Broadcast Employees Frequently Exempt From Non-Compete Agreements

Jason Shinn, author of Defending the Digital Workplace, was kind enough to e-mail me this week about a fairly new Arizona statute that prohibits broadcast employers from requiring certain employees to sign non-compete agreements. Many readers may be aware that competitive and contractual concerns were front and center in the negotiations between Conan O'Brien and NBC over his departure from the network. (No copy of Conan's agreement appears online, and since he worked in California, a non-compete likely would not be enforceable under California law. Conan's dispute really was not about the terms of a non-compete anyway, but rather an exclusive services provision for walking away from NBC.)

Arizona is certainly not alone in exempting broadcast employees from non-compete restrictions. In 2008, New York passed a similar statute. Other states which have enacted legislation concerning non-compete agreements and broadcast employees include Illinois, Maine, Massachusetts and Connecticut. Michigan introduced legislation in 2007 that would have made broadcast industry non-competes presumptively unreasonable.

Many of these statutory provisions do not apply to broadcast executives or sales managers. The clear intent is for the exemption to govern on-air talent. Why the distinction? It has to do with the test most states apply in determining whether a non-compete is valid or an illegal restraint of trade.

Applying the legitimate business interest test to on-air talent is a little different. The interest to be protected, presumably, is goodwill in audience and network sponsorship retention. That appears to be more than a valid interest for an employer to assert. One can certainly imagine a ratings decline (with correspondent economic losses) if a high-profile anchor defects to a cross-town competitor.

Because most news anchors or sportscasters do not go out and solicit clients (i.e., the viewers themselves), applying the legitimate business interest test as courts have traditionally formulated it can be a little tricky. It is for this reason that the broadcast employees' trade association, the American Federation of Television and Radio Artists, has been aggressive in pushing for legislative non-compete exemptions.

Motorola Obtains Limited (And Vague) Restraining Order Against David Hartsfield

As I wrote last week, Motorola filed another unfair competition case, this time against high-level executive David Hartsfield, based on the "inevitable disclosure" doctrine. It sought fairly sweeping relief in its verified complaint, but when pursuing an emergency temporary restraining order, Motorola appeared to back off substantially. The reason may be strategic.

The inevitable disclosure doctrine permits a party to impose what amounts to an ex post facto non-compete on an employee if the competitive position sought is substantially similar to the previous one and the risk of disclosing specific, valuable trade secrets is imminent and real. However, this looks better on paper than in practice. In most circumstances, when competition has yet to commence, the potential for harm is inherently speculative and the specific trade secret at issue is hard to pin down.

This is a problem with all trade secrets case, but especially ones where there is no proof as to what the employee has or hasn't done. In the Hartsfield case, Motorola invoked the inevitable disclosure doctrine but did not follow through at the TRO hearing for any relief beyond what amounted to a court order restricting what the law already prohibits. Put differently, Motorola did not seek to extend the use of the inevitable disclosure doctrine to prohibit Hartsfield from working at Nokia. This may result from the fact that Nokia and Hartsfield reside in California, but that issue was not briefed before Judge Norgle in federal court.

But why file the case anyway if Hartsfield already has a contractual and common law duty not to disclose certain confidential or trade secret information? Motorola most likely is trying to make a statement that it will carefully monitor Hartsfield and subject him to ongoing discovery requests, in which case its complaint or request for injunctive relief may be amended and supplemented.

The TRO entered by Judge Norgle, however, is fairly limited, and potentially problematic - for it may not meet the required specificity demanded by Rule 65 to put Hartsfield on notice of what exactly is restrained. For instance, Hartsfield is restrained from using such broad, malleable categories of Motorola information as: (a) business plans, marketing plans, financial data and projections; (b) information on customers and potential customers; (c) intellectual property; and (d) Motorola's methods of operation and processes.

It would not be surprising to see this case develop another angle in the course of discovery if Hartsfield is involved in some projects or initiatives on behalf of Nokia which are closely related to what he performed at Motorola. Hartsfield and Nokia will be called upon to produce significant competitive information, and if Motorola unearths specific information about his plans and specific responsibilities at Nokia, the relief it seeks on a preliminary injunction will certainly expand beyond what was sought at the TRO stage. For now, the TRO is limited, though perhaps not compliant with Rule 65. Motorola did have to post a $50,000 bond to secure the TRO.

A preliminary injunction hearing is set for March 5, and the parties will be engaged in expedited discovery over the next 6 weeks.

Liquidated Damages Provision Upheld In LLC Non-Compete Dispute (Mattern & Associates v. Seidel)

A federal district judge in Delaware has upheld enforcement of a $150,000 liquidated damages clause ancillary to a non-compete clause. The restrictive covenant was contained in an operating agreement for Mattern & Associates, a consulting firm that provided technology services to law firms. The defendant, John Seidel, was a 3% member of the LLC and left in 2005 to seek a sales position with Konica Minolta Business Solutions.

At trial, a jury found in favor of M&A and against Seidel on all claims, the most significant of which was Seidel's breach of contract and application of the liquidated damages provision. The Operating Agreement, which was governed by Pennsylvania law, applied the $150,000 sum only to the non-compete covenant, not other types of restrictions. Under Pennsylvania law, this is vitally important. Though Pennsylvania is like many states when it comes to analyzing the enforceability of liquidated damages provisions, it takes a much closer look at them in the context of non-compete arrangements. In particular, an employer must demonstrate that the "sum fixed as security for the performance (of the non-compete) must not be overbroad in that it applies to a number of stipulations of widely different importance." M&A smartly limited the application of the liquidated damages provision to the most significant restriction.

The prophylactic rule articulated in Mattern & Associates requires employers to draft liquidated damages provisions carefully. Many employment contracts contain an array of restrictions, ranging from the onerous (a business non-compete) to the trivial (a non-disparagement clause). When a liquidated damages clause applies across the board to sweeping restraints and less exacting activity restrictions, it reeks of arbitrariness. An employer is vulnerable to a facial attack on the clause as a transparent penalty that bears no connection to a likely breach.

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Court: United States District Court for the District of Delaware
Opinion Date: 1/14/10
Cite: Mattern & Associates, LLC v. Seidel, 2010 U.S. Dist. LEXIS 3199 (D. Del. Jan. 14, 2010)
Favors: Employer
Law: Pennsylvania

Motorola At It Again In Trade Secrets Dispute Against Ex-Vice President

Motorola has not been shy about litigating unfair competition cases. The latest installment involves David Hartsfield, an ex-Vice President of Product Management for the Leadership Category for Mobile Devices. Motorola filed suit in Illinois state court after Hartsfield left to assume a new position at Nokia, presumably occupying the same space in the global CDMA market as his ex-employer.

The action has now been removed to federal court. Motorola is seeking to have a court issue a temporary restraining order that prevents Hartsfield's employment at Nokia altogether. There are a few interesting elements to this case. First, Motorola's claims are not based on the non-compete provisions contained Hartsfield's restricted stock agreement with Motorola. Instead, the claims revolve around his non-disclosure obligation contained in an Employment Agreement. Second, Motorola has invoked the inevitable disclosure doctrine, claiming Hartsfield cannot help but disclose certain proprietary secrets of Motorola in his new position at Nokia.

On this score, Motorola may have a few problems. First, its briefing on the TRO petition does not specify the secrets at issue. Instead, it lists broad categories of information that Hartsfield had access to while working at Motorola. This is always problematic when pursuing a trade secrets-based TRO, as courts demand that the actual secrets be particularized at some point. It is possible Motorola intends to disclose them in camera at a TRO hearing, but the pleadings at this point are fairly limited in scope.

Second, it appears Hartsfield moved to California, which has a strong public policy against non-compete restraints and which has not adopted the inevitable disclosure doctrine. The removal petition filed by Hartsfield goes to great lengths to note that Hartsfield is permanently relocated to California and is domiciled there. It remains to be seen whether Hartsfield invokes some public policy argument in defense of the suit, or seeks to have a new suit for declaratory relief filed in California. In the pleadings filed to date, he hasn't made an issue of this.

This case bears some hallmarks of one of last year's most high-profile non-compete cases, EMC Corp. v. Donatelli. In that case, Donatelli - a Vice President of EMC's Storage Division - took a job with Hewlett Packard in California and filed an action on his own in California court seeking to enjoin enforcement of his non-compete. When EMC fired back with its own suit in Massachusetts, the court there was decidedly unimpressed with Donatelli's effort to "escape" his contractual obligations by fleeing to California and imposed a broad injunction barring him from commencing work with HP.

The case involving David Hartsfield could involve the same issue - if Hartsfield decides to raise it. The suit now rests in federal court before Judge Norgle, who will decide on whether Hartsfield can continue work for Nokia.

Customer Contact May Be Prohibited In Absence of Non-Compete Agreement (Taxsalelists.com v. Rainer)

One issue that frequently comes up in my practice is the extent to which an employer can prevent an ex-employee from contacting customers when there is no non-compete or non-solicitation agreement. Though it's difficult to obtain this remedy, the circumstances are not quite as narrow as many attorneys believe.

Most frequently, post-employment competition without a valid non-compete can be restrained when an employee steals some proprietary data that bears a direct nexus to customer names or goodwill, or when the employee engages in pre-termination competitive activity with certain accounts.

As to the former, it is perfectly logical to prevent customer contact if proprietary customer information (such as a secret list) has been taken. Regarding the latter, courts call this a "headstart" injunction because it purges the unfair competitive advantage gained by an employee before his fiduciary duty of loyalty ended. So the reasoning goes, if an employee has moonlighted and diverted a customer account away for 6 months, then he or she should be restrained from working with that same customer for the same period of time.

A recent case from Colorado illustrates these two situations. In Taxsalelists.com, LLC v. Rainer., a business engaged in providing complete property tax sale lists to affiliates and subscribers suffered a bizarre familial fallout in November and early December. The owner of Taxsalelists.com, John Lane, hired his two stepsons and their wives in 2008 as employees. In July of 2009, one of the two stepsons, Matthew, resigned. While employed at Taxsalelists.com, Matthew had enabled his Gmail account to forward any personal e-mail to his company account. When Matthew quit, he forgot to disable this feature.

This might not have been a big deal, except that the plaintiff claimed Matthew was providing Taxsalelists.com's customer database to a direct competitor both before and after his employment at Taxsalelists.com ended. At the time of an injunction proceeding, a review of e-mail information seemed to confirm that the other step-son, who is still employed by Taxsalelists.com, was enabling Matthew to provide such proprietary information illegally to a direct competitor.

The court had little trouble issuing a temporary restraining order on a complaint charging violation of the Computer Fraud and Abuse Act, breach of fiduciary duty, and a host of other common-law claims. The TRO ruling is interesting in a few separate respects:

(1) It was issued ex parte (i.e., without notice) on the basis that the defendants may seek to destroy electronic evidence, hard drives and relevant information if given notice of the TRO hearing.

(2) The TRO prohibited all of the defendants from contacting any of plaintiff's customers contained on the appropriated e-mail/customer lists.

With compelling evidence of misappropriation of customer data, the court was able to fashion what amounts to a non-compete even though no contract prohibiting customer competition was in place. Under most state trade secrets statutes and the common law of fiduciary duty, courts have wide latitude to remedy acts of unfair competition, and in many cases a strong case on one of these theories may enable a plaintiff to restrain more competitive acts than even the most airtight agreement.

UPDATE X1: This matter settled with no admission of liability by the Defendants who strongly denied any misappropriation ever occurred.

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Court: United States District Court for the District of Colorado
Opinion Date: 12/11/09
Cite: Taxsalelists.com, LLC v. Rainer, 2009 U.S. Dist. LEXIS 122274 (D. Colo. Dec. 11, 2009)
Favors: Employer
Law: Federal

Application of Non-Compete in Term Agreement Often a Matter of Contract Interpretation (St. Johns Investment v. Albaneze)

Term contracts (that is, those for a set period of time) containing non-compete claues often present interpretation questions vastly different than agreements for at-will employees. The problem, one which often leads to litigation, generally concerns when a non-compete expires.

A recent Florida appellate case dealt with a very common situation involving a non-compete in a term contract. In St Johns Investment Management v. Albaneze, an investment advisor entered into a four year employment agreement with a firm to which he sold his prior competing company. He had a two-year client non-solicitation covenant that provided: "in the event Employee is employed by Employer throughout the term, [the period shall be] twenty-four months following the date Employee resigns...or is terminated by Employer." The same clause provided the industry non-compete expired after the four-year term ended.

Albaneze, the business seller turned employee, continued as an at-will employee after his term contract ended in 2006. More than two years later, Albaneze quit and went to work for a competitor. He admitted to soliciting clients, which would have violated the client non-solicitation restriction. Albaneze claimed, however, that the term on his non-solicit expired in 2006 when the term contract ended.

The trial court agreed with him, but the appellate court reversed and entered a mandate for an injunction to issue. The court's rationale was that as a matter of contract interpretation, the non-solicitation covenant could be triggered even after the four-year term ended. In particular, the court seized upon the contract language which stated that the two-year term applied in the event Albaneze was employed throughout the Term. To do so, he had to be employed past the end of the term contract. Accordingly, the non-solicit could be, and was, triggered by a resignation after the contract expired.

This is curious contract language for St. Johns to choose, for it could be argued that had Albaneze quit during the four-year term, the non-solicitation period would not apply at all. That seems counterintuitive, but maybe his contract contained another provision dealing with this hypothetical. Based on what the parties' contract actually said, the court probably reached the correct result.

In any case involving a term contract, attorneys must be very careful to word the non-compete carefully. Illinois, unlike Florida, will strictly construe employment agreements against the employer, so that any ambiguity will be resolved in favor of the employee.

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Court: Court of Appeal of Florida, First District
Opinion Date: 11/13/09
Cite: St. Johns Investment Mgmt. Co. v. Albaneze, 2009 Fla. App. LEXIS 16873 (Fla. Ct. App. Nov. 13, 2009)
Favors: Employer
Law: Florida

The Meaning of "Solicitation"

Most well-drafted non-compete agreements now contain more limited activity restrictions, such as client non-solicitation covenants. These commitments are designed to limit an ex-employee's contact with customers on behalf of a competitor, but they don't purport to limit employment altogether. For obvious reasons, they are most often directed at employees in sales or client-facing positions.

But what does the term "solicit" really mean? This is a question I often have to answer when advising clients what is permissible and what is not. As with any contract, the terminology selected will carry significant weight, and so the analysis begins there. Solicit does not mean "accept business from", but if the agreement says that an employee cannot "solicit, take away, contract with, or accept business from" a protected account then so-called passive solicitation will be prohibited as well.

Generally speaking, solicitation is all about intent. A court will examine the method an employee uses to contact and reach out to former customers and discern his or her intent that way. Judge Kocoras once remarked that solicitation does not require "an express request for business." Contact that is more benign and oblique can rise to the level of "solicitation." Courts also have held that an employee cannot make contact and advise a client that after a certain period of time, he or she will be able to work with that client again. The solicitation of future business is not exempt.

We frequently see a gray area in regards to announcement e-mails and postcards, where an ex-employee simply informs the former contact of a departure and new affiliation. Generally speaking, employees ought to assume that this rises to the level of solicitation - particularly if there is any customization to it.

General rule for announcements: the shorter the better! With each additional word, the chances that a court will find a solicitation rise significantly. Any time there is personal contact, an employee is at risk for violating a non-solicitation clause. A court will be able to infer intent, and it will step into the shoes of a reasonable person and assess how a particular communication was received. Put differently, a court will look to whether a person would have interpreted a communication as a request for business, even if those exact words were not used.

Then again, not every communication with a protected account will constitute solicitation. Certainly, a general advertisement or press release will not suffice. Nor would an employee's act in changing an online profile (which may result in an e-mail notification to friends or contacts) or sending a Christmas card (as long as the card is confined simply to holiday greetings). If the employee has a long personal relationship with a protected account, he or she probably will be afforded some latitude in continuing that relationship without the court inferring that some contact only could be understood as a business solicitation.