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Non-Compete and Trade Secrets Report

Developments in protecting businesses against unfair competition

NLRB Holds Employee Termination Pursuant to an Unlawful Confidentiality Policy is Lawful

Jackson Lewis has posted an analysis of the National Labor Relations Board’s latest decision in Flex Frac Logistics, LLC, 360 NLRB No. 120 (2014). In this decision, the Board determined that it was lawful to discharge an employee for violating  a confidentialty policy which the Board separately found was unlawfully overbroad under Section 7 of the National Labor Relations Act.

As the authors indicate:

Therefore, even if an employer’s policy or rule is found to violate the NLRA, all is not lost. That policy or rule still may be enforced, even to the point of discipline or discharge, as long as the conduct to which the enforcement is directed does not implicate Section 7 rights.

 

 

Louisiana Court of Appeals Holds Non-Compete Was Triggered When Employment Agreement Expired, Not When Actual Employment Ended

The Louisiana Court of Appeals, First Circuit, recently affirmed a lower court’s denial of a preliminary injunction to enforce a covenant not to compete in Gulf Industries, Inc. v. Boylan (La. App. 1 Cir. June 6, 2014). The case demonstrates continued careful scrutiny by Louisiana courts of non-compete agreements.

Gulf Industries provides highway safety, highway construction, and other related services.  The plaintiff, Boylan, worked his way up within the company to the position of Senior Vice President of Operations and was responsible for maintaining good client relationships with state and local transportation officials, as well as private contractors and suppliers.

In 2009, Boylan signed a one year employment agreement that contained a non-compete provision that was to extend for two years beyond the date Boylan’s last services rendered on behalf of Gulf.  The term of the employment agreement was August 1, 2009 to July 31, 2010.  Boylan continued to work for Gulf after July 31, 2010 and up until his resignation on August 31, 2012.  His last date of employment was September 18, 2012.  A week later, Boylan began competing with Gulf Industries through a new business he and others formed.

Gulf Industries filed suit asserting that Boylan was in violation of his agreement not to compete with the company for two years “beyond the date of Mr. Boylan’s last services rendered on behalf of Gulf.”  Despite the language of the contract, the Court of Appeals affirmed the lower court’s holding that the two-year period began at the conclusion of the employment period identified in the agreement (July 31, 2010) rather than Mr. Boylan’s last date of employment (September 18, 2012).

In its holding, the court noted:

[a]fter a common-sense reading of the employment agreement, we find that its employment period was not extended beyond the original termination date. While Mr. Boylan continued to work for Gulf after July 31, 2010, he no long worked under the terms of the employment agreement and was an at-will employee. When the employment period under the employment agreement terminated on July 31, 2010, Mr. Boylan then became subject to its non-compete clause for two years. The effective period of the non-compete clause ended on July 31, 2012.

The court rejected the employer’s argument that the agreement had been extended when Boylan initialed an exhibit that listed the parishes where the non-compete clause would be effective on March 8, 2011.  The court noted that Boylan testified at the preliminary injunction hearing that his initialing of the exhibit was because it had not been presented to him when he originally signed the agreement in 2009 but that he was not agreeing to extend the terms of the employment period with his initials.

The case highlights the dangers of incorporating a non-compete agreement with a formal employment contract with a defined term.

Alabama Signals Possible Expansion of Exemption for “Professionals” from Non-Compete Restrictions

Alabama does not enforce non-solicitation and non-compete agreements against professionals as that term is traditionally defined – to include, by example, physicians, lawyers, and accountants.  In G.L.S. & Associates, Inc. v. Rogers, 2014 Ala. Civ. App. Lexis 87 (2014), the Alabama Court of Civil Appeals recently opened up a possible expansion as to what qualifies as a “professional”.   The plaintiff in Rogers worked as a securities broker and was sued by his former employer pursuant to a non-solicitation agreement.  Plaintiff filed a motion to dismiss arguing that he was a professional, based upon his job duties and responsibilities (including regulatory obligations), and, therefore, the non-solicitation agreement was unenforceable as a matter of law.  No evidence outside the initial pleadings was offered.   The trial court agreed with the plaintiff and dismissed the lawsuit.

In reversing the lower court, the Alabama Court of Civil Appeals found that whether a securities broker is a professional was a matter of first impression and no evidence was introduced to support such an argument.  This leaves open the possibility that once the record is fully developed, the traditional definition of what qualifies as a “professional” may be expanded.  This would be particularly impactful in the securities industry.  That is, the Rogers court reasoned that the definition of a professional is subject to expansion provided the evidence is properly before the trial court for such a determination.

Pennsylvania Superior Court Holds Continued Employment Not Sufficient Consideration for Non-Compete

In a case of “first impression”, The Superior Court of Pennsylvania has ruled that a restrictive covenant entered into after employment has already commenced is unenforceable if not supported by separate valuable consideration.  Socko v. Mid-Atlantic Systems of CPA, Inc., No. 1223 MDA 2013.

The plaintiff in the case, David Socko, worked for Mid-Atlantic, a basement waterproofing business at various times.  Upon his original hire in 2007, he signed an employment contract containing a two year covenant not to compete.  Socko resigned his employment in February 2009, but in June 2009 he was rehired and again signed a new employment agreement containing a covenant not to compete.  In December 2010, Socko signed a third covenant, the subject of the litigation. Socko resigned in January 2012 and accepted employment with a competitor of Mid-Atlantic.  In February 2012, following his resignation, Mid-Atlantic sent a copy of the 2010 covenant to the new employer and threatened litigation.  Ten days later, Socko was terminated.   In April 2012 Socko brought suit for declaratory judgment declaring that the 2010 Covenant was not supported by sufficient consideration and was, therefore, unenforceable. Mid-Atlantic argued that because the agreement included the language “intending to be legally bound” the Uniform Written Obligations Act (“UWOA”) required enforcement, even in the absence of consideration.

The Superior Court began its analysis recognizing that Federal Courts in the Eastern and Western District of Pennsylvania had come down on both sides of this argument.  The court then observed that non-competition agreements are disfavored in the Commonwealth of Pennsylvania because they are “viewed as a trade restraint that prevents a former employee from earning a living.” The Superior Court then turned to its 57-year old holding in Morgan’s Home Equipment Corp. v. Martucci, 136 A.2d 838 at 844 (Pa. 1957) and even reached back to Medieval England to explain the evolution of restrictive covenants. It noted that resistance to such agreements started after the Black Death left a shortage of qualified workers and then traced the law up through the 18th Century when English courts upheld contracts in partial restraint of trade that included geographic and temporal limitation but were directed to skilled employees.

Arriving at the holding in Socko, the Superior Court discounted what the employer argued should be the saving invocation of the UWOA’s language “that the parties intend to be legally bound” as adequate consideration for the agreement.  Instead, the Superior Court recognized the language as having no value to the employee who was intended to be restrained.  Thus it is now the case in Pennsylvania that “when the restrictive covenant is added to an existing employment relationship…the employee must receive a corresponding benefit or a change in job status.”  It remains to be seen what Pennsylvania courts will require in terms of additional consideration, but the Court in Socko said that consideration must be more than continued employment, nominal consideration (such as one dollar), or a “seal” on the contract.

Noncompete Case Certified to Wisconsin Supreme Court on Issue of Consideration

The Wisconsin Court of Appeals has asked the Wisconsin Supreme Court for “guidance” as to whether additional consideration is required to support a covenant not to compete entered into during an at-will employment relationship.  The case, Runzheimer International, LTD v. Friedlen, involves an action by Runzheimer International, Ltd to enforce a non-compete agreement signed by David Friedlen in 2009, after Friedlen had been working at Runzheimer as an at-will employee for nearly 20 years.   Signing the agreement was made a condition of Friedlen’s continued employment and his participation in the company’s yearly incentive plan.  The agreement did not increase Friedlen’s salary, nor did it make him eligible for incentives that he had not been eligible for prior to signing the agreement.  The trial court found that the non-compete was invalid because it lacked sufficient consideration. Runzheimer appealed, arguing that there should be no difference in how courts treat restrictive covenants entered into at the start of employment and those entered into after years of employment, because “every day is a new day both for employer and employee in an at-will relationship.”

Runzheimer, in its briefing, suggested that Wisconsin courts ought to be allowed to evaluate the circumstances occurring after the restrictive covenant was signed to determine whether the agreement was reasonable, pointing to neighboring Illinois as an example of a state which has arguably followed this practice.  Other states have shunned this case by case inquiry due to the traditional rule that “the law does not inquire as to the adequacy of consideration to support a promise, only its existence.”

The court of appeals for the First District of Wisconsin concluded that existing Wisconsin Supreme Court precedent was unclear and, to some extent, contradictory in a way that would require the Court of Appeals to contradict the higher court either way it ruled.  It therefore certified the question to the state’s highest court for resolution.

Wisconsin has a statute governing non-competes, Wis. Stat. Section 103.465, but the law is silent on the issue of consideration.  It is expected that the Wisconsin Supreme Court will rule on this question and provide clear guidance for employers in the Badger State.

 

 

Refusal to Sign Non-Compete Warrants Unemployment Benefits, Says Missouri Court

The Missouri Court of Appeals recently ruled that an employee who resigns rather than sign a non-compete agreement is entitled to unemployment benefits.   Darr v. Roberts Marketing Group, LLC, , No. 13-07274R-A, (Mo. Ct. App. Apr. 22, 2014)  In this case, David Darr appealed a finding by the Missouri Labor and Industrial Relations Commission denying him unemployment benefits.

Darr began working for Roberts Marketing Group in October, 2012 selling life insurance.  In January 2013, Darr was informed that the employer would be requiring all employees to sign non-compete agreements.  The employees were required to sign the agreement by February 1, 2013.  Darr refused and said he wanted to speak to an attorney.  Darr was told signing the agreement was a condition of his employment.  Darr refused to sign the agreement and later resigned.

Darr filed a claim for unemployment benefits.  The Missouri Labor and Industrial Relations Commission ultimately ruled that Darr was disqualified from receiving unemployment benefits because he left his position voluntarily without good cause.  Missouri law permits an employee to leave a position voluntarily with good cause and still receive unemployment benefits.  The Commission ultimately concluded that the non-compete was no so restrictive of Darr’s employment prospects to warrant a finding of good cause.

The Missouri Court of Appeals reversed the Commission finding that the Commission had vastly understated the facts of the case.  The Court of Appeals began by noting that Roberts Marketing had given Darr an ultimatum to sign a non-compete or be terminated, combined with a limited opportunity to review the agreement and seek legal advice.  Roberts Marketing had also drafted a non-compete that was nation-wide, could have been extended for up to six years, and required Darr to waive any defenses in future litigation. The Court of Appeals implied that these restrictions were far more than permissible in Missouri.

The Court of Appeals ultimately concluded that it viewed the Agreement was one that “may significantly constrain a person’s future ability to earn a livelihood or to pursue a chosen occupation while simultaneously exposing the individual to potential litigation and liability.” Id. at *18.  The Court of Appeals concluded that Mr. Darr was faced with external pressures “so compelling that a reasonably prudent person would be justified in terminating his employment.”  Id.  The Court of Appeals reversed the Labor and Industrial Commission and remanded the matter back to them to process Darr’s unemployment claim.

Takeaways:  First, the Missouri Court of Appeals did not explicitly rule on the enforceability of the employment agreement in this case, but cast doubt on whether the employer could enforce it.  Restrictive covenants should be reviewed by an experienced non-compete lawyer before they are provided to employees.  Second, the Missouri Court of Appeals did not rule that it was impermissible for an employer to require an employee to sign an agreement as a condition of continued employment. Employers in Missouri may still terminate an employee who refuses to sign a non-compete agreement.  Third, employees in Missouri should be provided with sufficient time to review a proposed agreement, and be allowed to have their own lawyer review it if they ask. These failures of the employer, weighed heavily on the Court of Appeals’ analysis of whether good cause existed to permit the employee to obtain unemployment benefits.

Claims in Pennsylvania Lawsuit Alleging En Masse Defection of Employees as “Sabotage” Survive Dismissal

A U.S. District Judge in the Eastern District of Pennsylvania has allowed several claims to proceed to trial following a motion for summary judgment by defendants in Ozburn-Hessey Logistics, LLC v. 721 Logistics, LLC, et al, No. 12-0864 (April 4, 2014). The allegations in the case go beyond the typical defection of an employee or two to join a competitor.  As the court noted:

[m]ost centrally, OHL accuses the defendants of sabotage. According to its allegations, the defendants participated in a coordinated plan to cripple OHL’s produce-clearing operations and convert its customers by arranging for OHL’s entire perishables division to quit, and join 721, at precisely the moment when it would be most damaging to OHL.

Plaintiff Ozburn-Hessey Logistics asserted counts of misappropriation of trade secrets, unfair competition, breach of contract (non-solicitation agreement), tortious interference with contractual relations, civil conspiracy, and breach of duty of loyalty against ten individual defendants as well as its competitor, 721 Logistics.  The Court granted a motion to dismiss in part, but allowed core provisions of the lawsuit to survive against the key actors. Specifically, the court held that whether customer contact information was a trade secret under the Pennsylvania Trade Secrets Act was questionable, but ultimately a question of fact as to three of the defendants.

Addressing the claim of unfair competition, the Court noted that under Pennsylvania common law, unfair competition is the “systemic inducing of employees to leave their present employment and take work with another to cripple and destroy an integral part of a business” or “for the purpose of having the employees commit wrongs, such as disclosing their former employer’s trade secrets or enticing away his customers,” rather than “to obtain the services of particularly gifted or skilled employees.” To determine the issue of intent, specifically the argument that the group resignation was timed in order to cause maximal harm, the court looked at various emails that said, in part, “After the first week of January – when all the ‘s’ will hit the fan . . . we’ll set a date!” and “how’s this for quickness? … snapping necks and cashin’ checks!” The court concluded that the unfair competition claim should be dismissed as to all but one individual defendant and the sole corporate defendant.  Similarly, the court declined to dismiss the civil conspiracy claim against the same parties based on the possibility of unfair competition.  The tortious interference claim was dismissed as to all defendants. The breach of contract claim survived as to one defendant. Finally, the breach of duty of loyalty claim was dismissed because the employees merely made arrangements to compete before resigning and did not use confidential information or solicit customers while still employed.

Overall, the decision provides a useful atlas of the geography of unfair competition law in Pennsylvania.

Illinois Federal Court Questions Fifield

A recent Illinois federal court decision has called into question the much begrudged holding from the Illinois Appellate Court for the First District, First Division, in Eric Fifield and Enterprise Financial Group, Inc. v. Premier Dealer Services, Inc., 373 Ill. Dec. 379, 993 N.E. 2d 938 (Ill. App. Ct. June 24, 2013).

The Fifield Decision

 In Fifield, the Illinois Appellate Court heard an appeal from the Circuit Court of Cook County, which had granted a motion for declaratory relief filed by plaintiffs, an employee and current employer, against the defendant former employer. The Cook County Court held the nonsolicitation and noncompetition provisions of the employment agreement were unenforceable as a matter of law for lack of adequate consideration.  The Appellate Court, assessing the issue of consideration for post-employment restrictions, concluded, “there must be at least two years or more of continued employment to constitute adequate consideration in support of a restrictive covenant” – even in the case where the employee received an offer of employment, contingent on his agreement to the nonsolicitation and noncompetition provisions and the employee voluntarily resigned.  Id. at 944.  As Plaintiff had worked for defendant Premier far less than the two-year threshold, the Appellate Court affirmed the judgment of the Cook County court.

This holding was somewhat radical given the employee had received a conditional offer of employment and voluntary resignation, but the consideration was still insufficient to enforce the agreement.  Despite the stir caused by this decision, the Illinois Supreme Court declined to review it.

A Recent Federal Court Departure from Fifield

At least one federal judge does not agree with the Fifield decision.  Recently, the Northern District of Illinois decided Montel Aetnastak, Inc. and Montel Inc. v. Krstine Miessen a/k/a Kristine N. Schneider, Bradford Systems Corporation and Space Saver Corporation , No. 13 C 3801, 2014 U.S. Dist. LEXIS 11889 (N.D. Ill. Jan. 28, 2104), which is a departure from the holding in Fifield.  As to the issue of whether a fifteen month employment was sufficient consideration, Judge Ruben Castillo, stated that “Illinois law does not, however, provide a clear rule to apply in this instance.”  Judge Castillo cited to Fifield and agreed the former employee needed a “substantial period” of employment to generate consideration, but he also referenced other Illinois appellate court cases in which employment for a year was considered a “substantial period” of employment.  As such, Judge Castillo concluded, “Both the length of her term of employment, along with her voluntary resignation, led the Court to conclude that she was provided with a ‘substantial period’ of employment. Therefore, Miessen was provided adequate consideration to support the enforceability of the employment agreement.”  Id. at *46.

Lessons

The law in Illinois remains unsettled.  It is unclear if or when the Illinois Supreme Court will ever rule on this issue.  In the wake of these decisions, we are reminded that drafting a favorable forum provision and selecting the right courthouse venue may prove to be the critical difference until this issue is resolved.

Fifth Circuit Ruling Serves as Reminder that Confidentiality Agreements Should be Drafted so as to not Tread on NLRA Section 7 Rights

The Fifth Circuit Court of Appeals has affirmed a finding of the National Labor Relations Board (“NLRB”) that a confidentiality clause that defines “confidential information” to include “financial information, including costs, prices . . . [and] personnel information” among other items was overly broad and restricted the rights of non-managerial employees to engage in concerned activity under Section 7 of the National Labor Relations Act (“NLRA”) to discuss the terms and conditions of their employment for “collective bargaining or other mutual aid or protection.”  The decision in Flex Frac Logistics, LLC v. National Labor Relations Board (5th Cir. March 24, 2014) is consistent with previous NLRB decisions and advice memoranda, but is significant because the Fifth Circuit Court of Appeals deferred to the NLRB on this interpretation.  The Court held, in part, that references to “financial information” could be reasonably viewed to include information about wages, and also found the reference to “personnel information” to be overly broad.

Non-compete counsel who do not practice traditional labor law and who have not been following these developments may be surprised to learn that seemingly innocuous confidentiality agreements may run afoul of the NLRA with respect to non-managerial employees.  For those who have been following this issue, the decision serves as a reminder that old fashioned confidentiality agreements given to non-managerial employees that include a laundry list of examples of “confidential information” may require a surgeon’s scalpel, either to remove generalized references to “personnel information” or “financial information,” and/or to utilize safe harbor language clarifying that the proscription is not meant to prohibit the non-managerial employees from discussing personnel information with other employees or with third parties who are not future employers or competitors of the employer.  The NLRB, however, has previously indicated that a simple statement that a policy “does not deny any rights provided under the National Labor Relations Act to engage in concerted activity” may not be sufficient to bring an otherwise unlawful policy into compliance. American Red Cross Blood Services, Western Lake Erie Region, case number 08-CA-090132 (June 4, 2013). These NLRA concerns would not apply to individualized executive agreements or policies for upper-level managerial employees.

Companies will therefore continue to struggle to reconcile the collision of collective bargaining rights of non-managerial employees, with the employer’s right to protect trade secrets and confidential business information, until further guidance is provided by the courts.

Courts Reigning in What It Means to be a “Hacker” Under the Computer Fraud and Abuse Act

Jackson Lewis e-discovery guru Ralph Losey has posted an article about the Computer Fraud and Abuse Act (“CFAA”) on his e-discovery blog ediscoverylawtoday. Losey posits that more courts may be turning to the minority application of the CFAA as applying only to acts of unauthorized access, as opposed to unauthorized use. As he states in part:

A majority of courts have to date construed the meaning of “unauthorized access” in the CFAA to include access for unauthorized purposes, such as to steal an employer’s information. They applied the anti-hacker statute even though the employee was authorized to access the computer system, just not for purposes of theft. Now a growing number of courts are stepping back from the expansive construction of what it means to be a “hacker” under the statute. They are instead limiting the CFAA to situations where the access to the computer itself was unauthorized, and disregarding whether or not the access was for a permitted use.

A recent case out of the District Court in Pittsburgh provides an example of this new trend, and includes a good discussion of the law. Carnegie Strategic Design Engineers, LLC v Cloherty, March 6, 2014.  Judge Eddy points out that there is a split in the Circuits on the issue, and then follows the minority view that the CFAA was not intended to convert disloyal employees into hackers. The plaintiff employer’s case was dismissed with prejudice because there were no allegations that the employee was not authorized to access the computer system, just allegations of improper purpose.