Federal District Court In Missouri Raises Doubts Concerning Whether At-Will Employment Is Consideration For A Non-Compete Agreement

The United States District Court for the Eastern District of Missouri, in Durrell v. Tech Electronics, Inc., 4:16-CV-01367 (E.D. Mo. Nov. 15, 2016), held that an at-will employee’s non-compete agreement may not be enforceable where the only form of consideration is the employee’s at-will employment status since an at-will employment relationship cannot constitute consideration.

In Durrell, a former employee filed a complaint asserting various employment claims including FMLA retaliation and discrimination under the ADA and MHRA, along with a claim for declaratory relief alleging that the non-compete clause in his employment agreement was unenforceable because an at-will employment relationship cannot form the basis for consideration to enforce a non-compete agreement.

With respect to the former employee’s claim for declaratory relief, the employer moved to dismiss, arguing that Missouri courts have consistently recognized, for decades, that continued at-will employment provides sufficient consideration to render employee non-compete agreements enforceable under Missouri law. See, e.g., JumboSack Corp. v. Buyck, 407 S.W.3d 51, 55-56 (Mo. App. 2013) (“Missouri courts have recognized that continued at-will employment constitutes consideration for a non-compete agreement where the employer allows the employee by virtue of the employment, to have continued access to its protectable assets and relationships.”) (internal quotations omitted).

The Eastern District of Missouri rejected the employer’s argument. The court relied upon a series of Missouri cases regarding arbitration agreements in the employment context which have held that at-will employment is not a source of consideration for an arbitration agreement.  The Eastern District, however, did not address the fact that those cases explicitly distinguished non-compete agreements and arbitration agreements. See Morrow v. Hallmark Cards, Inc., 273 S.W.3d 15, 28 (Mo. App. 2008) (“[I]t is a mistake to think that the judicial approach to enforcement of a covenant not to compete is comparable to enforcement of an employer-dictated condition of continued employment requiring the employee to arbitrate claims against the employer.  We enforce covenants not to compete for equitable and policy reasons[.]”).

In the end, the court held that the employee’s claim to declare the non-compete clause unenforceable survives the motion to dismiss, and adequately states a claim upon which relief can be granted. Given the procedural context, perhaps the ramifications of this opinion will be minimal. Nevertheless, since the opinion extends the contract formation analysis from arbitration agreements to non-compete agreements and numerous recent Missouri court opinions have refused to enforce arbitration agreements, employers should take note.  At a minimum, employers should review their non-compete agreements and consider including alternative forms of consideration supporting a non-compete agreement, such as bonuses, vacation time, or any other benefit to which the employee would not otherwise be entitled but for his or her execution of the non-compete agreement.

White House Continues Attack on Non-Compete Agreements

white houseThe assault on non-compete agreements has continued in a significant way, as outlined in our web article, White House Continues Attack on Non-Compete Agreements.  The latest White House document, coupled with prior reports from the White House and Treasury Department, as well as actions initiated by the Attorney General of New York and the Attorney General or Illinois, raise a number of questions about this effort to rein in the use of non-competes.

  • Are employers really increasing their use of non-compete agreements with lower-level employees, or is this a matter of perception becoming reality?
  • Is state legislation the answer to the perceived question, or will the courts continue to be capable of addressing these issues on a case-by-case basis?
  • Is it a good idea for states to adopt what are now referred to as “red-pencil” rules of construction, especially where non-compete clauses are folded into incentive compensation or profit sharing or similar agreements or plans?
  • Is the Defend Trade Secrets Act sufficient to protect employers’ legitimate business interests, when federal agencies like the SEC, NLRB and EEOC have tried to curtail the use of non-disclosure of confidential information agreements?

We welcome your thoughts about these issues, as we all continue to monitor these developments.

Non-Solicitation Agreement Enforced in Wisconsin

WISCONSINThere are so many stories about restrictive covenants being unenforceable in Wisconsin that it is refreshing to see a case where a restrictive covenant is enforced – especially at the preliminary injunction stage.   This week, the U.S. District Court for the Eastern District of Wisconsin granted a preliminary injunction in favor of BMO Harris Bank, ordering the bank’s former employee to abide by her customer non-solicitation agreement for the remainder of its term.  (BMO Harris Bank N.A. v. Lailer, E.D. Wis., Case No. 16-CV-545-JPS, 10/21/16)

The court found that it was highly likely that the bank could show that the agreement was enforceable, and that the harm it would suffer if the agreement was not enforced was far greater than the harm the former employee and her new employer would suffer if the employee was required to abide by her contract.  The Court also noted that the agreement is narrowly tailored to protect the bank’s interest in its customer relations without preventing the former employee from maintaining new employment.

The agreement provided that:

During your employment and for twelve months following the end of your employment with the Company, you must not, directly or indirectly, solicit … any client of the Company that you serviced during your last twelve months with the Company to offer any product or service that is the same or similar to any product or service that you provided to that client previously.

The court noted with approval that this covenant was reasonably restricted as to time, because it was limited both retroactively – applying only to customers with whom the employee actually worked within the last year – and prospectively – restricting solicitation only for one year post-employment.  It also found that the customer-based restriction could appropriately substitute for a territorial limitation because it was probably more narrowly tailored than a geographic restriction.

Having found that the covenant was reasonable, the court then looked at the harms from enforcing and not enforcing its terms during litigation.  Because the former employee served as a liaison between the bank and its high-net worth clients, she had developed good will with clients that properly belonged to the bank.  She solicited those clients by telling them that her research in the industry led her to her new employer, effectively telling them that her new employer was a superior financial services provider compared to BMO.  Such solicitations, the court ruled, irreparably damaged BMO’s reputation and made this a “particularly strong candidate for injunctive relief.”  The potential harm to the former employee and her new employer, by contrast, was fairly limited, as the restrictive covenant would be in effect for only a limited time and they could solicit other potential customers in the meanwhile.

The take-away is that restrictive covenants can be enforced in Wisconsin, as long as they are narrowly drafted.  Jackson Lewis’s Non-Competes Practice Group are available to assist.

Applying Delaware Law, Federal Trial Court in Texas Determines that Restrictive Covenants in Incentive Stock Agreements Are Overbroad and Unenforceable as Written

The importance of drafting non-competition and other restrictive covenant agreements narrowly in terms of geography, duration and scope of activities to reasonably meet the employer’s legitimate business interests should not be underestimated. A recent decision from the Southern District of Texas illustrates the importance of narrowly crafting post-employment restrictions.

In Cameron International Corporation v. Abbiss, Civil Action No. 4:16-cv-02117, ECF  No. 49 (S.D. Tex. Sept. 27, 2016), the employee, Steven Abbiss, worked for Cameron International Corporation from 1990 to June 2016.  From 2010 to 2014, Abbiss was Regional Manager for Asia, stationed in Singapore.  Beginning in January 2014, Abbiss was District Manager in Oman.  In June 2016, Abbiss was hired by FMC Technologies Singapore PTE Ltd., a competitor of Cameron, as its General Manager for the Middle East.

Abbiss was awarded restricted Cameron stock between 2013 and 2016 pursuant to annual Restricted Stock Unit Award Agreements.  The four RSU Award Agreements, which were largely the same, precluded Abbiss for a period of one year following his resignation from Cameron from, among other things, rendering “services for any person or organization, or engaging directly or indirectly in any business, which is or becomes competitive with [Cameron] or any Subsidiary” and from “directly or indirectly soliciting the trade or business of any customer of [Cameron] or any Subsidiary.”  The Agreements failed to contain a geographic scope.

Cameron filed suit against Abbiss in federal court and sought a preliminary and a permanent injunction precluding Abbiss from soliciting Cameron’s customers or otherwise competing with Cameron in the Middle East.  In response, Abbiss filed a motion for summary judgment in which he argued that the non-compete and non-solicitation provisions in the Agreements were overbroad and unenforceable.  The parties agreed that Delaware law controlled their dispute.  Delaware law follows the usual rule of reasonableness: “for a non-compete clause to be enforceable, it must (1) be reasonable in geographic scope and temporal duration, (2) advance a legitimate economic interest of the party seeking its enforcement, and (3) survive a balancing of the equities.” Opinion p. 5.  As is the law in many jurisdictions, Delaware law permits a court that determines that a restrictive covenant fails because it does not include a reasonable limitation or unreasonably restricts an overly broad scope of activity to limit the scope of the covenant to what is reasonable.  Opinion p. 6-7.   In ruling on Abbiss’ motion for summary judgment, the Court in Cameron used this so-called “blue-pencil rule.”

In assessing the enforceability of the non-compete and non-solicitation provisions, the Court first found, and the parties did not dispute, that the one-year restriction was a reasonable time limit under Delaware law.  But because neither of the two restrictive covenants included a geographic limitation, the Court concluded that they were unenforceable as written.  The Court also found that the restrictions were overbroad because they were not limited to preventing Abbiss from directly competing with Cameron in his former area of responsibility or from soliciting only those Cameron customers with whom he dealt while he was employed by Cameron.  The Court noted that Cameron did not have a legitimate business interest in preventing Abbiss from rendering services or engaging in business with any entity which is or becomes a competitor of Cameron or a subsidiary, or from soliciting business from customers with whom he had no material contact while a Cameron employee.  To make its point, the Court used an example that often appears in restrictive covenant decisions.  Specifically, the Court explained that the covenants before it would, as written, prevent Abbiss from soliciting janitorial services contracts from Cameron customers or competitors in Norway.  The Court stated that these restrictions go unreasonably beyond protecting Cameron’s legitimate economic interests and would, as written, preclude Abbiss from employment with any company in the oil and gas industry anywhere in the world.

Notwithstanding its determination that the restrictive covenants in the Agreements were overbroad as to the geographic region and the scope of activities prohibited, the Court instructed the parties to confer and attempt to reach agreement on the reasonable scope of the provisions at issue.  If the parties are unable to agree, the Court will take up the reasonable scope of the restrictive covenants at the preliminary injunction hearing that is set for October 17.

Here, the employer was lucky that the judge is willing to address the reasonable scope of the agreement.  Not all courts apply the blue-pencil rule to post-employment restrictions, and not all judges will exercise their discretion to blue pencil in all cases.  Perhaps the Court felt so inclined as a result of the RSU’s which were granted to Abbiss, although the Court does not mention this one way or the other.  On balance, employers should review their restrictive covenant agreements to confirm that the restrictions are reasonably limited in time, geographic area, and scope; that they are designed to protect the employer’s legitimate business interests; and that they extend no further than is necessary to protect those interests.

Texas Court Reminds: Lost Sales Are Not Lost Profits

2000px-Texas_flag_map_svgProof of damages in restrictive covenant matters can be complicated.  In Rhymes v. Filter Resources, Inc., the Ninth Court of Appeals in Beaumont, Texas reminded parties that revenue and sales are not the same as lost profits, and expenses must be considered when developing a damage model.

George Rhymes (“Rhymes”) was employed by Filter Resources (“Filter”) as a Branch Manager.  In this role, he received confidential and proprietary information regarding customers, pricing, and margins, among other financial data.  Rhymes executed an employment agreement containing a twelve month customer non-solicitation covenant.  Rhymes resigned from Filter and started a competing company called Rhymes Industrial.

The evidence at trial showed that Rhymes Industrial was a direct competitor of Filter, and that all the customers of Rhymes Industrial were former customers of Filter that Rhymes serviced while employed by Filter.  Filter presented evidence that Filter’s annual revenue decreased over $1,000,000 since Rhymes left, and Filter offered expert testimony from a Certified Public Accountant claiming that Filter’s lost profits were $622,800.  Based on this record, a jury rendered a verdict finding that Rhymes breached his employment agreement and awarded Filter $620,000 in damages.

On appeal, the Beaumont Court of Appeals explained that to support a lost profit theory of recovery, the plaintiff bears the burden to demonstrate by competent evidence the amount of lost profits with “reasonable certainty.”  Exact calculation is not necessary, but the plaintiff must present evidence based on “facts, figures, or data” to reflect lost revenue as well as expenses.  The evidence presented at trial (expert and otherwise) reflected that Rhymes Industrial had between $638,000 and $732,000 in sales during the non-solicitation period.  However, this figure failed to account for expenses, such as payroll, the cost of goods sold, and related overhead.

The court explained that lost profit is not synonymous with lost sales, and lost profit evidence must demonstrate the lost net income to the plaintiff by accounting for expenses.  By failing to present evidence of net income, as opposed to simply lost sales, the plaintiff did not present evidence to support lost profits of $620,000 with reasonable certainty.  However, the court concluded there was evidence that Rhymes Industrial had expenses of approximately $403,000, and Filter avoided salary expenses of $28,000.  Based on $638,000 in lost revenue, and accounting for $431,000 in expenses, Filter suffered lost profits (or lost net revenue) of $207,000.  Accordingly, the court issued a remittitur of $207,000.

The lesson to remember is that when litigating a restrictive covenant matter, lost revenue is only half the calculation.  Parties must also develop and present evidence to reflect expenses (and avoided expenses) credibly to prove lost profits (or lost net income) with reasonable certainty.  Depending on margins, lost profits may only be a fraction of lost sales, but to sustain a verdict, parties must account for both revenue and expenses.  Alternatively, in some circumstances, an employer may choose to include a liquidated damages provision, which of course carry with them another set of issues – a topic for another conversation.

The Long-Arm of Minnesota Law Reaches Out to Adjudicate Claims Against an Out-of-State Employee

In Patterson Dental Supply, Inc. v. Vlamis (Sept. 6, 2016), the Minnesota Court of Appeals reminded that employees who reside and work outside of Minnesota may still be hailed into Minnesota courts to defend their actions.

Patterson Dental Supply (“Patterson”) is a corporation with its principal place of business in Minnesota. Theodore Vlamis worked for Patterson for 17 years in Scranton, Pennsylvania.  In August 2015, Vlamis resigned from Patterson and went to work for one of its competitors.  In a subsequent lawsuit, Patterson claimed Vlamis misappropriated confidential and proprietary information, and used removable storage devices and a personal Internet cloud storage account to copy, store, and access Patterson’s confidential information from a laptop computer provided by Patterson’s Minnesota office.  Patterson filed a lawsuit in Minnesota State District Court (Ramsey County) seeking to enjoin Vlamis from using the allegedly confidential and proprietary information.

Vlamis moved to dismiss the case for lack of personal jurisdiction. Specifically, Vlamis argued he never resided in Minnesota, never worked for Patterson in Minnesota, never solicited customers in Minnesota, and Minnesota was not part of his sales territory.  Thus, Vlamis argued he did not have sufficient contact with Minnesota to support personal jurisdiction.  The Ramsey County District Court denied Vlamis’s motion to dismiss, and Vlamis appealed to the Minnesota Court of Appeals.

The Court of Appeals affirmed the District Court’s denial of Vlamis’s motion to dismiss. The Court of Appeals began its analysis by reiterating the principle that out-of-state defendants may be sued in Minnesota when they have “minimum contacts” with Minnesota. Vlamis had consistently and continually been in contact with Patterson’s Minnesota office for his entire 17 year career, including by traveling to Minnesota at least annually for work conferences as a branch manager.  Moreover, Vlamis was paid his compensation and received his work benefits from Minnesota.  Finally, Vlamis reported to a supervisor in Minnesota.

The Court of Appeals also noted that Vlamis’s contacts with Patterson in Minnesota were at the heart of Patterson’s claims against him. The allegedly misappropriated information came from confidential business information provided to Vlamis during managers’ meetings in Minnesota, and from a laptop computer provided to Vlamis from Patterson’s Minnesota office.

Given the quantity, quality, and nature of Vlamis’s contacts with Minnesota, and the connection between Vlamis’s contacts with Minnesota and Patterson’s claims, the Court of Appeals held Vlamis was subject to the personal jurisdiction of Minnesota courts, which had a significant interest in providing Minnesota residents (like Patterson) with a forum for redressing and remedying any alleged injuries committed by parties such as Vlamis.

Finally, the Court of Appeals rejected Vlamis’s argument that Minnesota was an inconvenient forum for him on the grounds that such a defense to personal jurisdiction is only applicable in extreme cases where there are very few contacts between the defendant and Minnesota. Based on the quantity, quality, and nature of Vlamis’s contacts, this was not such a case.

The lesson for Minnesota employers wishing to protect their confidential and proprietary information is twofold. First, Minnesota employers should give serious thought to suing former employees in Minnesota, rather than automatically suing them in the state where they reside or work.  For a Minnesota employer, it is likely cheaper and easier to sue in Minnesota, and a Minnesota employer that has suffered an injury by a former employee is likely to get a fair hearing of its claims in Minnesota.

Second, Minnesota employers sharing confidential information with employees should disseminate such information from Minnesota and document this and other contacts between Minnesota and its employees. In this way, Minnesota employers can readily supply Minnesota courts with the facts necessary to justify exercising personal jurisdiction over out-of-state employees.

Illinois Statute Bars Non-Competes For Low-Wage Workers

2000px-Seal_of_Illinois_svgIllinois has a new non-compete statute that bans the use of non-compete agreements with “low-wage” employees.

Peter Bulmer in our Chicago office has written this article on the Jackson Lewis website analyzing the new law, which takes effect January 1, 2017, and explaining the context which led to its enactment:  Illinois Freedom to Work Act: One State’s Reaction to Overreaching Non-Compete Agreements.

As the article’s title suggests, this new law in Illinois is the latest effort to limit the use of non-competition agreements stemming from the perception that there is widespread overuse of such agreements by employers. The Illinois Attorney General, the New York Attorney General, the Treasury Department, and the White House have been active in this area. Of course, courts around the country for years have been carefully applying their state’s rule of reasonableness to determine whether non-competition agreements should be enforced. In Illinois, for workers earning less than $13.00 an hour, the courts will not have the opportunity to assess the reasonableness of a non-competition agreement.

The debate regarding these issues is certain to continue.

Wisconsin Court Finds Anti-Poaching Agreements to be Unenforceable

WISCONSINFor all the court decisions out there interpreting non-competition restrictions and customer or client restrictions, case law regarding non-solicitation of employees restrictions can be a little hard to find. At the link below is a report about a new decision from the Wisconsin Court of Appeals — written by our colleague in Madison, Sharon Mollman Elliott — construing an employee restriction just as it would a non-compete.

As always, careful drafting is key.  Here is the article, which appears at www.jacksonlewis.com:

Wisconsin Court Finds Anti-Poaching Agreements to be Unenforceable 

SEC Fines Company $265,000 for Severance Agreements that Potentially Chilled Whistleblowers

Our Corporate Governance Practice Group posted  this article regarding further activity by the Securities and Exchange Commission in response to confidentiality provisions it found might deter potential corporate whistleblowers under the Dodd-Frank Act.

Employers should be reminded to carefully draft non-disclosure of confidential information provisions clearly not to prohibit employees from reporting violations of law or cooperating with investigations by federal, state and local governmental entities. Jackson Lewis attorneys, and particularly our Non-Competes and Protection Against Unfair Competition Practice Group, are available to assist with reviewing and revising confidential information and non-disclosure agreements.

 

Groundhog Day for Massachusetts Non-Compete Reform

Massachusetts

Once again, the Massachusetts legislature was unable to agree on non-compete reform legislation by the July 31, 2016, end of the current legislative session. The House and Senate had passed versions of non-compete reform that differed on key provisions. At the end of the session, however, the House and Senate failed to pass a compromise bill. (For details, see our article, Down to the Wire for Proposed Non-Compete Reform Legislation in Massachusetts.)

While efforts at non-compete reform are dead in the water until the process begins anew at the start of the next two-year legislative session in January 2017, non-compete reform legislation appears to have moved closer to approval with each legislative session. Given Governor Charlie Baker’s public statement in support of some type of non-compete reform, non-compete legislation may have the momentum needed to gain support early in the next legislative session.

The focus on non-compete reform in Massachusetts, the passage of the Federal Defense of Trade Secrets Act, and case-law developments in this area, should provide employers with ample incentive to review their agreements and related processes to ensure that current agreements provide the best opportunity for enforcement and protection of valuable company assets. Simple process changes, such as ensuring that a non-compete agreement is discussed before or at the time an offer is extended, and following consistent protocol as to which employees are required to sign such agreements and when, can avoid costly litigation over the enforceability of a non-compete, or at least give employers a better chance at prevailing in such litigation. Changes to the agreements themselves, such as increasing protections of non-disclosure and non-solicitation provisions, can minimize the risk associated with employee departures even if non-compete reform becomes a reality in Massachusetts.

Please contact Jackson Lewis if you have any questions about non-compete, non-disclosure, and non-solicitation agreements.

 

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