Should You Negotiate Your Non-Compete? Yes, and Here's 5 Reasons Why.

It's no secret that most employees feel as if they have no choice but to sign a non-compete presented to them by their employer. For some, it is handed to them the first day on the job, while for others it is tendered in connection with a new compensation plan, a promotion or increased access to clients or confidential information of the company.

Trying to negotiate a non-compete with an employer is no easy task, and the vast majority of employees don't even try. However, employees should always make an effort to review it carefully, understand the terms and try to negotiate a more favorable agreement. Here are 5 reasons why this is so:

1. By and large, an employer will respect you if you scrutinize what you're signing. Questioning the terms of an agreement, even its fundamental fairness, shows diligence and business acumen. This is not much different than negotiating a higher salary or a sign-on bonus. Most employers don't expect you to sign your life away or abandon your self-interest. An employer may even feel that an employee who blindly signs a personal contract won't be the most savvy person to deal with tough customers or vendors.
2. Failed negotiations could help you in a subsequent dispute. For instance, if you end up in a non-compete dispute, and the employer previously failed to make changes to the terms of a non-compete that you requested, it could help demonstrate that the contract is adhesive and unreasonable. It will also help negate the impact of any representations you disagree with that are contained in the agreement.
3. Negotiating the agreement will help you understand the employer better. There is a fairly good chance that if the employer is accommodating and willing to modify terms that may not apply to you, or willing to narrow up the covenant, that employer is someone you want to work with for the long term. Keep in mind that in small or closely-held organizations, your opportunities for negotiation are better. On a related point, you also may learn something about whether the employer has had issues in the past with other employees and what its intent is regarding enforcement.
4. Negotiations should allow you to understand the non-compete better. Many sophisticated employees have never seen a non-compete before and are unclear as to what it actually restricts. By consulting with your counsel and your employer, you will have a much clearer understanding of what it actually prohibits, and this may clear up some misconceptions you might have. This understanding will help you evaluate a potentially competitive opportunity that may arise in the future.
5. You might actually get something out of your negotiations. If you don't negotiate, you may be accepting a covenant your employer is perfectly willing to modify for you. There is no sense being bound to the most restrictive covenant if you don't need to be.

Massachusetts Non-Compete Legislation Re-Introduced

Russell Beck, author of the awesome Fair Competition Blog, has written extensively today about the refiled bill in Massachusetts that would modernize and govern non-compete agreements. Mr. Beck points out a number of changes to the prior bill and summarizes the key take-aways from the legislation. This is an excellent article worth reading in full to see what state legislatures are considering as far as reform. Remember that Massachusetts has a vibrant high-tech community, and that much debate has surfaced in recent years about whether its non-compete laws have caused a brain drain to California - the state most hostile to employee non-compete arrangements.

Meanwhile, in the great State of Illinois, which has not yet filed for bankruptcy, Rep. Jill Tracy reintroduced the Covenants Not to Compete Act, the text of which can be found here. Even assuming the General Assembly would take up this legislation and pass it through the required floor readings, the bill likely would go through several modifications. (Having written this legislation for a representative a few years ago, I would like to see something done with it in a modified form. No, not everything in this bill reflects my personal belief as to how the law should be.)

Let's Talk Procedure!! The Burden of Proof In Non-Compete Cases

You can tell from the title of this blog that I am very excited to discuss mundane aspects of civil procedure with my readers.

In actuality, though, this procedural issue - the burden of proof - is a fairly important one for clients and attorneys to understand. By now, if you've been reading this blog, you're aware that non-compete contracts must be reasonable to be enforceable.

This is important in practice for a couple of reasons. First, it is not enough for an ex-employer simply to establish a breach of the non-compete agreement. A court must also find the agreement is reasonable in time, space and scope. Second, in most jurisdictions, this requires an employer to plead in the Complaint that the agreement is reasonable.

Experienced attorneys normally set forth detailed factual allegations to show why the non-compete is reasonable. These allegations may include statements about a unique product or service that the employer offers, the development and protection of confidential information, and an employee's development of client goodwill.

But when it comes down to brass tacks - to trying a case at a preliminary injunction hearing or trial on the merits - whose burden is it to tackle the issue of reasonableness?

Like many areas of non-compete law, jurisdictions vary in their answer to this question. In some states, the employer bears the burden of demonstrating reasonableness. These states include: Arizona, Illinois, and Mississippi. In other states, like Connecticut, the employee must demonstrate unreasonableness.

There are some twists. In Florida, the burden is on the employer to demonstrate a protectable interest that would support the covenant, while the employee has the burden of showing that a facially reasonable covenant is overbroad and beyond what is necessary to protect the employer. In Michigan, much like its flagship school's football program, the answer is unclear. A recent case in 2007 stated the burden is on the employer, but in doing so relied upon the law in place before the legislature significantly reformed non-competes in 1985. Much like Brady Hoke trying to work with Rich Rodriguez's recruits, this seems to be a square peg in a round hole solution.

In Ohio, an employer actually has a heightened burden. That is, it must demonstrate reasonableness by "clear and convincing evidence", a not insignificant factor to consider when picking choice of law.

In practice, does all this stuff about burden of proof matter? Absolutely. In a jurisdiction that puts the onus on an employee to establish reasonableness, that employee's counsel will have to request a significant amount of discovery that may relate to the protectable interests asserted by an employer. The employee certainly would have a longer case to present, with more witnesses to show that the covenant is unreasonable and overbroad.

At the end of the day, cases still turn on their facts, and an employer who has a poorly drafted covenant still faces an uphill battle. But who has the burden of proof is a factor to consider for all attorneys at the outset of any non-compete case.

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

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

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

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

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

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

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

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

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

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

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

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

Specific Allegations Required to State Claim for "Threatened" Misappropriation of Trade Secrets (Edifecs Inc. v. TIBCO Software)

The Uniform Trade Secrets Act allows for sweeping injunctive relief if a plaintiff can demonstrate an actual, concrete business secret and either actual or threatened misappropriation.

It is important to remember that the theory of threatened misappropriation is relevant only to claims for an injunction, not damages. The same goes with the concept of "inevitable disclosure." If a plaintiff has a cognizable damages claim, then actual misappropriation must have already occurred.

What does "threatened" disclosure mean? In California, where a substantial number of technology trade secrets cases are fought each year, courts have held that "threatened misappropriation means a threat by a defendant to misuse trade secrets, manifested by words or conduct, where the evidence indicates imminent misuse."

A recent Washington case, Edifecs Inc. v. TIBCO Software Inc., applying California law, held that a plaintiff's claim of threatened misappropriation did not survive a motion to dismiss when the only factual allegations related to the defendant's purported failure to segregate employees who knew of the plaintiff's trade secrets and who joined the defendant following a lawful acquisition of the plaintiff's competitor. The court specifically noted these allegations suggested no "affirmative conduct that would indicate a threat" of misappropriation.

It is difficult to discuss the concept of inevitable disclosure without discussing threatened misappropriation. The two theories are so closely linked as to be virtually indistinguishable in many cases. For instance, does an employee threaten to misappropriate trade secrets simply by joining a competitor in a similar position, or is this merely inevitable disclosure. Similarly, if an employee engages in suspicious conduct in addition to joining a competitor, such as downloading documents on the eve of departure, can this be considered a "threat" of misappropriation? Each case, of course, depends on many unique facts.

For practitioners, it is essential to determine whether your jurisdiction recognizes the theory of inevitable disclosure. If it does not, then the theory of threatened misappropriation certainly is available to pursue injunctive relief. But as Edifecs demonstrates, the Complaint should contain affirmative, clear allegations of imminent use of an actual trade secret.

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Court: United States District Court for the Western District of Washington

Opinion Date: 12/17/10

Cite: Edifecs Inc. v. TIBCO Software Inc., 2010 U.S. Dist. LEXIS 138654 (W.D. Wash. Dec. 17, 2010)
Favors: Employee

Law: California

Difference In Degree of Competition Between Wedding Photographers Results In Denial of Injunction (LCD Videography v. Finomore)

I must confess that having dealt with the wedding photography industry last year, I was not particularly sympathetic to the litigants in the case I am about to discuss. That is not to say there aren't wonderful businesses in this niche space, but my experience was less than satisfactory.*

The Ohio case of LCD Videography v. Finomore presents an issue that courts often confront: how should a non-compete agreement be enforced when the degree of competition between the ex-employer and the departing employee is quite small? I see this often when employees leave to start up their own business, and in many cases avoid contacting former customers altogether.

In LCD Videography, the trial court denied the employer's motion for preliminary injunction largely on the basis that no real, imminent harm would result from the defendants' continued competitive conduct. In that case, the trial court appeared persuaded by the fact that the employer conducted large-scale national and international weddings, while the ex-employees relied on a close network of friends and family to shoot smaller more intimate weddings.

The trial court noted that the employees' non-compete agreements, which prohibited competition within 75 miles of their former place of business, were reasonable and protected legitimate interests of the employer (which, though not discussed at length, appeared to be specialized training). However, the court found that, despite a likelihood of success on the merits, the employees did not pose any real threat to their former company.

There are a number of cases like LCD Videography, where courts look at the disparity between plaintiff and defendant to deny injunctive relief. For those defendants in a position similar to the ex-employees in the LCD Videography case, it is important to de-emphasize the level of competition between the parties. Particularly when the ex-employees avoid directly competing for firm clients, an employer will have a difficult time in such a case getting a non-compete enforced.

* (Yes, that picture is from my wedding. I could not think of a way to paste a clever photo for this article without violating copyright law or misappropriating someone's likeness.)

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Court: Court of Appeals of Ohio, Eleventh Appellate District
Opinion Date: 12/30/10
Cite: LCD Videography, LLC v. Finomore, 2010 Ohio App. LEXIS 5420 (Ohio Ct. App. Dec. 30, 2010)
Favors: Employee
Law: Ohio

2010, Yer Outta Here!

It's time to put a wrap on 2010, a very satisfying year for me personally and professionally. On the personal side, I saw something I was convinced I'd never see in my lifetime: a Stanley Cup brought home to the City of Chicago. My parents saw something they never thought they would see in their lifetime: their only son get married.

On the professional side, I've advised many great clients on some very challenging and interesting issues. I won the only trial I had this year and was able to help several clients negotiate their way out of tough situations. Last year at this time, I wrote a post that captured some thoughts and impressions I formed through advising clients, litigating cases and studying other lawsuits and trends. I'd encourage readers to click on the link and read that post, as I think many of the same comments apply.

As for 2010, it was a more interesting year than 2009 for sure in regards to non-competes. A couple of points to highlight:

(1) As Jay Shepard writes, the volume of non-compete cases and disputes continues to rise and shows no signs of slowing down.

(2) Georgia enacted significant non-compete reform that will take effect for contracts entered into after today.

(3) Illinois, my home state, produced a number of significant state and federal court decisions, highlighted by the opinion in Reliable Fire Equipment - discussed at length this month.

(4) The number of cases involving the Computer Fraud and Abuse Act in the context of garden-variety employee unfair competition claims has declined significantly.

(5) And, I saw the absolute dumbest non-compete agreement I've seen in 13 years of practicing law: a non-solicitation restriction buried in a 52-page employee handbook that itself contained a disclaimer that it was not a contract. Hard to believe.

As for 2011, I look forward to the third full year writing this blog. Honestly, I feel like I'm just getting warmed up. I still plan to write 2 to 3 times per week, but I have some ideas to mix up the content a bit. Once per month, I will write a "Spotlight" column, focusing on a state, an industry or a legal topic. It will be a bit more in-depth than my regular columns, kind of like a poor man's bar journal article. I also plan on sharing more of what my blogger colleagues write. I've done that some, but not enough. There are a lot of great law blogs out there, and I plan to highlight and discuss others' posts. Some of the best are listed on my Blog Roll (look to your right...).

I would like to hear from you too. I have been blessed to have more than 45,000 visitors to my site this year, and I always look forward to the thoughtful e-mails my readers send to me. If there is a topic or issue on your mind, please feel free to send it along and I will see if I can work it into a column.

The end of the year always means that it's time for every scribe, professional and amateur alike, to put together a top 10 list of sorts. Throughout the year, I've offered several comments about what employers need to consider when drafting or enforcing non-compete agreements.

It occurred to me, though, that since a fair percentage of my clients are employees, rather than companies, I really ought to put together a list for them. I thought a great deal about what kind of list to draft, and I wanted to do something different and practical.

So I put together this list of ten things employees need to provide their attorneys to receive non-compete advice.

1. Copies of all employment contracts - This may seem self-evident, but I emphasize the word all. I have met with many clients who have non-compete obligations expressed in several different agreements, and it's essential that your lawyer have a full understanding of all contracts and terms.
2. Personnel file - In some states, employees have an automatic right to receive their personnel file. If you live in one of these states, you should always request a copy of your file.
3. Cease and desist or "reminder" letters - It is fairly standard now for any departing employee to receive a not-so-friendly reminder from an ex-employer about the terms of a non-compete agreement. If you have received such a letter, don't sweat it. If you haven't, it could help establish that your ex-employer has not been vigilant about protecting its confidential information.
4. Prior job description or resume - In assessing your non-compete, it is imperative that your attorney have a full understanding of what it is you do and how you could potentially harm your ex-employer's business interest.
5. Company proprietary information - If you left and retained company proprietary documents, your lawyer needs to see them. This could avert a potential claim and allow the employee to walk into court with clean (or cleaner) hands.
6. Prior legal opinions - If you've met with other attorneys about your non-compete and received an opinion letter, bring it with you. It is important for your lawyer to understand what advice - good or bad - you have received previously.
7. Stock or equity option agreements and plans - Participation in a company incentive plan can trigger a whole separate set of agreements (usually called award agreements). Those documents may contain restrictions on competing, though they are more likely tied to paying back income received from exercising options.
8. Employee handbook - Particularly in involuntary termination cases, it is important for your attorney to assess whether you might have some severance, progressive discipline or other right that has not been resolved.
9. New employment documents - This could include a number of documents if you're already employed or have a new opportunity on the horizon: an indemnification agreement, employment agreement, offer letter, and new job description.
10. Questions - Yes, you should list out any questions you have for your attorney. Hiring an attorney is often a new experience for many employees. Unfortunately, it is stressful too and you're bound to forget questions you want to ask. No question is dumb, so write them down and bring that list with you.

Well, that's it. Thank you, again, to each of my readers, colleagues, and especially my clients for another great year!

Wal-Mart/CVS Dispute Over Mullany Illustrates Problems of Hiring the "Senior Big Dog"

The Delaware Non-Compete Law Blog has a couple of excellent posts on the recent decision by Judge Travis Laster enjoining CVS Caremark from hiring Hank Mullany, a former senior executive with Wal-Mart Stores, Inc.

At the time of his departure, Mullany was the Executive Vice-President and President of Wal-Mart North, a position that reported directly to Wal-Mart's CEO. Mullany oversaw store operations, real estate and supply chain functions for 19 states, stretching from Illinois all the way to eastern seaboard states from Maine to North Carolina.

Mullany gave notice of his resignation in October, about 10 months after his promotion to President of Wal-Mart North. Wal-Mart later found out that CVS intended to hire Mullany. According to Wal-Mart's Complaint, CVS and Wal-Mart compete in the retail pharmacy market and other associated markets, such as beauty aids, consumables and groceries. Mullany's non-compete agreement with Wal-Mart prohibited him from working with any general or specialty retail store with a gross revenue threshold of $5 billion.

Vice-Chancellor Laster found that, in signing the non-compete agreement, Mullany knew exactly what he was signing and that the covenant appeared reasonable under Delaware law. It is true that one does not necessarily think of CVS and Wal-Mart as direct competitors, but in the retail space, with whom wouldn't Wal-Mart compete at least in some respect?

In his decision, Vice-Chancellor Laster specifically noted that if non-compete agreements should apply to anyone it is to "senior big dog executives." Though it is relatively uncommon for a state's non-compete test to hone in on the position or pay grade of the employee, it is not a stretch by any means to think that courts consider an employee's level of sophistication and business acumen to be a significant factor when determining to what extent the covenant should be enforced.

This relates, most often, to the protectable interest of "confidential information." Wal-Mart's Complaint was replete with references to the types of information and business strategies Mullany was able to access while at Wal-Mart. Those allegations portrayed a convincing story of how Mullany could use that information to run CVS' operations and take on Wal-Mart directly, particular in the pharmacy and prescription drug market. In competitive transitions like the one Mullany sought to make, a non-disclosure agreement is of limited use because compliance is hard to monitor. It is much easier to determine whether an executive employee is working for a competitor, and nearly impossible for outsiders to determine exactly what information he or she is using to perform day-to-day duties.

Bobby Petrino's New 7-Year Deal With Arkansas Contains Only In-Term Non-Compete Restriction

As the University of Arkansas prepares to play The Ohio State University (my alma mater) in the Sugar Bowl after the New Year, it apparently does not need to worry about perennial navel-gazer Bobby Petrino looking for greener pastures.

It was reported a few weeks ago that Arkansas locked up Petrino to a new employment agreement that runs through 2017, a move clearly necessitated by high-profile job openings at Florida and Miami. One aspect of Petrino's original deal that was somewhat controversial was his non-compete agreement, which was limited to the SEC's Western Division. As any college football fan well knows, the SEC is somewhat of an incestuous conference, with several coaches - Nick Saban and Houston Nutt, to name a few - jumping from one conference rival to another in a relatively short time-frame.

Notably, Florida is in the SEC's Eastern Division. Had Petrino been offered and taken the Florida job (which went to Texas' high-profile assistant, Will Muschamp), the non-compete would not have applied. Florida would have been on the hook only for the buyout payment to Arkansas, but Petrino likely would not have faced an injunction to prevent him from taking the position altogether.

Petrino's new contract contains a significant pay raise and a non-compete that extends to the entire SEC. The long form of Petrino's new deal with Arkansas is not yet final, but should be within several weeks. His letter agreement contains a total compensation package averaging $3.56 million per year. The non-compete clearly applies during the term of his employment with Arkansas only. So if Petrino reaches the end of his current 7-year deal with Arkansas, and an SEC job is open, he is free to take it. As we all know, coaches almost never reach the end of a deal. They are either extended or fired. On this score, if Petrino were fired without "cause", the SEC non-compete would not apply.

Most courts consider in-term non-competes like the one Petrino has to be far less problematic than post-termination non-competes. They are viewed as a reasonable exchange for those individuals offering unique personal services, and there is little concern about loss of livelihood or income. In fact, the interest that an employer like the University of Arkansas is seeking to protect through its in-term non-compete is the loss of Petrino's services, not irreparable harm from an ex-employee through direct competition.

I don't know how Arkansas courts have construed in-term non-competes, but the law of other states clearly demonstrates that such covenants are enforced much more broadly.

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

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

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

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

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

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

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

Favors: Employee

Law: Massachusetts