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Non-Compete and Trade Secrets Report

Developments in protecting businesses against unfair competition

Wisconsin Non-Compete Waters Just Got Muddier

Wisconsin WatersOn April 30, 2015, the Wisconsin Supreme Court issued its long-awaited decision in Runzheimer Int’l, Ltd. v. Friedlen, settling a dispute in Wisconsin over whether continued employment alone was sufficient to bind an employee to a non-compete agreement. The case involved an important, if nuanced, distinction between (a) whether there is a legal “agreement” in the first place and (b) whether that legal agreement is enforceable. If there is no legal agreement, then there is nothing to enforce. If there is a legal agreement, the question becomes whether the restrictions themselves are enforceable (based on their reasonableness, etc.). The former question was addressed in Runzheimer.

Wisconsin always has found the initial agreement to hire an employee as sufficient consideration to create legal agreements; but Runzheimer answered the question of whether an existing employee could be required to sign a non-compete agreement without being given any additional consideration. (Runzheimer did not involve whether the agreement’s restrictions were themselves enforceable.)

The Court held that no additional consideration is required. The fact that an employer foregoes its right to terminate an at-will employee immediately is, in and of itself, the only consideration necessary to create a contract containing post-employment restrictions. The Court was unconcerned by the possibility that unscrupulous employers might force an employee to sign a non-compete and then fire the employee the next day and seek to enforce the non-compete. In the view of the Court, in such a circumstance the employee would have other means of contesting enforcement, such as claiming that he was fraudulently induced to sign the agreement, or that the employer acted in bad faith. If the decision had ended here, its effect would have been fairly clear. But it did not end here.

One member of the Court, in a concurring opinion, stated that the Court’s decision could be understood only if the employer’s promise not to immediately fire the employee constituted an implied promise not to fire the employee without cause for some (undetermined) period of time. This concurrence surely will create additional litigation down the road.

Wisconsin non-compete law has always been an outlier of sorts, and after Runzheimer it will continue to be so. In the first instance, employers now need to make sure they instruct incumbent employees whom they want to sign a non-compete that they will be fired immediately unless they agree to the newly imposed non-compete (and, presumably, must then actually fire them if they refuse to agree).  And the concurring opinion might create litigation over “wrongful discharge” of any employee who (1) was required to sign a non-compete after employment had commenced and then (2) was fired “without cause” relatively soon thereafter (how long before they lose the “cause” protection is anybody’s guess).

New Arkansas Law Permits Blue-Penciling of Employment Non-Compete Agreements

Arkansas has a new non-compete law.  James H. Stock, a shareholder in our Memphis office, has written an article on the Jackson Lewis website about these developments.  As he notes, the legislation signed by Arkansas Governor Asa Hutchinson will allow “a court to enforce the reasonable parts of a non-competition agreement, while deleting the overbroad, unenforceable provisions, rather than striking down the entire agreement.” The new law is scheduled to take effect on August 6, 2015.

Cases are easier to start than they are to finish: California Court awards $180,000 in sanctions for meritless trade secret misappropriation lawsuit brought in bad faith

sanctionsThe California Court of Appeal has upheld an award of monetary sanctions against a company that brought a lawsuit against its competitor that the court found was meritless and intended to stifle competition. Cypress Semiconductor Corp. v. Maxim Integrated Products, Inc., H038555 (Apr. 28, 2015). Cypress sued Maxim for trade secret misappropriation, alleging Maxim was attempting to hire its employees in violation of California law. Cypress pled two theories: (1) the names of its employees were trade secrets and Maxim wrongly obtained and exploited a list of its employees, and (2) Cypress was seeking to hire its employees to misappropriate their knowledge of Cypress’ touchscreen technology.  The trial court denied Cypress’ requests for preliminary relief, finding Cypress had no evidence to support its claims. One piece of telling evidence the court noted was a declaration submitted by Maxim’s attorney demonstrating she learned the name of nearly every Cypress employee who worked on touchscreen technology by spending an afternoon perusing LinkedIn. Facing an upcoming hearing on Maxim’s demurrer to its first amended complaint, Cypress voluntarily dismissed its lawsuit without prejudice. Maxim thereafter sought and was awarded $180,817.50 in sanctions on the ground Cypress had brought its suit in bad faith, which under California law has two prongs: (1) objective speciousness of the claim, and (2) subjective bad faith in bringing or maintaining the action, i.e., for an improper purpose.

The appellate court’s reasoning on the improper purpose prong is worthy of particular note. It found the following weighed in favor of a finding that Cypress brought and maintained its lawsuit for the improper purpose of intimidating Maxim and other Cypress competitors against soliciting Cypress’ employees under the threat of an expensive but unmeritorious lawsuit:

In a pre-lawsuit letter Cypress sent to Maxim, Cypress asserted claims of wrongdoing it could not support with evidence in the lawsuit;

  • In the pre-lawsuit letter Cypress wrote, “The next person you try to hire illegally from Cypress will not be cheap for your company, as Cypress will spare no effort or legal expense to protect its people and its technology” (emphasis added by court);
  • In a press release Cypress issued the day it dismissed its lawsuit, it claimed only that Maxim acted “unfairly,” not “unlawfully,” and in the press release Cypress did not point to any information tending to show that Maxim was doing anything more than seeking the most qualified candidates for openings in its own enterprise;
  • Cypress waited to amend its original complaint until the last day on which it could have filed an opposition to Maxim’s demurrer, requiring Maxim to file another demurrer, even though the amendments were not substantive;
  • Cypress took over four months to respond to Maxim’s demand for specification of the alleged trade secrets at issue;
  • In response to an interrogatory seeking the basis for Cypress’ claim that Maxim had misappropriated Cypress’ touchscreen technology, Cypress stated it was “in the process of investigating and compiling documentation regarding its allegations in its Complaint”;
  • Cypress’ attorney suggested counsel meet and confer over Cypress’ discovery responses in two weeks, but in the interim Cypress dismissed its lawsuit and did not notify Maxim until it issued its press release three days later; and
  • Cypress pursued a baseless motion to seal the declaration filed by Maxim’s attorney which contained the names of Cypress employees that the attorney compiled via perusing LinkedIn.

California law permits businesses to protect their trade secrets and other intellectual property from misappropriation by competitors. However, California also has a well-known public policy favoring lawful competition, which prohibits the use of unmeritorious lawsuits to stifle competition.

“Loyalty” Provision Actually an Unenforceable Restraint of Trade, Georgia Court Rules

LoyaltyMany employers require their employees sign agreements containing a “loyalty provision.” That is, a clause that requires the employee to devote all or most of his/her working time to the employer’s endeavors, while the employee remains employed by the employer. What many employers fail to realize, however, is that some states treat such loyalty provisions as restrictive covenants. Thus, as a recent decision from the Georgia Court of Appeals reminds, these loyalty provisions must comply with restrictive covenant law. See Early, et al v. MiMedx Group, Inc. 330 Ga. App. 652 (Feb. 10, 2015).

Background Facts

MiMedx Group, Inc. and ISE Professional Testing & Consulting Services, Inc. (“ISE”) entered into a Consulting Agreement, whereby Ryanne Early was to provide consulting services to MiMedx on behalf of ISE. The Consulting Agreement contained a “loyalty provision,” requiring Early to “devote her full working time (not less than forty (40) hours per week) to [the] performance of [her] duties” under the Consulting Agreement and in service of MiMedx. Notably, this clause addressed Early’s duties while she worked as a consultant, not after the termination of the Consulting Agreement.

Eventually, MiMedx terminated the Consulting Agreement and sued ISE and Early, alleging, among other things, that Early had failed to devote her full working time to the performance of her consulting duties under the Consulting Agreement; thereby, breaching the loyalty provision in the Consulting Agreement. In their defense, ISE and Early argued the loyalty provision was, essentially, a restrictive covenant and unenforceable under Georgia’s applicable restrictive covenant law.

Court of Appeals Rules Loyalty Provision is an Unenforceable Restrictive Covenant

Though the trial court rejected ISE and Early’s argument, the Court of Appeals reversed, holding that the loyalty provision entered into by the parties was a restraint on trade and, therefore, must comply with Georgia’s restrictive covenant law. (Unfortunately for MiMedx, the Consulting Agreement was entered into before the enactment of Georgia’s Restrictive Covenant Act, which is much more favorable to restrictive covenants than Georgia’s old law.) Specifically, the Court Appeals held the loyalty provision was unenforceable because it contained “no limitation at all concerning either scope or territory,” which is required of restrictive covenants in Georgia. Thus, any claim by MiMedx for breach of this unenforceable contractual provision was doomed.

Under Georgia’s current Restrictive Covenant Act (which applies to all agreements entered into on or after May 11, 2011), however, this loyalty provision would likely be enforceable.  Specifically, O.C.G.A. 13-8-56(4) states that restrictive covenants that operate during the term of an employment relationship do not need “any specific limitation upon scope of activity, duration, or geographic area, so long as [the covenant] promotes or protects the purpose or subject matter of the agreement or relationship[.]”  Therefore, agreements entered into on or after May 11, 2011 need not comply with the Court’s instruction in this decision.

Though most employers are aware restrictive covenants must be carefully reviewed to ensure compliance with applicable state law, this decision reminds that loyalty provisions should be similarly reviewed. If you have any questions about the enforceability of your current employee contracts, please contact the Jackson Lewis attorney with whom you regularly work.

Missouri Federal Court Reminds Employers that Non-Compete Agreements are not Automatically Assignable

The United States District Court for the Western District of Missouri has declined to enforce two employment agreements containing non-competition covenants because the employees who signed them had not contemporaneously assented to their assignment when their employer sold its assets to another company.  Symphony Diagnostic Services No. 1, Inc. d/b/a MobileXUSA v. Greenbaum, No. 13-4196 (W.D. Mo. March 16, 2015).  This case involved application of Missouri law pertaining to the assignability of non-competition agreements.

The first defendant began working as a part-time x-ray technician in 2007 for Ozark Mobile Imaging.  Contemporaneous with the start of her employment, she executed a covenant not to compete against Ozark.  Later she became a District Manager and began working full time.  The second defendant executed a similar non-compete agreement when she began working as a mobile x-ray tech for Ozark in October 2010.  Both agreements were silent on the issue of assignment.

In 2012, Ozark was sold in an asset purchase to MobileX USA.  Prior to the effective date of the sale, the employees were offered employment with the new company though on significantly less favorable terms.  Each was offered employment on a “PRN” or “as needed” basis which eliminated their eligibility for benefits.  The first employee was no longer to be a District Manager.  The employees refused the job offers which resulted in their termination.

After their employment ended the employees began to compete in apparent violation of their post-employment restrictive covenants.  MobileX USA filed suit seeking to enforce the agreements.  The former employees filed summary judgment arguing that because they did not consent to the assignment of their non-competition agreements contemporaneously with the asset sale, their agreements were not enforceable under Missouri law.  Judge Gaitan agreed.  In so holding, he relied on the Missouri Court of Appeals’ decision in Roeder v.  Ferrell-Duncan Clinic, Inc., 155 S.W.3d 76 (Mo. App. 2004).  In Roeder, the Court of Appeals held that employment contracts, including non-compete and confidentiality agreements, are not assignable absent consent.

Significantly, the court distinguished these facts from cases in which the employment agreement expressly permits assignment by the employer.  The court strongly implied that had the contracts at issue contained such a provision, the outcome would have been different.

This decision highlights the need for Missouri employers to ensure their employment agreements contain clauses permitting assignment.  Absent such language, employers run the risk that their contractual protections will be unenforceable in the event of a sale, acquisition, or other change in control.

 

Minnesota Supreme Court Allows Advice of Counsel Defense to Tortious Interference Claim in Non-Compete Dispute

lawyer giving adviceThe Minnesota Supreme Court has affirmed lower court findings dismissing a claim of tortious interference with contract by a staff augmentation company that successfully sued a former employee and his new employer for breach of a non-compete agreement. Sysdyne Corp. v. Rousslang, et al, No. A13-0898 (Minn. March 4, 2015).  Sysdyne, the plaintiff at the trial court level, based its tortious interference claim against Xigent Solutions, LLC, the new employer, on an earlier Minnesota Supreme Court decision, Kallok v. Medtronic, 573 N.W.2d 356 (Minn. 1998) in which the Court affirmed judgment against the hiring company in a non-compete dispute for tortious interference, with damages measured by the attorneys’ fees expended in the successful prosecution of the lawsuit.  Since Kallok, companies looking at the possible hiring of a candidate with a non-compete have had to consider the potential impact of this court-created exception to the “American Rule” which could result in the award of attorneys’ fees to the prevailing plaintiff in a non-compete lawsuit.

In this most recent case, Xigent’s president provided its outside counsel with a copy of Brian Rousslang’s offer letter and employment agreement from Sysdyne, and informed the lawyer that the positions were essentially the same. Xigent’s attorney opined that the non-compete was overbroad as to Rousslang’s existing customers and stated that “the entire agreement was unenforceable.”  Based on this advice, Xigent hired Rousslang.  At summary judgment, the trial court ruled in favor of Rousslang as to his pre-existing customers, but denied summary judgment as to the balance of the non-compete.  At trial, Sysdyne won damages of $158,240 plus costs and interest on the breach of contract claim. Based on the evidence presented, however, the trial court found that Xigent was justified in interfering with the contract because it conducted a reasonable inquiry into the enforceability of the non-compete agreement and, based on the advice of counsel, honestly believed the agreement was unenforceable.

Sysdyne appealed, arguing that Xigent’s actions were not justified and that Sysdyne should have been allowed to call Xigent’s attorney as a witness. The Court of Appeals affirmed.  The Minnesota Supreme Court granted review to address two issues: (1) whether the justification defense to a claim of tortious interference with contract may be justified by reliance on incorrect advice of counsel and (2) if so, whether the trial court’s finding of good-faith reliance was supported by the record.  The Court held that interference in the form of hiring an employee with a valid non-compete can be justified if the inquiry performed and reliance on the advice obtained was “reasonable.”

The Court noted in a footnote that an amicus brief filed in the case expressed

concerns that recognizing this defense will effectively extinguish tortious interference with contract claims and will unfairly transfer the consequences of erroneous legal advice onto the innocent party.

The Court downplayed the impact of its ruling, pointing out that the plaintiff obtained a six figure monetary award.

The Court next turned to Sysdyne’s contention that, even if an errouneous belief based on advice of counsel can justify intentional interference with contract, “the belief must be informed by something more than an infirm, conclusory legal opinion.”  The nature of the advice of Xigent’s attorney was never revealed in the litigation. The evidence consisted of testimony as to what information the attorney was provided (including a copy of the agreement and confirmation that the work would be the same) and billing records showing that the attorney billed time for review and providing advice.  The Court found that this was sufficient, distinguishing Kallok where the defendant failed to provide relevant information, actually provided incorrect information, and did not provide copies of the relevant noncompete agreements.

The Court held that a defendant is not required to establish the legal analysis underlying an attorney’s advice in order to prove justification. An advice of counsel defense requires that the defendant establish that he or she disclosed all mateiral facts to the attorney, received advice that his or her conduct was legal, and acted in good-faith reliance on that advice.

This decision may make tortious inteference claims more difficult in Minnesota. It suggests that clients and their counsel should document, in a generic fashion, that advice was provided before proceeding with the hire of an applicant with what is believed to be an unenforceable non-compete.

 

 

 

Company Pays For Taking Short Cuts to Start New Business

geneticsA New Jersey state court judge has allowed a $10 million jury verdict to stand in favor of biotech firm GenScript USA in its trade secret and employee piracy claims against competitor, Genewiz, Inc. In October 2014, the jury had entered a multi-million dollar verdict in GenScript’s favor following a six-week trial. The jury found former GenScript employee Ping “Mark” Yang had misappropriated GenScript’s trade secrets and helped Genewiz solicit more than 20 GenScript employees to join him at Genewiz to help launch Genewiz’s gene synthesis business. On February 20, 2015, Superior Court Judge Arthur Bergman denied Genewiz’s post-trial motions that sought to set aside the jury verdict. While the verdict may be appealed, this case presents a cautionary tale for companies seeking to expand capabilities by hiring individuals who possess trade secrets or other confidential and proprietary information.

In the litigation, GenScript claimed that Yang engaged in a number of unfair competitive activities that allowed Genewiz to gain entry into the gene synthesis business despite not possessing the requisite technology or employees with the necessary skills and training. In 2002, GenScript became one of the first companies in the United States to perform gene synthesis. Through the investment of significant funding and research to develop new technologies, GenScript managed to become a leader in the gene synthesis market in the United States.

GenScript alleged that in February of 2009, Genewitz offered Yang the position of general manager at its Beijing laboratory and promised him a bonus tied to the establishment of a gene synthesis business by March of the following year. According to GenScript, at the time, Genewiz was not performing gene synthesis and lacked the technology and skilled employees to do so. GenScript alleged that Yang remained with the company for six weeks after accepting the job at Genewiz and used this time to collect confidential company information concerning GenScript’s gene synthesis business. Genewiz also solicited over 20 GenScript employees who then proceeded to work for its new gene synthesis business. As a result, GenScript alleged Genewiz was able to begin offering gene synthesis services within less than one year of Yang leaving GenScript.

The verdict against Genewiz highlights the dangers facing companies that fail to properly assess the risks of hiring from a competitor when developing new lines of business, products or services. While Genewiz was able to bring its gene synthesis business into existence in a relatively short period of time, the company ended up with significant exposure through a lengthy litigation and costly jury verdict.

$40 Million In Sale of Business Held Sufficient Consideration for Non-Compete

Rochester MedicalA federal court in Minnesota has rebuffed a plea by the founders of medical device company Rochester Medical to invalidate five year non-competes they signed in connection with the sale of their business to C.R. Bard, Inc. Conway v. C.R. Bard, Inc. (D. Minn. Feb. 12, 2015).  Plaintiffs argued that the non-competes were invalid for lack of consideration because the per-share price they received for their stock, $20, was the same as the per-share stock received by other shareholders who did not have non-competes.  A U.S. District Judge in the District of Minnesota dismissed the lawsuit. It noted that C.R. Bard was not wiling to purchase the company at the agreed upon price without the non-competes and therefore at least a portion of the price per share reflected consideration for the restrictions.  That Plaintiffs received only “part” of this consideration, it held, was immaterial. (The Court noted that Plaintiffs were possibly paid as much as $40 million in the transaction, and certainly over $10 million.)

The court’s dictum that the “amount of consideration received by the Conways is immaterial as long as they received some consideration” may be misleading, however. Minnesota Courts will not necessarily enforce a non-compete entered into for token consideration (the mythological peppercorn) and may inquire into the adequacy of consideration in certain circumstances.

The Court noted that the Plaintiffs mentioned “blue penciling” in their moving papers, but not in their complaint, and held that the complaint did not “come close to adequately pleading a blue pencil claim.” The take away, at least in this Court, is that if a plaintiff seeks blue-penciling, he or she must specifically ask for this relief in the complaint.

 

Eighth Circuit Affirms Judgment on the Pleadings in Arkansas Non-Compete Case

arkansasThe Eighth Circuit Court of Appeals has affirmed a lower court decision granting judgment on the pleadings to defendant in non-compete dispute based on Arkansas law. The decision in NanoMech, Inc. v. Suresh rested in part on the fact that the non-compete did not include a geographic limitation and was otherwise overbroad as it would have prohibited defendant from “working in any capacity for any business that competes with the company” anywhere in the world. The district court found that the provision was unreasonable on its face, and therefore unenforceable as a matter of law.

The Appellate court noted that Arkansas does not allow blue-penciling, which may have saved plaintiff from dismissal in a different jurisdiction (“Under Arkansas law, a non-compete agreement must be valid as written; a court may not narrow it.”)

The result in this case was not necessarily obvious, for a few reasons. First, Plaintiff, a nano-technology company, pointed out that the Arkansas Court of Appeals has upheld non-compete agreements without any geographic restriction on at least two occasions. The Eighth Circuit distinguished those decisions, however, because the restrictions were otherwise limited to solicitation of certain customers. (Courts in several other states have held that a customer-based restriction can substitute for a geographic restriction.) Here, however, the agreement stated:

COVENANT NOT TO COMPETE: The Employee agrees that during the term of this Agreement, and for two (2) years following termination of this Agreement by the Company, without or without cause; or for a period of two (2) years following a termination of this Agreement by the Employee, the Employee will not directly or indirectly enter into, be employed by or consult in any business which competes with the Company.

Second, the decision runs contrary to a trend among at least a few courts to place reduced importance on geographic restrictions in cases involving global or national competition in light of modern technology and transportation. Indeed, the Court in NanoMech quoted the Third Circuit in Victaulic Co. v. Tieman, 499 F.3d 227 (3d Cir. 2007) which observed, “[i]n this Information Age, a per se rule against broad geographic restrictions would seem hopelessly antiquated.” But, the Court still found the provision overbroad under Arkansas law.

Third, the dismissal of the action under Rule 12 of the Federal Rules of Civil Procedure, without the benefit of discovery, was somewhat aggressive, considering the parties were involved in cutting-edge research and development.

Enforcement of non-competes usually turns on the application of state law. In Arkansas, a non-compete must be “reasonable” as to geographic and temporal scope and based on a valid interest to protect. Considering the lack of blue-penciling authority in Arkansas, employers in that state should be careful when crafting restrictions of this kind.

Former Employee in Louisiana Bites Back, Files Suit Against Employer for Threatening to Enforce Non-Compete

Louisiana has strict requirements for enforcement of non-compete agreements which are not “favored” in the Pelican state.   In a recent case, Boudreaux v. OS Restaurant Services, LLC, a former employee in Louisiana preemptively filed a lawsuit claiming a violation of Louisiana’s unfair trade practices statute and intentional interference with business relations after his former employer sent a letter stating its intent to enforce a non-compete agreement.  The district court held that the complaint alleged sufficient facts to support the two claims and survive dismissal.

The plaintiff, Boudreaux, managed the operations of Outback Steakhouse in Houma, Louisiana.  He signed an employment contract that prohibited him from engaging in a competing business that was within a radius of thirty miles of any Outback Steakhouse.  After his termination, Outback sent a letter warning Boudreaux that Outback would be “aggressive” in enforcing the non-compete provision of the Agreement.

After receiving the letter, Boudreaux went on the offensive by filing a suit against Outback for violation of Louisiana’s unfair trade practices statute and for intentional interference with contractual relations.  Outback filed a motion to have the case dismissed for failure to state a claim.

Unfair Trade Practices

Under Louisiana law, a party can be found to have engaged in unfair trade practices if it is shown that alleged conduct “offends established public policy and . . . is immoral, unethical, oppressive, unscrupulous, or substantially injurious.”  Essentially, a party must show egregious acts that involve fraud, misrepresentation, or other unethical conduct.  Here, the court held it was sufficient for Boudreaux to allege that Outback knew that the agreement was unenforceable at the time it sent the “cease and desist” letter to provide a basis to state a claim for unfair trade practices.

Intentional Interference with Business Relations

To state a claim for intentional interference with business relations, a plaintiff must show that the defendant acted with malice that is demonstrative of spite or ill will.  On the one hand, the court here noted that this tort is rarely appropriate in commercial disputes since business conduct is driven by profit motive, not bad feelings.  Nevertheless, the Court decided that the allegation that Outback acted maliciously and intentionally by trying to enforce an invalid non-compete was sufficient to state a claim of intentional interference with business relations.

Lessons Learned

The Boudreaux case may be the first time a court in Louisiana has allowed claims to proceed against a former employer for sending a “cease and desist” letter regarding a non-compete.  It is not altogether unheard of, however, for allegations of tortious interference to be lobbed back by employees in such circumstances in other states. Employers should always be careful when crafting and sending cease and desist letters, and keep them professional and properly grounded under the law and the facts presented.