Unfair Competition & Trade Secrets Counsel - The latest news and innovative strategies for protecting trade secrets and preventing unfair competition

By Paul Kennedy 

Non-compete restrictions are creations of state law, which can sometimes vary on key aspects of contract formation and enforceability. One of those aspects is the extent to which states will reform or "blue pencil" the language of the restrictions. In many states a court will rewrite the terms of the restrictions to make them reasonable, thus fulfilling the parties' contractual intent. Courts in other states refuse to tamper with a restriction's language, requiring the non-competes to rise or fall on their literal terms.   

One means of avoiding state-specific nuances that might otherwise threaten enforceability is a choice-of-law provision that designates the law of an enforcement-friendly jurisdiction to apply to the agreement's interpretation. While states often honor the contracting parties' intent to apply another state's law, a potential problem arises when the chosen state's law violates a fundamental public policy of the state where enforcement is sought. To that point, the Restatement (Second) of Conflict of Laws, Section 18, provides that parties' choice of law will not apply if "application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue." Hence, in a lawsuit brought outside a home jurisdiction, one argument to avoid enforceability of a non-compete is that the chosen law violates the policy of the forum state.

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In a rare procedural move, the Ohio Supreme Court reconsidered and reversed its May 24, 2012 decision in Acordia of Ohio, L.L.C. v. Fishel, 2012-Ohio-2297 ("Fishel I"). At issue was the enforceability of restrictive covenants in employee noncompete agreements subsequent to a  merger. In Fishel I, affirming the decisions of the lower courts, the Ohio Supreme Court held that all assets and property, including employment contracts and agreements, transferred through operation of law to the resulting company post-merger. The merged company, however, was precluded from enforcing its predecessor's noncompete agreements because the agreements did not contain language that extends to others, such as the company's "successors or assigns," and the noncompete agreements had expired as to all the employees involved.  

On October 11, 2012, the Ohio Supreme Court reversed its position in a 6-1 ruling (Pfeifer dissenting), holding that the surviving company could enforce the agreements as if it had stepped into the shoes of the original contracting company. See Acordia of Ohio, L.L.C. v. Fishel, 2012 Ohio LEXIS 2454 ("Fishel II"). 

To learn more about the decision, please continue reading Littler's ASAP, The Ohio Supreme Court Reverses Its Position on the Enforceability of Noncompete Agreements after a Merger, by Thomas Metzger and Melanie Houghton.

By Patricia Reilly and Matthew Curtin

A Connecticut state court recently found non-compete/non-solicitation agreements unreasonable and therefore unenforceable because the agreements did not protect any legitimate business interest. Creative Dimensions, Inc. v. Laberge is an unusual case in that the court found the agreements were reasonable in terms of their geographical and temporal restrictions, but nevertheless invalidated the agreements because they were inherently unfair to the employee-defendants. In reaching this conclusion, the court balanced the employee-defendants’ inability to work for 18 months against the employer’s failure to identify a protectable interest justifying the 18-month restriction.   

The defendants sold their business to the plaintiff in 2005. As part of the sale, the company hired the defendants as vice presidents and, pursuant to the purchase agreement and an employment agreement, the parties executed non-compete and non-solicitation agreements.  The agreements prohibited the defendants from competing with the company, soliciting its business or suppliers, or soliciting its employees for a period of 18 months from termination of employment. 

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By Dylan W. Wiseman and Dustin L. Clark

Earlier this month in Ruiz v. Affinity Logistics Corporation [pdf], the Ninth Circuit ruled that California’s interests and public policy superseded a choice-of-law provision stating that Georgia law would govern disputes between a company and its purported independent contractor.  While Ruiz did not involve claims of unfair competition, the opinion echoed the California court of appeal's 1998 non-compete decision in Application Group, Inc. v. Hunter Group, Inc. and reaffirmed that companies with California ties must consider the state’s unique employment laws and public policy even when crafting employment agreements and restrictive covenants for contemplated use outside California.

In Ruiz, delivery truck drivers sued under federal and California law claiming that the company they provided services to failed to pay overtime as well as vacation and severance compensation.  The defendant company asserted that the drivers, each of whom had signed independent contractor agreements, were not entitled to such pay.  Citing the Georgia choice-of-law provision in the independent contractor agreements, the company argued that the drivers could not satisfy their burden under Georgia law and overcome the presumption of independent-contractor status.  In finding that Georgia law controlled, the trial court analyzed only whether that state had a “substantial relationship to the parties or their transaction.”  The trial court concluded that a substantial relationship existed because the defendant company was incorporated in and had its principal office in Georgia.

On appeal, the Ninth Circuit agreed with the trial court’s substantial-relationship analysis but ultimately overturned the court’s ruling because it failed to consider two additional factors required under California’s choice-of-law framework.  First, the trial court did not analyze whether Georgia law conflicted with California public policy.  Second, the court failed to consider whether California had a “materially greater interest” in the case’s outcome.

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By Thomas J. Flaherty and Rebecca Signer Roche

In Home Paramount Pest Control Cos. v. Shaffer [pdf], the Virginia Supreme Court ruled that a covenant not to compete was overbroad and unenforceable, even though it was identical to a covenant the court had upheld 22 years earlier in Paramount Termite Control Co. v. Rector, 238 Va. 171 (1989). Acknowledging this, the court expressly overruled its holding in Paramount Termite.

Shaffer’s agreement prohibited him from ". . . engag[ing] directly or indirectly or concern[ing] himself . . . in any manner whatsoever in the carrying on or conducting the business of exterminating, pest control, termite control and/or fumigation services" in any city or county in which he worked for two years after separating from employment. After resigning from the company, and within the two-year period, he became employed by another pest control company and engaged in competing activities. The company filed suit to enforce the covenant.

Emphasizing that the restrictive covenant was not limited to preventing the former employee from engaging in activity that competes with the company, the court reasoned that the employer bore the burden of proving a legitimate business interest in prohibiting the former employee from working in any capacity for a competitor.  The court observed that the covenant "bars [the former employee] from engaging even indirectly . . . in the pest control business," even as a stockholder in a public company with a pest control subsidiary. In the court's view, this provision was so overbroad that it could not be saved by the agreement's limited geographic scope and duration (two years).

For more on Shaffer, continue reading at Littler’s ASAP: Supreme Court of Virginia Continues Narrowing the Enforceability of Covenants Not to Compete

 By Jedd Mendelson

We have previously addressed the pros and cons of including arbitration provisions in restrictive covenants and the efficiency of arbitrating disputes concerning those covenants.  In this entry, we address how an employer can enforce an arbitrator’s award. 

Once an arbitrator issues an award, it is difficult for the losing party to overturn it.  The standards for vacating an arbitration award are strict.  While this can be a disadvantage to the company seeking to enforce a restrictive covenant if it fails to persuade the arbitrator of the merits of its case, arbitration presents a sensible alternative warranting consideration since a company can draft an employment contract to maximize the prospects of enforcement of a restrictive covenant.

An arbitrator is a creature of contract who is supposed to decide a claim pursuant to the contract that empowered him with authority.  It follows that an arbitrator should decide the claim in accordance with the plain terms of the restrictive covenant provision.  This should render arbitration a superior forum to court because judges review restrictive covenants with an eye to case law and in most jurisdictions restrictive covenants are disfavored because they are restraints on competition.  Although arbitrators typically are familiar with these principles, their mandate is to enforce the provisions of the employment agreement and, therefore, the restrictive covenant.  We have not seen any empirical studies that test this premise, but a company that decides to utilize arbitration of restrictive covenant disputes, including the application for injunctive relief that often “kicks off” the case, can draft a clause that informs the arbitrator that his responsibility is to enforce the contract as written and that the parties’ expectation is that he will do just that. 

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By Jedd Mendelson

In this entry, we discussed the pros and cons of including arbitration provisions in restrictive covenants.  In that entry, we addressed the assumption that arbitration is a speedier and more efficient process than litigation.  Indeed, one advantage of arbitration is that, generally speaking, cases in arbitration tend to advance more expeditiously than cases in court.  While some well-respected arbitrators can have crowded dockets that may slow the process down slightly, on balance, the likelihood is that following expedited consideration of a company’s application for an arbitral injunction, the remainder of the case will proceed quicker than would be the case in court.

In some instances, a company may not want its claim against a former employee to proceed quite so promptly.  Sometimes the value of an action against the former employee is that the pendency of the litigation forces the employee and his new employer to conduct themselves scrupulously lest they create an evidentiary record that haunts them in the proceeding.  In instances such as this, a company may prefer to proceed in court.  The ideal is an employment agreement provision that affords the company the option of selecting the forum in which it proceeds with its claim.  Although an arbitration agreement must be “fair” in order for it to be enforced, it is common for a provision to state that the company has the right to enforce the restrictive covenant provision in court or arbitration.  Generally, an employee may be able to move to compel arbitration of the merits of the claim, but it is certainly plausible that language can be drafted that is “fair” and affords the company the choice of forum.   

Ultimately, arbitral enforcement of restrictive covenants may not always be expedited due to a number of circumstances, including the interplay between the arbitral and judicial fora.  Nonetheless, there are several possible advantages to inclusion of an arbitration clause—including the potential for expedited arbitral consideration of a company’s injunction application against a former employee—that warrant consideration of this option.     

By Jedd Mendelson

Given the difficulties many businesses encounter in preventing former employees and executives from competing through enforcement of restrictive covenants, more companies should consider using “garden leave” provisions.  The garden leave concept, which arose in England, most typically takes the form of a clause in an employment contract under which a resigning employee must provide a certain period of notice of separation during which the company pays the employee to remain home, i.e., tend his/her garden, while the company transitions responsibilities and customers to other personnel.  Such clauses offer the business an opportunity to effect such a transition before the resigning employee has emerged at a competitor ready to compete. In this entry, we will explore the various ways a garden leave clause may benefit the employer. In subsequent entries, we will consider issues of timing and enforcing garden leave provisions.

Inasmuch as the resigning employee has a duty of loyalty to the enterprise by which she is still employed, a garden leave provision may compel the resigning employee to refrain from advising customers as to the identity of her prospective employer.  Even if that is not the case or the resigning employee breaches that obligation through some form of “off the record” communication, the enterprise has a better opportunity to maintain business than is the case in the ordinary restrictive covenant setting because the resigning employee remains in suspense and not immediately settled in at her new employment.  While there may be situations in which a customer chooses to redirect business to the resigning employee’s prospective employer pending the resigning employee’s arrival, more often than not a customer will be reluctant to put its business in the care of complete strangers when the familiar face upon which it has relied is absent.  Instead, customers will be more likely to stick with the company for which the resigning employee worked, which has some familiarity with the customer, and which has demonstrated a commitment toward transition of the customer to one of the resigning employee’s colleagues.  

The other key instance in which a garden leave clause makes sense is when a manager or executive has familiarity with the company’s strategic plans.  Although the higher salary that managers or executives earn can be a deterrent to using garden leave clauses, it makes sense to sideline a manager or executive despite the substantial cost of doing so if that delay in her commencement of employment with a competitor can be the difference between the company’s success and failure in the marketplace.  Although former personnel are bound by a duty of loyalty to refrain from disclosing the company’s confidential, proprietary information, common sense suggests that this is one of the greatest perils of executive turnover.  Moreover, as we previously discussed here, in most jurisdictions, there are considerable obstacles to enjoining competition by way of the inevitable disclosure doctrine.  As a result, a garden leave clause may be the best tool for delaying a competitor from availing itself of a resigning employee’s knowledge and expertise.

By Scott McDonald, Jacqueline Johnson Lichty and Allan H. Neighbors

In 2006 and again in 2009, the Texas Supreme Court significantly departed from its 1994 decision in Light v. Centel Cellular Co., which confounded employers, practitioners, and courts for years with its highly technical and largely impractical interpretations of the Texas Covenant Not To Compete Act.  On June 24, 2011, the Texas Supreme Court further departed from Light by doing away with the requirement that consideration for a covenant not to compete must “give rise” to the employer’s interest in restraining the employee from competing.  In doing so, the court ruled by a 6-3 majority that stock options granted to a valuable employee are sufficient consideration to support a post-employment restrictive covenant because they are “reasonably related” to the company’s interest in protecting its goodwill.  As it did in 2006, the court again sent a strong signal to lower courts that the focus is whether or not the covenant is reasonable, not whether the agreement passes muster under a highly technical analysis not contemplated by the Texas Legislature. 

In Marsh USA Inc. v. Cook, the Texas Supreme Court takes yet another aggressive step towards eliminating technical “all or nothing” arguments against the enforcement of covenants not to compete in Texas.  The court goes back to its basic theme from Alex Sheshunoff Management Services, L.P. v. Johnson, finding that the first step in the two-step statutory construction is there to avoid naked, stand-alone noncompete obligations, and not to serve some other more complicated and convoluted construction obligation.  There is still need for some connection between the consideration given by the employer and an interest worthy of protection – so, is the “give rise” test truly dead?  Only time will tell, but it would appear that it has been modified to be a much looser requirement for some kind of reasonable relationship between a protectable interest and the consideration given. 

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By Christopher M. Leh, Darren E. Nadel, and Oliver J. McKinstry

On May 31, 2011, the Colorado Supreme Court ruled that continued employment of an existing at-will employee is sufficient consideration to support the validity of a noncompetition agreement between that employee and the employer. While Lucht's Concrete Pumping, Inc. v. Horner is ultimately a very good decision for employers, the court left several questions unanswered regarding what factors Colorado courts will consider in determining the enforceability of noncompetition agreements going forward.

The court expressly left open a key issue that is destined for further litigation. Noting that all noncompetition agreements must be assessed for reasonableness, the court stated that if “an employer enters into a noncompetition agreement with an employee with the intention of terminating the employee immediately afterwards, the agreement may fail for lack of consideration.” Of course, this rule is in tension with the rule that any benefit – no matter how small – is sufficient consideration. In this case, the trial court never evaluated the reasonableness of the plaintiff’s noncompetition agreement.  The court provided no guidance as to how long it would have to employ an at-will employee who signed a post-hiring noncompetition for consideration to be valid.

Regardless of the Lucht’s decision, Colorado law still renders void any noncompetition agreement that does not fit within one of several statutory exceptions, including agreements to protect trade secrets and those with executive and management personnel and officers and employees who constitute professional staff to executive and management personnel. It also must be reasonable in duration and geographic scope. If an employer’s noncompetition agreement with an at-will employee passes muster based on those requirements, what impact does the Lucht’s decision have on employers governed by Colorado law?

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By Eric Smith and Jerry Newsome

For decades, Georgia law on employee restrictive covenants has been defined exclusively by the decisions of the Georgia Supreme Court and Court of Appeals, which historically have been hostile toward such covenants. Under the court-created common law, noncompete and customer nonsolicitation agreements are subject to a "strict scrutiny" standard, which consists of a maze of highly technical rules under which most covenants are vulnerable to enforceability challenges. As a component of the strict scrutiny standard, the Georgia courts adopted an "all-or-nothing" rule, under which an overbroad noncompete clause automatically invalidates both the noncompete covenant and any nonsolicitation covenant contained in the same agreement (and vice versa).

In November 2010, the Georgia electorate voted to amend the state's constitution so as to allow for legislation enhancing the enforceability of post-employment restrictive covenants. While the November 2010 vote gave immediate effect to a statute containing flexible enforceability standards for noncompete, nonsolicitation, and nondisclosure covenants, due to a drafting oversight, the enabling constitutional amendment itself did not become effective until January 1, 2011. The mismatched effective dates arguably rendered the statute unconstitutional and void, and this made relying on the statute an extremely risky proposition. Consequently, many Georgia employers never endeavored to take advantage of the benefits the statute was intended to provide.

In November, attorneys from Littler alerted key members of the Georgia General Assembly to the statute's apparent constitutional defect. We advised that the problem could effectively be resolved by reenacting a substantially identical version of the statute during the 2011 legislative session. And, the General Assembly has done just that. The "new" version of the statute was passed on April 14, 2011, and Georgia's Governor signed it into law on May 11, 2011. Like its first incarnation, the reenacted statute eschews the "strict scrutiny" standard in favor of more lenient and forgiving enforceability rules. The Statute also eliminates the draconian "all-or-nothing" rule and allows courts to modify covenants that are found to be overly broad. Importantly, however, the new version of the Act applies only to agreements that are entered into on or after May 11, 2011 (the Statute's effective date).

Continue reading at Littler’s ASAP: Georgia's Reenacted Restrictive Covenants Statute – A New Era in Georgia Noncompete Law Has Finally Arrived

By Alison S. Hightower 

It’s a recurrent nightmare for many companies—that gung-ho salesperson you hired, trained, and developed, now that she’s profitable, has established customer relationships, and knows your trade secrets—bolts to work for a competitor or to open her own competitive business, using your customer list and proprietary information.  

How do you protect your business from this frustration?  No doubt you try by requiring your employees to sign a restrictive covenant and non-competition agreement.  But increasingly courts are reluctant to enforce such agreements, elevating (no pun intended, as you’ll see below) the allegedly devastating effects on the salesperson’s ability to make a living over the business’ rights to enforce its contracts. 

A case in point arose in Maryland, where a court struggled to balance the rights of a company to protect itself from the unsavory tactics of a former salesperson whose veracity was so questionable that the court outright rejected as wholly implausible his contention that his signature on the non-compete agreement was forged.  

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