing, successful arguments that covenants of this kind are narrowly crafted to protect their interest in maintaining business relationships with accounts that generate an ongoing stream of revenue. And, generally speaking, they reflect a careful balance between a company's interest and that which an individual has in maintaining the right to earn a living.

But companies run into trouble when the covenant stretches too far in protecting both former clients and prospective clients. Courts correctly reason that such covenants go beyond what is necessary to protect companies from unfair competition, principally because past and prospective customers aren't contributing to existing goodwill.

Cases reflecting this principal are widely available, with one of the most recent being Newport Capital Group, LLC v. Loehwing, 2013 U.S. Dist. LEXIS 44479 (D.N.J. Mar. 28, 2013). That New Jersey case appears to be the first in that state to take a relatively bright-line approach to barring restrictions on an ex-employee's ability to service prospective customers.

What are the common problems associated with broad, customer-based restrictions? Here are the two most common:

1. The definition of "prospective" customer is perverse. Sometimes agreements define customer in such a way that it's impossible for the employee to even know who is off-limits. If, for instance, "prospective customer" includes any "individual identified by the company's employees as a potential client," it would be impossible to subject this restriction to verification.

2. "Prospective" customers is not defined at all. Most well-drafted non-solicitation covenants contain a definition of the key, triggering term - such as "Restricted Customer" or "Active Account." But many don't, and these agreements often cause judges to scratch their heads. If the term "prospective customer" is entirely undefined, it could mean that particular employee's prospect, another employee's prospect, or some prospect generally available to the market as a whole. Such a shifting, malleable definition causes the parties to interpret the agreement in such a way as to favor their position. Generally, ambiguities go in favor oft the party being restricted.

It's hard to create bright-line rules and there may be situations when companies can define "prospective" customers in a way to make it reasonable. They could limit the definition to:

1. Those prospects with whom the employee, or someone under employee's direct management, had been actively making a proposal at the time of his departure.

2. Those prospects identified on certain confidential lists of customers developed and maintained by the company and to which the employee had regular access.

3. Prospects for which the company's confidential information was used to solicit competitive products or services on behalf of a third-party.

It's entirely possible even these limiting definitions won't do. But they're certainly a good start in extending a non-solicitation covenant into otherwise forbidden terrain.

New Jersey Non-Compete Bill Follows Maryland Lead - And Then Takes It a Step Further

In January, I discussed Maryland's proposed Senate Bill 51, which (if passed) would ban certain non-compete agreements if an employee was deemed eligible to receive unemployment benefits.

I offered my take on why this bill was fatally flawed. This is nothing more than another example of intrusive legislative meddling with absolutely no concern for the unintended consequences likely to result in day-to-day practice.

At least three Assemblymen from New Jersey have taken an even further step, proposing A3970, a bill that would ban a broader range of business protection covenants when an individual is deemed eligible for benefits under the state's unemployment compensation law. Incredibly, the proposed bill is not limited to general market-based non-competes, but also extends to any kind of non-solicitation covenant and even non-disclosure agreements.

New Jersey's unemployment compensation law is very similar to those in other states, in that an employee is generally not eligible to receive UC benefits if she voluntarily quits her job or is terminated for misconduct. Some states - like Maryland - have broader definitions concerning eligibility. "Misconduct" is very fact-specific and could, in many cases, cover the type of pre-termination conduct (e.g., theft of data, solicitation of accounts) that gives rise to competition suits.

For more on A3970, read the fine post from Seyfarth Shaw here and an interesting online article from NJBIZ.com here. The latter post discusses the exact point that I made in January when discussing the proposed Maryland legislation: the bill encourages companies to fight unemployment claims when they otherwise wouldn't. This is the law of unintended consequences at work.

Non-Compete Case Law Update: The Mildly Interesting, But Useful, Edition

The new year is off to a pretty big start. We've already seen significant decisions from federal appellate courts on criminal trade secrets prosecutions and the epic Mattel/MGA "Bratz" dolls dispute. We have a looming debate over amendments to the Computer Fraud and Abuse Act, and pending legislation in Massachusetts concerning non-compete agreements.

But there's other activity in the trenches - the sort of routine work that parties and courts continue to crank out that don't necessarily generate headlines. Over the past few weeks, I've noticed some lower court decisions come through that are significant in their own right.

Trade Secrets Preemption in New Jersey

Last year, New Jersey became the latest state to adopt the Uniform Trade Secrets Act. Like all versions, the New Jersey Act displaces conflicting remedies based on claims of trade secrets misappropriation. However, the language of the statute preserves other common law rights and remedies, such that its text is not directly comparable on the issue of preemption in other states. As a result, New Jersey courts have not yet subscribed to the view that other civil claims are not preempted. This is an odd result, and the statute may be in for revision since it's near impossible to reconcile the preemption clause with the savings clause. The case discussing preemption is unreported and not binding on any other New Jersey court, SCS Healthcare Marketing, LLC v. Allergan USA, Inc., 2012 N.J. Super. Unpub. LEXIS 2704 (Sup. Ct. Ch. Div. Dec. 7, 2012).

Injunction Bonds

I have written in the past on the considerations underlying the need for an injunction bond - effectively, security for a preliminary order later deemed wrongfully entered. Federal courts have to consider the amount of security when entering a temporary restraining order or preliminary injunction. The case of Smiths Group, PLC v. Frisbie, 2013 U.S. Dist. LEXIS 9445 (D. Minn. Jan. 24, 2013), looked at a high-level executive's prior year's salary and ordered security in that amount as a condition for enforcing a one-year non-compete covenant.

Dischargeability of Debts Arising Out of Non-Competes

Damages claims against ex-employees often intersect with bankruptcy law. For a defendant found to be in breach of a non-compete, an award of lost profits may greatly exceed the defendant's ability to pay. As such, the specter of bankruptcy is always at the fore. A debt is not dischargeable though if it is a result of a "willful and malicious" injury to another entity or its property. In an adversary proceeding, a hair salon, contending a departed stylist's non-compete debt was non-dischargeable, was unable to show she willfully injured her ex-employer. The court focused on two factors: (a) the employee was terminated and therefore may have breached the agreement not to injure her ex-employer, but rather to pay her bills; and (b) she obtained the names of her customers largely from Facebook, the White Pages, and her memory. Finally, the court determined that the hair salon could not establish that as single customer even left, thereby indicating it suffered no real injury. Though the "willful and malicious injury" test is flexible, this was a clear case where some of the equities strongly favored the employee. The case is In re Rhoades, 2013 Bankr. LEXIS 157 (S.D. Oh. Jan. 11, 2013).

Playing the California Card Doesn't Always Work

Anyone familiar with non-competes knows that California is somewhat of an outlier state. Non-compete agreements, even non-solicitation agreements, are highly disfavored and almost always unenforceable except within a narrow band of cases.

One issue that has arisen frequently over the last several years in non-compete disputes is the forum fight involving California. This usually arises when California has some, but not a complete, connection to the dispute. How does that connection arise? Usually in one of two ways:

1. The party bound by the non-compete lives or is domiciled in California.

2. The prospective business opportunity somehow bears a substantial relationship to California. An example? The new employer is based there. Or, even better, the employee's job calls for him to move to California.

Employees seeking to void non-competes have been aggressive in recent years in filing preemptive declaratory judgment actions in California courts when that state has some arguable connection to the parties' business relationship. And, in many cases, California courts have issued judgments that invalidate the contract as an illegal restraint under California's Business and Professions Code.

But the problem is more nuanced when another state also has a substantial interest in the case. For instance, a national company with a footprint in many states may use one form agreement calling for another state's choice of law, or even a forum selection clause. If an employee lives in California, the presence of choice-of-law and choice-of-forum clauses would undercut California's interest in the dispute, since another state (most likely, that where the employer maintains its nerve center) has an equal interest in regulating its out-of-state affairs on a uniform, consistent basis.

So these competing interests can lead to forum fights? What to do?

I am probably in the minority on this, but I happen to feel that the New York court got it right in the Aon Risk Services v. Cusack decision this past week when it refused to dismiss a suit on venue grounds in favor of a pending California case. Even though the defendant, Peter Arkley, was a California resident working for an Aon subsidiary principally in California, Illinois law governed his employment agreement (it contained a narrow, 2-year non-solicitation covenant). And Aon commenced injunction proceedings in Illinois (and later New York state court) right after Arkley's preemptive strike suit in California. Arkley was enjoyed in Illinois and in New York, despite the presence of his California action.

Fights over venue when there is a California connection are not easy to resolve, and courts have to be respectful of litigation in other states. But in my opinion, courts should take a pragmatic approach and decline to override choice-of-law provisions in all but a narrow set of cases. It makes little sense why a New York entity can't have one state's laws govern all of its contracts, unless that choice is completely arbitrary.

There's also an easy fix to this. If a state decides that choice-of-law clauses over its residents' non-compete agreements should not be enforced, then it can pass a law making this established public policy. I happen to think that venue and choice-of-law fights are unfortunate, expensive distractions in cases demanding a quick resolution. This is one of many reasons that the presence of choice-of-law and choice-of-forum clauses ought to command great deference.

Let's Start Year 5: Amazon.Com Loses Preliminary Fight Over Non-Compete Agreement

So 2013 starts, and what better way to kick off Year 5 of this blog than discussing Amazon.com's effort to enforce a non-compete against an executive who left for Google.

In mid-2012, Daniel Powers was terminated from his position with Amazon.com as a vice-president in Amazon Web Services. This is not the Amazon.com we all know and love. It was a segment that the retail consumer does not see and dealt with Amazon's effort to sell cloud computing services to businesses.

Powers, like most Amazon.com employees, signed a broad non-competition agreement that contained a number of restrictions. When Google hired him several months after his departure, it limited his job role to avoid any potential problems with Amazon.com. Nonetheless, it seems clear he was providing cloud computing services to Google, even if the parties disputed whether Google's products actually competed with those offered by Amazon.com.

After Amazon.com filed a preliminary injunction motion, a federal judge in Washington granted it very limited relief to enforce only that part of the contract that forbade Powers from working with Amazon.com's business customers. It did not enforce a broader non-compete restriction and found that Amazon.com had not submitted evidence to support an "inevitable disclosure" of trade secrets theory.

From my perspective, there are two interesting elements to this opinion.

First, the court specifically found that there was no evidence that Powers had intended to violate the customer non-solicitation covenant. Yet, it enforced it anyway by way of injunctive relief. This was a mistake. It is unclear to me how Amazon.com could establish a likelihood of success on this claim if there is no evidence of breach. The court's rationale was that Powers resisted the preliminary injunction motion, which suggests he might want to solicit his former business customers. But this proves too much, because any party could then go into court and base its request for an injunction solely on the fact that its opponent contests the motion.

Second, the court seemed to suggest that this non-solicitation covenant gave Amazon.com the protection it needed, and that a further ban on employment (the non-compete covenant) was not necessary. This is best summed up in the following passage:

"[Amazon's] ban on working with former customers serves to protect the goodwill it has built up with specific businesses. A general ban on Mr. Powers' competing against Amazon for other cloud computing customers is not a ban on unfair competition, it is a ban on competition generally."

When a business aims to protect customer goodwill, often times a general non-compete stretches too far. As the Powers court recognized, a customer non-solicitation is often the right fit to protect this interest.

The case is Amazon.com, Inc. v. Powers, C12-1911 (W.D. Wash.). A copy of the Order and Opinion on Amazon.com's preliminary injunction motion is contained below.

Amazon.com v. Powers - Order

Type of Nonsolicitation Clause May Influence Proper Venue

In the past, I have assiduously avoided discussion of venue and jurisdiction disputes. These arise with alarming frequency in non-compete litigation. By and large, they are dull and uninteresting topics that only lawyers can warm up to.

One issue, though, does warrant some mention on this blog. And (as the title of this post indicates) it has do with the interplay between the type of non-solicitation covenant at issue and the considerations courts give to determining proper venue.

Start with this premise: non-solicitation covenants come in two shapes and sizes. First, some covenants prohibit only true customer "solicitation" by an employee. Second, others prohibit an employee from not only soliciting certain customers but also from working with them. The distinction lies in who initiates the contact - the customer or the employee. In the latter class, a broader range of competition is off-limits.

So let's discuss how this can factor into a venue dispute. Take, for example, a case out of Nebraska - Farm Credit Svcs. of America v. Opp, 2012 U.S. Dist. LEXIS 171818 (D. Neb. Dec. 4, 2012). It yields a common fact pattern:

1. Agreement contains a mandatory choice-of-law and forum selection clause of Nebraska, where the plaintiff maintains its corporate nerve center.

2. Employee works in South Dakota and deals with customers only in South Dakota.

3. Employee contends that customers will say they sought him out - not the other way around.

4. Those witnesses will be inconvenienced by having to travel to Nebraska to testify.

The argument has some appeal. But only if the non-solicitation covenant is of the first kind I described above - one that only limits "solicitation."

Why is that the case? Because customer testimony likely is very relevant to determine how the initial contact with the ex-employee started. Those customers are often decisive in resolving the critical fact question - who solicited whom? Courts will discount the employee's testimony, but they're more likely to credit what a non-party has to say on the stand.

The problem in the Nebraska case is that the agreement was broader - the second kind I described above. The non-solicitation covenant prohibited both active and passive solicitation. Customer testimony was, in the court's mind, irrelevant. If the ex-employee sold to those customers, it matters not at all who initiated the contact.

Back to venue clauses a second. There are two types - consent to jurisdiction and consent to venue. In a consent-to-jurisdiction clause, a selected venue is permissible, but not mandatory. In a true forum selection clause, however, an employee waives any challenge to venue based on his or her incovenience.

But the analysis does not end there. Federal courts have the power to transfer a case out of the mandatory venue if third-party witnesses will be inconvenienced. In non-compete cases, this would include customers who are at the heart of the dispute. And when the clause is drafted in such a way that precludes any work with certain customers, then a federal court is much less likely to view their testimony as relevant in the case. A broader non-solicitation clause, in effect, means that an employee will have a far more difficult time claiming third-parties will be inconvenienced by the agreed-upon forum.