Oregon Case Illustates Realistic Approach to Deciding Complex Non-Compete Issue (Epiq Class Action v. Prutsman)

At the beginning of 2008, the Oregon legislature passed reforms to the state's law governing non-competition agreements. The statute is so specific it likely will create loopholes as lawyers and their clients devise ways to circumvent the law's requirements.

Prior to the 2008 amendments, the statute attempted to govern the enforceability of non-compete agreements by dictating they were enforceable only if signed at the inception of employment or upon a bona fide advancement. Agreements signed prior to the effective date of the new law are still governed by the previous iteration, and so we can expect a runoff of cases decided under the old statute.

One such case involved Jim Prutsman, a former IT chief and sales employee of Epiq Class Actions and its predecessors. When Prutsman was promoted from IT to sales in 2003, he signed a two-year non-compete agreement. Subsequently, his employer was acquired in a stock purchase by ECA. Following the closing, Prutsman signed a new non-compete agreement - which reduced his post-termination restriction from two years down to one.

As the court noted, the consideration for the agreement did not meet either criteria for enforceability - it was not signed upon the commencement of his employment and not pursuant to a bona fide advancement at ECA. However, the court took a realistic view of the statute and disagreed with Prutsman's consideration argument. Specifically, the court held that the impact of the new agreement was to reduce Prutsman's burden; he was barred from competing for only one year, not two. The court noted that enforcing the less onerous agreement was consistent with the legislature's intent in prohibiting non-competes where the employer foists a new document on an employee under threat of discharge.

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Court: United States District Court for the District of Oregon
Opinion Date: 11/13/09
Cite: Epiq Class Action and Claims Solutions, Inc. v. Prutsman, 2009 U.S. Dist. LEXIS 108129 (D. Or. Nov. 13, 2009)
Favors: Employer
Law: Oregon

Scope of Arbitration Submission Renders Decision on Non-Compete Remedy Unreviewable (Comprehensive Orthopaedics v. Axtmayer)

A physician and his former medical practice became embroiled in a dispute over his former employment, and like many such cases, the cause was submitted to arbitration. One of the issues in dispute concerned the physician's non-compete agreement, and the practice's assertion he breached it.

As part of the arbitration submission, the arbitrator was charged with awarding attorneys' fees to the plaintiff if the medical practice prevailed under its non-compete claim. The arbitrator rendered an award for the practice, but found that - as written - the non-compete claim was overbroad in its restrictions and that the liquidated damages should be reduced from $150,000 to $75,000. It declined to award attorneys' fees due to the reformation.

Was this decision proper?

Maybe, but according to the Supreme Court of Connecticut, that is not really the issue. When a matter is submitted to binding arbitration, the only reviewable issue is whether the arbitrator had the authority to reach the issue decided - not whether the decision was factually or legally correct.

Clearly, the parties disagreed as to whether the medical practice ultimately "prevailed" by winning - in essence - half of what it requested. The counterview of this is the physician may have won, just as much as the medical practice lost. Perhaps his benefit from the breach exceeded $75,000, and he considered the award not a loss at all, but rather a victory.

Ultimately it doesn't really matter. The Supreme Court of Connecticut was absolutely correct to hold that the parties' decision to kick the issue to an arbitrator meant judicial review was exceedingly narrow.

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Court: Supreme Court of Connecticut
Opinion Date: 10/20/09
Cite: Comprehensive Orthopaedics and Musculoskeletal Care, LLC v. Axtmayer, 980 A.2d 297 (Conn. 2009)
Favors: Employee
Law: Connecticut

Connecticut Court Rejects Unclean Hands Defense In Non-Compete Case (Drummond American v. Share Corp.)

There is a big difference between a justification and an excuse. In a non-compete case, many times an employee - being in a position of having to admit breach - offers only a litany of excuses, rather than a legal justification.

Such was the case in a summary judgment decision involving a claim against a sales agent for a chemical products distribution company. The ex-employee, Mahoney, sold commercial grade chemicals to large customers - and only a couple of dozen, at that - on behalf of Drummond American. She signed a two-year customer non-compete clause, barring her from soliciting sales of competing products relating to accounts she serviced at Drummond.

Drummond had to admit a breach - despite her new employer's admonition against violating the non-compete contract, she sold chemical products to 12 of her 26 former Drummond accounts. In defense, Mahoney offered an array of excuses for her breach, it being generally acknowledged that the covenant was reasonable under Connecticut law.

The court rejected, rather easily, each defense. Of particular note was Mahoney's contention that the doctrine of unclean hands applied to her argument that Drummond hired employees from competitors and encouraged them to violate non-compete contracts. This "defense", if one can call it that, is one I see frequently. However, it is irrelevant, at best.

Even assuming the defense is true, no two employees are alike. One employee may have little value to an ex-employer (perhaps she was an underperformer), so the cost of litigating almost certainly would outweigh any benefit from obtaining an injunction. The company from whom another employee is hired may be exiting the market entirely and not likely to pursue a claim. There really are an unlimited number of reasons.

But the doctrine of unclean hands requires a showing that the plaintiff acted inequitably as to the particular controversy at issue. Airing your ex-employer's dirty linens in an unrelated matter not only is a poor defense, it generally shows the court the employee can offer nothing more than flimsy excuses for a contract breach.

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Court: United States District Court for the District of Connecticut
Opinion Date: 11/12/09
Cite: Drummond American LLC v. Share Corporation, 2009 U.S. Dist. LEXIS 105965 (D. Conn. Nov. 12, 2009)
Favors: Employer
Law: Connecticut

Temporary Restraining Order In Non-Compete Case Requires Showing of Immediate Harm (Ride-Away Handicap Equip. v. Tracey)

Employer seeking immediate redress from threatened competitive harm have to move fast. The preferred remedy in most non-compete disputes is an injunction, and for extreme emergencies, an employer can seek a temporary restraining order - in effect, a paper trial before the court hears live evidence.

TROs are important because the employer will be largely in control of the documents. At a preliminary injunction, the defense has the benefit of time - time to amass evidence, prepare witnesses and find helpful third-party testimony.

But TROs require exigency. Illustrating this key point is a decision from earlier in the week in Florida federal court. In Ride-Away Handicap Equipment v. Tracey, the employer waited four months after sending a "cease and desist" letter to two ex-employees (and its new employer) to file a TRO petition. It also appears the employer gave no notice of the TRO to the defendants. Notice is not required in some circumstances, but the moving party must show why irreparable injury would result from lack of notice.

The court was unimpressed with the employer's delay and denied the TRO petition without a response. There is no bright-line rule for when an employer must move for injunctive relief. Immediacy, in fact, can arise during the pendency of a dispute, for example if an ex-employee suddenly starts poaching other co-workers or discloses confidential information to a customer in violation of a contract. But in a case where the breach is known to the employer, and the employer waits a few months to seek an injunction to stop that breach, it risks losing a valuable equitable right.

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Court: United States District Court for the Middle District of Florida
Opinion Date: 11/10/09
Cite: Ride-Away Handicap Equipment Corp. v. Tracey, 2009 U.S. Dist. LEXIS 104984 (M.D. Fla. 2009)
Favors: Employee
Law: Federal Rules of Civil Procedure

Failure to Present Employee With Contemplated Non-Compete Agreement Fatal to Employer's Claim (Workflow Solutions v. Lewis)

Can an employer seek a court order requiring an employee to sign a non-compete agreement he previously agreed to execute? The answer is, and should be, no.

On a couple of different occasions this year, courts have weighed in on a strange issue going more towards contract formation than enforceability. The Second Circuit in a high-profile dispute involving IBM refused to enforce a non-compete against an employee who never manifested his intent to be bound. Earlier this week, I wrote about a bizarre Louisiana case where an employer tried to enforce an agreement against an employee who only signed a non-compete not personally, but only in her capacity as a representative of the employer.

Today, it is worth pointing out a Virginia case that deals with a more common scenario, although the facts of this case are a little more unique. In 2003, Mark Lewis resigned from Workflow Solutions, LLC, a nationwide print broker. Lewis apparently resigned under contentious circumstances, and the general allegation appears to be that he engaged in pre-termination solicitation of accounts. Several months later, Lewis and Workflow Solutions reached a settlement agreement whereby he agreed to continue working on an at-will basis for a six-month trial period, after which he could continue if the parties mutually agreed to do so. The agreement specifically contemplated that at the end of the probationary period, Lewis would have to sign a non-compete similar to what he previously signed (and apparently breached).

Lewis did continue to work at Workflow Solutions, for several years in fact. But he never signed the non-compete (which was an exhibit to the settlement agreement) and there was no indication the employer pushed him to execute it. When Lewis left to compete in 2008, Workflow Solutions sued to compel him to execute the non-compete contract and have him bound to the same.

The court dismissed the case, finding that the allegations could not possibly sustain a claim against Lewis. As a matter of contract construction, the court held that it could not bind Lewis to a contract he never signed. The settlement agreement contemplated that his signature on a new agreement was essential, and the employer simply never demanded it. Under those circumstances, the court was powerless to enforce anything.

Lewis and his counsel deserve credit for not agreeing to a non-compete in the first instance as a key term of the settlement agreement. There is no indication why Workflow Solutions capitulated on this when the dispute arose in 2003 or 2004, but it would seem that it should have demanded Lewis sign a non-compete and not agree to address the issue sometime down the road. It is possible that Lewis had leverage - perhaps his original agreement was unenforceable or Workflow Solutions created a problem on its own that would have made enforcement difficult. But the case illustrates a powerful lesson for employers: If you want a valid non-compete agreement, obtaining a signature on the document is always advisable...

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Court: Circuit Court of the City of Norfolk, Virginia
Opinion Date: 12/12/08
Cite: Workflow Solutions v. Lewis, 77 Va. Cir. 186 (Va. Cir. Ct. 2008)
Favors: Employee
Law: Virginia

Louisiana Affirms Common Sense Rule That Non-Compete Cannot Be Breached In Absence of...Actual Agreement (Action Revenue Recovery v. eBusiness Group)

In what may be the year's dumbest non-compete case, a Louisiana appellate court has affirmed a judgment that an employee did not violate a non-compete agreement she did not sign.

Though that sentence may appear confusing, it is the essence of the holding in Action Revenue Recovery, LLC v. eBusiness Group, LLC. The plaintiff sued to enforce a non-compete agreement its general manager did not sign, and indeed refused to sign. The employer's theory - bizarre as it was - rested on the notion that the employee signed agreements for other employees as a representative of the company, and therefore that she had to be bound individually to those trade restrictions.

Surprisingly, there was no discussion of frivolous litigation or fee-shifting in the appellate decision, but it is hard to believe this lawsuit could have had a good-faith basis in law or fact. The case is notable in one substantive respect. The non-compete - had it been signed - did not contain a reasonably specific geographic term under Louisiana statute. That law requires that the non-compete identify the parishes or municipalities to which it applies; otherwise, the contract is invalid.

In this case, the non-compete agreement the employee did not sign only described the restricted territory as applying to "all parishes [plaintiff] covers on a like business in said parishes or counties." Aside from being virtually unintelligible and gramatically challenged, the non-compete failed for lack of specificity.

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Court: Court of Appeal of Louisiana, Second Circuit
Opinion Date: 9/19/09
Cite: Action Revenue Recovery, LLC v. eBusiness Group, LLC, 17 So. 3d 999 (La. Ct. App. 2009)
Favors: Employee
Law: Louisiana

Employer's Statements About Limiting Scope of Non-Compete Barred by Parol Evidence (New Life Cleaners v. Tuttle)

It is not at all uncommon for an employee to ask questions about the scope of his non-compete agreement before signing it. Employers can, and often do, run into trouble by advising an employee that the agreement isn't as broad or restrictive as it appears on paper.

However, an employee who fails to secure such limitations in writing is also asking for trouble. A perfect illustration comes by way of a recent Kentucky case, New Life Cleaners v. Tuttle. In that case, the employer presented Chad Tuttle with an employment contract about two years after he started working for it. The agreement contained two garden-variety restrictive covenants - a two-year business covenant prohibiting Tuttle from rendering carpet cleaning services in certain Kentucky counties, and a two-year client covenant prohibiting Tuttle from providing carpet cleaning services to New Life customers.

Tuttle had issues with the contract's scope. During a discussion about the non-compete, one of New Life's owners indicated to Tuttle that the contract was only meant to prohibit actual solicitation of New Life's clients. Tuttle, apparently satisfied with what New Life said, signed the contract unchanged from the original language.

When Tuttle left about two years after signing the covenant, he opened up a competing cleaning service in violation of the business covenant. New Life, apparently, was okay with this. However, things changed when one of New Life's clients called looking for Tuttle and was told he was no longer there. The client actively sought out Tuttle, who took the business away from New Life. There appears to be no dispute that the client was the onle who actively sought Tuttle out, and that Tuttle did not solicit the client 's business.

After the trial court entered judgment in Tuttle's favor - holding in effect that the oral statement made "modified" the non-compete terms - the appellat court reversed and entered judgment for New Life. The court did so on the grounds that the parol evidence rule barred introduction of extrinsic evidence, in this case evidence about oral statements limiting the non-compete. Accordingly, the court found New Life's contract was embodied fully within the written document, not some outside modification pre-dating signature.

It should be noted Tuttle acted without counsel - even at the appellate stage. And in that regard, the court did not address any defense of estoppel that might have been available to Tuttle. Also, the court apparently did not consider a laches defense. New Life apparently was fine with Tuttle violating the business covenant, but only took action several months later when Tuttle was able to take away a client. Tuttle might very well have been lulled into believing New Life would not take any action at all since it was fully aware he had been violating the contract.

The case serves as an obvious reminder to employees to get any modifications to non-competes in writing before executing the contract. However, employers should read too much into this case. It appears New Life lucked out on appeal given its rather careless conduct before the dispute.

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Court: Court of Appeals of Kentucky
Opinion Date: 8/7/09
Cite: New Life Cleaners v. Tuttle, 292 S.W.3d 318 (Ky. Ct. App. 2009)
Favors: Employer
Law: Kentucky

Court Will Not Convert Broad Non-Disclosure Agreement Into a Non-Solicit Restriction (Softchoice Corp. v. MacKenzie)

We often confront a situation where an employee has jumped ship to compete directly with his ex-employer, only to be bound by a garden-variety non-disclosure clause. Inevitably, the non-disclosure clause contains a lengthy, non-exhaustive list of potentially "confidential information," almost always including something along the lines of client identities, preferences, and purchasing details (such as rebates or discounts).

The question becomes whether use of this so-called confidential information can form the basis for an injunction prohibiting direct client competition - even in the absence of a restrictive covenant. The answer should depend on whether the information alleged to have been taken or used was truly confidential.

The case of Softchoice Corp. v. MacKenzie illustrates the usual outcome. In that case, the employee pointed to a wide range of third-party sources to demonstrate clearly that identities of customers were widely known in the industry of computer technology resellers. He identified social networks, leads websites, and other sites made available to all resellers, each of which contained the very information Softchoice claimed was confidential and therefore off limits. The employee also introduced evidence that customers themselves readily disclosed information to vendors to obtain the best possible pricing and services.

The court was unwilling to conclude that the employee misused any confidential information by targeting Softchoice's customers and entered summary judgment in the employee's favor. In so holding, the court noted: "Softchoice...could have limited MacKenzie's contact with his former customers, and consequently protected its pricing information, through a narrowly drawn, valid and enforceable covenant not to compete, but it did not do so. Softchoice cannot achieve by way of a nondisclosure agreement what it could have obtained via a nonsolicitation agreement."

Softchoice's dilemma illustrates the problem with relying only on non-disclosure clauses: they are incredibly hard to enforce. Any relief from breach usually is narrowly limited and does not extend to what is necessary to secure client relationships or goodwill.

Of course, there can be situations when confidential information is truly misused - perhaps brazenly so - and a court will retain the discretion to create a broader activity-based restriction. However, many judges are unwilling to take this step for fear that the injunction order extends beyond what is necessary to strike the proper balance of competing rights.

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Court: United States District Court for the District of Nebraska
Opinion Date: 7/2/09
Cite: Softchoice Corp. v. MacKenzie, 2009 U.S. Dist. LEXIS 56513 (D. Neb. July 2, 2009)
Favors: Employee
Law: Nebraska

Preliminary Injunction Ruling Brings More Clarity to Trade Secret/Confidential Information Distinction (SKF USA v. Bjerkness)

I wrote not long ago about a Missouri court which made the (rather difficult) distinction between trade secrets and confidential information. Most states have enacted a version of the Uniform Trade Secrets Act, which provides for an independent cause of action relating to theft of economically valuable information - whether prohibited by contract or not.

Similarly, many employees in the digital age are now bound by some form of non-disclosure agreement, limiting their use or disclosure of certain types of confidential business information after their employment ends. Often times, courts blur the distinction between trade secrets and other forms of confidential information.

In Illinois, courts have long hinted that such a distinction exists. For instance, a non-compete agreement can protect an employer's legitimate interest in misuse of confidential information, whether that rises to the level of a trade secret or not. Without actually formulating a test, Judge Shadur has noted that the concepts are not at all identical. Still, practitioners can find with relative ease a number of reported cases where judges misapply the trade secrets test to other forms of confidential information, usually concluding that a non-disclosure covenant has not been breached or that a non-compete is not enforceable.

In a recent federal district court case, Judge Pallmeyer took the analysis a bit further, actually defining what "confidential information" was and noting the distinction between it and trade secrets. In SKF USA v. Bjerkness, the court concluded confidential information is "particularized information disclosed to [the employee] during the time the employer-employee relationship existed which [is] unknown to others in the industry and which give[s] the employer advantage over his competitors."

The key analytical difference between confidential information and a trade secret? Judge Pallmeyer notes: "Confidential information, then, does not necessarily require positive steps by the employer to maintain the secrecy of the information, though such efforts may be relevant in the court's consideration of whether the information is truly confidential."

Customer information is an example of where this distinction may be meaningful in practice. Many cases hold that customer-specific quotes, price sheets or invoices (which may reveal buying habits, rebates, volume discounts and key contact information) does not rise to the level of a trade secret because the customer is free to do with this as he pleases. However, it may be confidential in the objective sense because in most cases the information would only be available to a select few and not publicly advertised (such as a retail price sheet, for instance).

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Court: United States District Court for the Northern District of Illinois
Opinion Date: 4/24/09
Cite: SKF USA, Inc. v. Bjerkness, 636 F. Supp. 2d 696 (N.D. Ill. 2009)
Favors: Employee
Law: Illinois