Mintel Case Addresses Breadth of Non-Compete, Equitable Extension Remedy (Mintel Int'l v. Neergheen)

The litigation saga involving Mintel International and Meesham Neergheen has finally concluded. The case reads as a primer for modern-day unfair competition litigation and in the process of demonstrating how difficult it can be to obtain meaningful recovery under both the Trade Secrets Act and the Computer Fraud and Abuse Act, the judgment entered by Judge Dow highlighted a couple of important issues under non-compete law.

First, the issue of reasonableness. By now, most people are aware that non-competes are judged under an overarching rule of reason. Geography is less important now than it used to be, particularly for services businesses like Mintel. But the type of activity that is off-limits under a contract generally yields some interesting rulings.

In Neergheen, the court refused to prohibit the defendant from working for a competitor during the non-compete period and instead limited his activities more narrowly to what Neergheen and his new employer agreed upon when he was hired: he was barred from working with customers he formerly had contact with at Mintel and could not work in the consumer product goods or retail sectors at his new company. Mintel had the rather obvious problem to overcome that it could not prove it lost clients as a result of Neergheen's post-employment activity.

The court also extended the non-compete obligation under the equitable tolling (or equitable extension) doctrine. This issue has not been developed particularly well by Illinois courts, though a 2007 decision from the Second Appellate District would seem to suggest that the remedy is only available if provided for by contract. Judge Dow did not cite this case in approving an extender remedy for Mintel.

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Court: United States District Court for the Northern District of Illinois
Opinion Date: 1/12/10
Cite: Mintel Int'l Group, Ltd. v. Neergheen, 2010 U.S. Dist. LEXIS 2323 (N.D. Ill. Jan. 12, 2010)
Favors: Employer
Law: Illinois

Are You Ready for Another Motorola Non-Compete Lawsuit?

From Crain's Chicago Business today comes another story about Motorola feeling jilted by a former employee. This time, Motorla sued David Aderhold, a former wireless network sales executive, after he took a job with Ericsson. By way of background, Ericsson and Alcatel Lucent beat out Motorola a year ago on a bid to become a supplier of fourth-generation network equipment to Verizon. After Motorola lost the bid, Aderhold claims Motorola consented to his new job, first through co-CEO Greg Brown and again through Fred Wright, a senior vice-president.

Motorola may have a difficult time preventing Aderhold from working on the Verizon account, as its loss of the account prior to the time Aderhold left would seem to militate against a finding that the non-compete supports a legitimate business interest. Under Illinois law, that test is rather exacting, and only near-permanent customer relationships and breach of confidentiality can support a restraint. By definition, there is no customer relationship between Motorola and Verizon (through no fault of Aderhold) and use of confidential information also would seem to be a non-issue. What Aderhold would have to gain from disclosing information of a jettisoned supplier like Motorola is an utter mystery. If anything, it seems Aderhold would want to distance himself as much as possible from anything her learned at Motorola.

First Circuit Affirms Denial of Preliminary Injunction In Non-Compete Dispute (ANSYS, Inc. v. Computational Dynamics North Am.)

Last year, I wrote about a decision from a federal district court in New Hampshire, which denied an employer's attempt to enjoin an employee, Dr. Doru Caraeni, from violating a non-compete agreement. That case, ANSYS, Inc. v. Computational Dynamics, served as a nice illustration of the difficulty in applying the legitimate business interest test to employees who are not in a client-facing position. In particular, the situation in the ANSYS case involved a source code developer who went to work for a direct competitor.

The First Circuit, in affirming the district court's order denying injunctive relief, did not provide a whole lot of clarification for what New Hampshire law might say regarding the protectable interest claimed by ANSYS in seeking to enforce the non-competition covenant. It effectively punted back to the district court's findings that ANSYS had not proven at a preliminary injunction hearing that Dr. Caraeni actually used, or threatened to use, anything proprietary during the course of his new employment.

For its part, ANSYS claimed that it only needed to show two facts for the non-compete to be enforceable: (a) that Dr. Caraeni had access to certain proprietary information; and (b) that he was employed in a position to use this knowledge or information for a competitor. Though the circuit court was not overwhelmingly persuaded by this logic - calling it "not irrational" - it was careful to note that New Hampshire had never adopted this standard as the prevailing law.

ANSYS' theory sounds an awful lot like the "inevitable disclosure" theory of trade secrets misappropriation. This doctrine, which can be used in certain circumstances to create an enforceable non-compete or even create a de facto restraint in the absence of a contract, is narrowly applied and by no means universally adopted.

For employees who have deep proprietary knowledge, but have little ability by themselves to cultivate client goodwill, the risk associated with enforcing general non-competes is quite high. Other types of restraints can achieve the same goal, with lower risk of non-enforcement. ANSYS may have been better off having Dr. Caraeni sign a garden-leave clause or paying him to sit on the sidelines for a short period of time.

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Court: United States Court of Appeals for the First Circuit
Opinion Date: 2/12/10
Cite: ANSYS, Inc. v. Computational Dynamics North America, Ltd., 2010 U.S. App. LEXIS 2858 (1st Cir. Feb. 12, 2010)
Favors: Employee
Law: New Hampshire

Equitable Extension Remedy Approved Under Maryland Law (TEKsystems, Inc v. Bolton)

The equitable extension remedy is a device that allows a court to give an employer the full benefit of the bargain if an employee is found to violate a valid restrictive covenant. In many non-compete cases, particularly those where no immediate restraining order is sought, an employee may continue to violate the non-compete covenant while the litigation is pending.

Employers seeking to enforce the agreement therefore will usually have to live with some actual competition until a court orders the employee not to work in a certain capacity or not to cultivate certain accounts. The extension remedy is a means to correct the period of time during which an employee is in actual breach.

In many states, like Illinois, the extension remedy must appear in the contract. From the employer's perspective, it is far more preferable to have a bargained-for remedy that gives it the ability to extend the non-compete for any period of time in which the employee is in breach. However, in the absence of a contractual clause specifically empowering the courts to extend the non-compete term, employers often argue for such an extension under the courts' inherent power to achieve equity.

In TEKsystems v. Bolton, a federal district court determined that Maryland law allowed for such an equitable extension, even in the absence of a contract provision granting the employer this remedy. That case, which involved the technology staffing industry, held that an 18-month, 50-mile industry non-compete covenant was valid and enforceable against a Jonathan Bolton, a Director of Strategic Accounts who developed a strong reputation and successful track record with financial services firms in New York.

The court therefore imposed an 18-month injunction against him following entry of summary judgment.

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Court: United States District Court for the District of Maryland
Opinion Date: 2/4/10
Cite: TEKsystems, Inc. v. Bolton, 2010 U.S. Dist. LEXIS 9651 (D. Md. Feb. 4, 2010)
Favors: Employer
Law: Maryland

Allocation of Goodwill In Sale of Business Non-Compete Not Reflective of Protectable Interest's Value (RSG v. Sidump'r Trailer)

Virtually every jurisdiction is in accord with the notion that non-compete agreements in the sale-of-business context are more readily enforced than those incidental to an employment relationship. Courts legitimately recognize that covenants are part of a bargained-for exchange and that compliance with them by the seller allows the buyer to realize the benefit of its bargain.

Though challenges to enforceability of a sale-of-business non-compete are far less common, they do occur and the arguments raised in trying to invalidate a freely negotiated covenant often strain common sense. One contention often argued by a seller trying to wiggle out of a non-compete involves the allocation of purchase price.

When parties enter into an asset purchase agreement, they need to determine the adjusted basis for the assets included in the sale. Sometimes this can be a point of contention, as the buyer and seller need to agree what portion of the purchase price must be allocated to equipment, fixtures, and intangibles - like goodwill.

Goodwill is the most often cited interest that justifies a non-compete in a sale-of-business. It is strictly intangible, representing the reputational value a going concern has built up over time. That value is expressed through repeat business or a particularly strong brand for key products. The buyer, who benefits from a seller's non-compete, faces somewhat of a paradox: It wants to allocate as little of the purchase price to "goodwill" as possible. It would rather allocate the purchase price to hard assets that can be expensed. (Goodwill can no longer be amortized.) If buyer and seller shove very little of the purchase price into goodwill, a seller could raise the argument - as it did (unsuccessfully) in RSG v. Sidump'r Trailers - that a sale-of-business non-compete's protectable interest was worth very little and disproportional to the impact of the restraint of trade.

Courts seem to see right through this argument, perhaps recognizing that an accounting methodology should not mask the realities of a business transaction. An allocation of purchase price has no bearing whatsoever on the protections offered by a seller's non-compete. During this phase of an acquisition, the non-compete likely has already been agreed upon, and the accountants (not the lawyers) have been left with the task of agreeing on a Form 8594 for the purchase price allocation.

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Court: United States District Court for the District of Nebraska
Opinion Date: 1/29/10
Cite: RSG, Inc. v. Sidump'r Trailer Co., Inc., 2010 U.S. Dist. LEXIS 8206 (D. Neb. Jan. 29, 2010)
Favors: N/A
Law: Nebraska

Staffing Contracts, Work Restrictions and Paternalistic Legislation

It is no secret that in services agreements between staffing companies and their clients, no-hire provisions are common and essential to maintaining a long-term relationship. Often times, however, these provisions are not known to the staffing agency's contractors or employees. For those workers who ingratiate themselves to the end-user client, a long-term employment relationship may be a very realistic possibility.

The clients, at whom laborers are placed, also have a financial interest in employing valuable workers directly, as they may be able to cut out the placement firm's profit margin. No-hire clauses, however, may eliminate this possibility and effectively restrain a client's ability to hire workers placed on-site by an agency.

The question arises, then, whether an agreement between third-parties (i.e., the staffing agency and the client) legitimately can restrict the rights of workers to accept work or employment outside the staffing relationship. In Illinois, the Supreme Court held in H&M Commercial Driving Leasing, Inc. v. Fox Valley Containers, Inc. that third-party no-hire restrictions were in fact restraints of trade.

This does not mean, however, that a traditional non-compete analysis applies to determining the validity of the restraint. To the contrary, all a court will do is examine whether the restraint is reasonable. The Supreme Court of Illinois has left open the question of whether a restraint (i.e., a no-hire clause) that is unknown and undisclosed to the affected worker satisfies the reasonableness test. As Justice Thomas noted in the H&M Commercial Leasing case, "two employers should not be able to contract away an employee's future employment opportunities without the employee's knowledge or consent."

Illinois, being the paternalistic state that it is with an array of bizarre industry-specific laws, has intervened on the legislative side. Under the relatively new Day Labor Services Act, a "day and temporary labor service agency" cannot restrict the right of a laborer to accept a permanent position with a third-party client. The agency can charge a placement fee, however, something akin to liquidated damages. That placement fee, though, is capped at a 60-day net commission rate.

In its infinite wisdom, the Illinois General Assembly provided that the DLSA does not apply to labor of a "professional or clerical nature." Whatever that means...

The bottom line is any entity in Illinois engaged in the placement of labor ought to be very careful about third-party no-hire restrictions in its master services contract. At a minimum, any restrictions ought to be disclosed in writing to impacted employees or contractors of the agency, so as to eliminate the open legal question from H&M Commercial Leasing. That case seems to indicate such undisclosed restraints may be invalid.

Reciprocal Litigation Undermines Claim for Injunctive Relief (Tradition Chile v. ICAP Securities USA)

Obtaining preliminary injunctive relief is never easy, even when a non-compete violation is established. It's even more difficult, however, for a plaintiff to convince the court to issue an injunction when it has been a defendant in the exact same type of litigation and argued against injunctive relief.

That scenario in fact led a New York court to deny preliminary injunctive relief for a financial institution, Tradition Chile Argentes, when it sought to prevent a competitor from hiring several of its inter-dealer brokers. The court held that the plaintiff could not demonstrate "irreparable injury", a showing courts require as a condition of preliminary injunctive relief. Normally, in non-compete disputes, the irreparable injury showing is met because harm from continued competition is ongoing and difficult to redress by way of damages.

However, Tradition Chile had argued in another case (when it was a defendant) that injunctive relief was inappropriate because damages were calculable. The court denied the preliminary injunction motion and used its prior litigation position against Tradition Chile, citing a state court appellate decision which stated:

"the parties in this industry have been asserting alternative and contrary positions depending on which side of a particular suit they are on. Their interpretation of the relevant case law seems to depend, not on the individual facts of the matters, but rather whether in each particular instance, they are the party seeking to prevent the alleged misconduct or whether they are defending against the conduct. This type of self-serving litigation unfortunately appears to have become routinely practiced."

Though no two non-compete cases are alike, it is always helpful to be able to use an adversary's prior history against it.

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Court: United States District Court for the Southern District of New York
Opinion Date: 1/12/10
Cite: Tradition Chio Agentes de Valores LTDA v. ICAP Securities USA LLC, 2010 U.S. Dist. LEXIS 3877 (S.D.N.Y. Jan. 12, 2010)
Favors: Employee
Law: New York

Attorneys' Fees In Complex Non-Compete Case Exceed $500,000 (Western Insulation v. Moore)

Most well-drafted non-compete agreements contain "prevailing party" fee-shifting clauses. In fast-moving emergency litigation, attorneys' fees often become a significant impediment to settling the case and can far exceed damages exposure.

Just because a party does not obtain a large damages verdict for proving breach of a non-compete does not mean attorneys' fees are off the table. When courts examine whether to award fees, it will look to whether the plaintiff obtained significant relief - and the most significant relief a plaintiff can obtain usually is an injunction.

Such was the case in the hotly-contested suit Western Insulation v. Moore, a case arising out of a sale-of-business non-compete violation by Hal and Melanie Moore. The defendants sold their business for $41 million and agreed to a non-competition covenant for a period of seven years. At trial, the plaintiff was largely unsuccessful in proving compensatory damages, but it did obtain injunctive relief. As such, the defendants were liable for attorneys' fees.

The total attorneys' bill from the plaintiff's very competent counsel? $557,555.30. The award ultimately was reduced to $218,705.90, which the Fourth Circuit affirmed on appeal as reasonable considering the success the plaintiff obtained. Though the amount may strike some observers as large, it is not at all out of the realm of reasonableness.

Any non-compete dispute which is defended on the basis that the covenant is simply unenforceable will be expensive to litigate, more so from the plaintiff's side than the defendant's. Extensive third-party discovery involving customers, suppliers, and co-workers will need to be conducted so that the issue of reasonableness and the legitimacy of asserted business interests can be decided. Cases which are defended on the basis of a contract defect, such as consideration or expiration of a term contract, are generally much more streamlined and efficient to defend.

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Court: United States Court of Appeals for the Fourth Circuit
Opinion Date: 1/22/10
Cite: Western Insulation, LP v. Moore, 2010 U.S. App. LEXIS 1445 (4th Cir. Jan. 22, 2010)
Favors: Employer
Law: Virginia