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Non-Compete and Trade Secrets Report

Developments in protecting businesses against unfair 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.

Nike Lawsuit Against Former Designers Will Test Company Security Initiative

Athletic shoe manufacturer Nike filed suit on December 8, 2014 in Multnomah County Circuit Court in Oregon against three of its former designers alleging that the designers misappropriated Nike’s trade secrets and conspired with Adidas to start a new, competing business venture.

The three former designers, Denis Dekovic, Marc Dolce and Mark Miner, all resigned from Nike in September 2014, telling Nike that they decided to pursue their own design studio. Two weeks after the three designers resigned, Adidas announced that it would fund the designed studio managed by Dekovic, Dolce and Miner.

The lawsuit, which alleges $10 million in damages, claims that while the three designers were employed with Nike, they “conspired to and developed for themselves, and then for Adidas, a strategic blueprint for a creative design studio to compete against Nike, began consulting with Adidas and misappropriated Nike trade secrets for use in their new business venture.”

In the Complaint, Nike alleges that Defendants knowingly violated several agreements signed with Nike at the outset of their employment. All three Defendants signed non-competition agreements pursuant to which they agreed to: (1) not to compete with Nike during and for a period of one year following their employment; (2) not to use or disclose any of Nike’s confidential information and to return all copies of such information upon leaving Nike’s employment; and (3) not to solicit other Nike employees away from Nike to a competitor.

In addition, the Defendants also signed Employee Invention and Secrecy Agreements, by which each of them “assign[ed] to Nike all…inventions…conceived” during his employment term with Nike relating “in any way” to Nike’s “business…or products.” Defendants further agreed to “disclose promptly and in writing to Nike all [such] inventions…conceived or made by me during the term of my employment with Nike whether or not such inventions are assignable under this Agreement.”

Nike’s Complaint describes the extensive, company-wide efforts taken to protect its confidential information. Since 2012, Nike has invested more than $1.5 million in a company-wide security initiative known as “Keep it Tight” or “KIT.” As described in the Complaint, KIT is a program designed to educate employees regarding the protection of Nike’s proprietary and confidential information, including its product design information. The KIT initiative provides employees with on-line training on social media, information security, device (laptop/mobile) security, and workplace and situational awareness security. Nike asserts that there has been, and continues to be, significant publicity of the KIT principles on postings throughout the Nike campus and on Nike’s internal employee website and social media platforms. Nike has apparently gone to great lengths to prevent leaks of proprietary, confidential and trade secret information and reinforces the company-wide culture of locking down such information.

Nevertheless, Nike claims the three designers stole a “treasure trove of Nike products designs, research information and business plans” in an effort to market themselves to Adidas. Dekovic in particular, had the contents of his laptop copied, which gave him access to “thousands of proprietary documents relating to Nike’s global football (soccer) product lines.”

In addition, just three days before leaving Nike, Dolce sent an email to his personal email account with highly confidential design drawings related to an as-yet unreleased shoe designed for one of Nike’s sponsored athletes. On their final day at Nike, the Defendants allegedly took to social media to announce joining Adidas and to promote the Adidas brand in further violation of their non-compete agreements with Nike.

As a result of Defendants’ actions, Nike claims that it will suffer irreparable harm in the form of lost market share, lost sales, and lost goodwill if Defendants are not enjoined from this continued and ongoing wrongdoing, including from consulting for or launching a creative design studio with Adidas, connecting themselves to Adidas through social and traditional media, and continued use of Nike’s Confidential Information still in their possession in operating the design studio or otherwise.

The lawsuit identifies that the information taken by the Defendants is among the most important and highly confidential information in Nike’s athletic footwear business, particularly its global football business. Disclosure of any of this information, it claims, “would irreparably harm Nike, by, among other things, enabling a competitor to effectively undermine and counter Nike’s performance in the athletic markets for the next three to four years.”

Nike also brings claims of breach of contract, breach of duty of loyalty, and “civil conspiracy,” among other charges.

The lawsuit, involving one of Oregon’s most famous companies, will be an interesting test of its KIT initiative to protect proprietary information and could provide a road map for other employers.

UPDATE:

On December 9, 2014, the day after filing its lawsuit against three former designers, Nike filed a Motion for temporary restraining order and preliminary injunction with the Multnomah County Circuit Court in Oregon. On December 11, 2014, the Court ruled on the motion, issuing a temporary restraining Order on behalf of Nike. The Court ordered a hearing to be held on February 11-12, 2015 during which defendants would have an opportunity to show cause why a preliminary injunction should not issue pending a final judgment on Nike’s claims.

However, on December 24, 2014 both parties agreed to vacate the Court’s temporary restraining order (and the scheduled February 2015 hearing) and instead, stipulated to a preliminary injunction enjoining defendants from the following:

•           Working for or consulting with Adidas or any other company in any industry in which Nike participates. This prohibition includes issuing any public statements, including via social media or traditional media, and in any way referring to any association between themselves, Adidas or any Nike competitor.

•           Using and or disclosing any Nike trade secrets and other confidential or proprietary information;

•           Directly or indirectly soliciting, diverting or hiring away Nike employees or Nike sponsored athletes

Both parties agreed that the above injunction would remain in place until July 6, 2015, ten days after the anticipated conclusion of trial on injunctive and equitable claims. Furthermore, both parties also agreed to incorporate the following provisions from the Court’s December 11, 2014 temporary restraining order, requiring the defendants to do the following:

•          Promptly return to Nike all electronic and hard copies of Nike’s trade secrets and other confidential and proprietary information in their possession, custody or control;

•           Disclose in writing to Nike the identity of any person, persons or business entity to whom defendants disclosed Nike’s trade secrets and other confidential and proprietary information;

•           Having defendant Dekovic return the Nike hard-drive referred to in his declaration in opposition to Nike’s motion for temporary restraining order

Finally, both parties agreed to appear before the Court on June 22-25, 2015, for a trial on Nike’s claims for injunctive and equitable relief. One can only speculate why the defendants would stipulate to such an injunction and lengthy schedule.

 

Missouri Court of Appeals Rules Non-Compete Lacking Geographic Limitation, Not Tied to Confidential Information, Is Unenforceable

A Missouri employer failed in its attempt to enjoin a former employee from working for a competitor after a Missouri appeals court ruled his employment agreement was unenforceable as a matter of law.  In Sigma-Aldrich Corp. v. Vikin, No. ED-100575, (Mo. Ct. App. Oct. 14, 2014), the Missouri Court of Appeals (Eastern District) upheld a St. Louis County trial judge’s ruling that a non-compete without a geographic restriction, that sought to protect information widely known to the public, was unenforceable.

In this case, Sigma-Aldrich employed Omar Vikin in a number of sales and related roles for its products.  Vikin signed a non-compete agreement which provided that he could not work for a competing employer for a period of two years.  The non-compete did not have a geographic restriction. Vikin later resigned and went to work for a competitor in a general manager position.  Sigma-Aldrich sued, and in response Vikin contended that the agreement was unenforceable in part because it was not drafted to protect reasonable employer interests.  The trial court held that the agreement was not enforceable because it contained no geographic limit and was essentially was a world-wide restriction.  The trial court also held that the information Sigma-Aldrich tried to protect in the agreement was not protectable as a trade secret.  Sigma-Aldrich appealed.

Affirming the decision, the Missouri Court of Appeals noted that the lack of geographic limitation in a non-compete agreement does not automatically render an employment non-compete void as a matter law in Missouri.  The Appeals Court held that that an agreement that had no geographic limit required some additional limitation on the class with whom contact was limited: “[T]he lack of a geographic limitation here renders the non-compete provision unenforceable without accompaniment by any specificity of limitation on the class with whom contact is limited. Rather, the non-compete provision creates a global prohibition in which Sigma attempted to ban employees from working for any of its competitors globally in any capacity.”  Given the lack of any limitation on a class of competitors, the Court of Appeals held the agreement unenforceable.

The Court of Appeals then analyzed whether Sigma-Aldrich had met its burden that the agreement protected confidential information or trade secrets.  In order to be valid under Missouri law, a restrictive covenant must seek to protect reasonable employer interests such as trade secrets or customer lists.  Here, Sigma-Aldrich did not contend that Vikin had taken customer lists, but did contend that Vikin had access to its trade secrets, including marketing plans and website development information.  Ultimately, the Missouri Court of Appeals disagreed, finding that the evidence demonstrated that the information Sigma-Aldrich sought to protect was widely known in the industry and that Sigma-Aldrich had made no effort to protect the secrecy of the information.  The Court of Appeals concluded that Sigma-Aldrich had not established that the information at issue was a trade secret.

The Court of Appeals held that Sigma-Aldrich had failed to meet its burden to show that the non-compete was not overly-broad and protected reasonable interests such as trade secrets and customer lists.

Takeaways:

A restrictive covenant with no geographic limitation can still be enforceable in Missouri if some consideration has been given to limiting the application of the restriction to certain types of employers, roles, or customers.  Courts in other states have reached similar conclusions.   Also, given that the employee in this case did not have access to any trade secrets or customer lists, the agreement was viewed as unreasonable by both the trial court and the Court of Appeals.  As always, employers must give careful consideration to which employees or positions should be required to sign a non-compete agreement.

Delay Leads to Denial of Request for Injunctive Relief in New Jersey Lawsuit

A recent decision from the United States District Court for the District of New Jersey highlights the perils of delay before applying for injunctive relief.   In PTT, LLC v. Gimme Games, et al.  No. 13-7161 (JLL/JAD), PTT, a slot machine developer, sued competitor Gimme Games and former PTT executives who started Gimme Games, for misappropriation, unfair competition, and patent infringement.  More particularly, PTT alleges in the pending lawsuit that Gimme Games creates slot machine games with the same look and feel as PTT’s games, especially with respect to “oversize symbols.”

The original complaint was filed on November 26, 2013, with the patent infringement claim filed by amended complaint soon after PTT received its patent on May 27, 2014.  PTT thereafter applied for a temporary restraining order on August 21, 2014, approximately one week after it discovered that the defendants maintained a Facebook page promoting the defendants’ games with oversized symbols.

In denying PTT’s application for injunctive relief, the court referenced two delays by PTT.  First, the court noted that PTT waited two months after becoming aware of the defendants’ alleged breach in September 2013 before filing its lawsuit in November 2013.  The court also noted the delay of about 11 months before PTT’s application for injunctive relief in August 2014.  The court cited its prior decision of Ultimate Trading Corp. v. Daus, where it had previously held a five month delay in seeking a preliminary injunction was too substantial to then make a showing of irreparable harm.  Even putting aside the delay in seeking the injunctive relief, the court concluded that PTT could not substantiate any allegations of “currently existing immediate harm” to justify the injunctive relief it was requesting.

The court’s decision should not surprise those familiar with the exigency standards and requirements generally applicable to injunctive relief applications.  However, the court’s closing comments in PTT drive home the importance of acting quickly, even where there is only a threat of a breach.  The court noted the “function of preliminary injunctive relief is to preserve the status quo pending a determination of the action on the merits …  The status quo to be preserved is that state of affairs existing immediately before the filing of the litigation, the last uncontested status which preceded the pending controversy.”   The district court judge suggested that to grant the injunctive relief requested after competitive activity was afoot, would not preserve the status quo but completely change it, and that “the prelitigation status quo would best be preserved by permitting the parties to remain in the state of free competition in the marketplace.”

Under certain circumstances, injunctive relief could and should be granted even after competitive activities have commenced, to prevent further solicitation and other unlawful activity beyond the date of the application. Still, employers should be aware that some judges in other circumstances might not grant injunctive relief once competitive activities are no longer a threat but a reality.  The more important message here, however, is that employers should be mindful of the adverse risks an unexplained delay will present to an application for equitable relief.

UPDATE

As a follow up to the above post, after the court denied PTT’s application for injunctive relief, the defendants moved to dismiss the amended complaint alleging, among other things, that PTT failed to plausibly allege the existence of a trade secret and its wrongful taking by the defendants, that PTT failed to allege a secondary meaning and that the products features are functional and not protectable, and that PTT had altered its alleged trade secret.  The court rejected these arguments and denied the defendants’ motion as premature (although the court dismissed the induced infringement claim without prejudice and with leave for PTT to amend within 30 days).  The court looked to the pleadings standards of the Federal Rules of Civil Procedure, and held that during discovery, PTT will be required to provide, with precision,  “a description of the trade secrets at issue that is sufficient to (a) put the defendant on notice of the nature of plaintiff’s claims and (b) enable the defendant to determine the relevancy of any requested discovery concerning its trade secrets.”