Colorado Finds Continued Employment Is Not Sufficient Consideration for Afterthought Non-Compete (Lucht's Concrete Pumping v. Horner)

Colorado has joined the list of states to hold that an existing employee's continued employment does not constitute valid consideration for signing a non-compete agreement.

So-called "afterthought" covenants are often put in place by an employer after it realizes an existing at-will employee may have influence over customer relationships or increased access to sensitive company information. A fair number of states, including Washington, South Carolina, and Minnesota, hold that an at-will employee is not bound by an afterthought covenant unless some consideration is provided to him or her. These courts reason that an employer's forebearance from discharging an at-will employee does not rise to the level of contractual consideration.

Increased pay or new benefits will, of course, but it is not clear how substantial those perks have to be. In Illinois, the appellate courts have, with no real clarity, held that only continued employment for a "substantial period of time" will constitute sufficient consideration. The length of time that the employee remains on the job, along with the manner in which the employment ends, are relevant factors for Illinois courts to consider when examining the validity of afterthought covenants.

The Supreme Court of Colorado has granted certiorari in the case only as to the consideration issue.

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Court: Court of Appeals of Colorado, Division One
Opinion Date: 6/11/09
Cite: Lucht's Concrete Pumping, Inc. v. Horner, 224 P.3d 355 (Colo. Ct. App. 2009)
Favors: Employee
Law: Colorado

Defendant Finally Obtains Fee Award in Trade Secrets Claim (Precision Automation, Inc. v. Krevanko)

I wrote last year about an Oregon case where the defendant not only prevailed but also obtained a finding that the trade secrets case brought against him was conducted in "bad faith", the fee-shifting standard generally found in the Uniform Trade Secrets Act.

Nearly a year later, the defendant finally obtained the amount of his fee award: $129,432.15.

The amount awarded by the court is less than the $202,000 sought by Krevanko, which is not surprising. Courts generally are apt to reduce fee petitions by some amount. However, the defendant appeared to get most of what he requested. The bulk of the excluded fees dealt with parsing out deposition time that involved separate trademark and patent claims in the lawsuit.

I won't try and summarize the court's fee petition decision; there is no area of the law more dull and uninspiring than fee petitions. About the only real noteworthy take-away from the opinion dealt with the court's refusal to approve certain time entries for multiple attorneys who attended the same hearing or deposition. Fee petitions can appear heavy when firms double- and triple-staff cases. Other than evidentiary hearings and trials, it is difficult to recover fees for two or more lawyers covering the same matter. This case provides some precedent for parties defending fee petitions to try and excise more than one time entry for the same work.

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Court: United States District Court for the District of Oregon
Opinion Date: 2/16/10
Cite: Precision Automation, Inc. v. TigerStop, LLC, et al., 2010 U.S. Dist. LEXIS 25394 (D. Or. Feb. 16, 2010)
Favors: Employee
Law: Oregon

Modification of Non-Compete Agreement May Prevent Fee Recovery (Paradise v. Midwest Asphalt Coatings)

Though the blue-pencil, or equitable modification, rule often saves employers and allows them to enforce overbroad or unreasonable non-compete agreements, its use should not be relied upon for several reasons. The first of which is obvious: blue-penciling is (in most states) discretionary and a tough sell on some judges. The second reason is not as obvious: prevailing on an action to enforce a non-compete where blue-penciling is ordered may limit the right to recover attorneys' fees by contract.

As the Court of Appeals of Missouri held last week in Paradise v. Midwest Asphalt Coatings, when a party obtains discretionary modification of a non-compete, it has not "prevailed" on its central claim of enforcing the written contract - even if the remedy of injunctive relief is ordered by the court.

What is less clear - and what was not at issue in Paradise - is whether an employer can be considered the "prevailing party" if it affirmatively requests in its Complaint modification of an original contract to prevent some lesser restriction. Logically, if this theory were to hold any validity, the contract would have to contain a provision consenting to modification by the parties.

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Court: Court of Appeals of Missouri, Western District
Opinion Date: 3/16/10
Cite: Paradise v. Midwest Asphalt Coatings, Inc., 2010 Mo. App. LEXIS 332 (Mo. Ct. App. Mar. 16, 2010)
Favors: Employee
Law: Missouri

Non-Solicitation Clause Without Backward Restriction Unenforceable (Share Corp. v. Momar, Inc.)

Competent drafting is essential to enforcement of non-compete agreements. For anyone who follows this blog, that should go without saying by now. But drafting errors continue to plague employers faced with threats of unfair competition.

Poor drafting generally takes two forms: procedural and substantive. Procedural errors concern contract formation, elements of consideration, or vague language about when a restrictive covenant begins. For anyone representing an employee, this is where to start. Demonstrate a procedural error, and you are well on your way to victory (or at least a favorable settlement). Attorneys must scour every word in a contract to find procedural errors, but the investment can be well worth the return.

Substantive errors, by contrast, are less clear and get litigated extensively. The issue here has to do with the overriding notion of reasonableness tied into any non-compete. Attorneys make substantive errors when they are not aware of the nuances of non-compete law and what courts will require from employers to make a restraint narrowly tailored to balance out the competing interests in employee investment and labor mobility.

A perfect example of a substantive drafting error can be found in the Wisconsin case of Share Corp. v. Momar, Inc., a dispute centered around employee recruitment between competitors in the chemical sales business. The non-solicitation clauses at issue generally barred sales representatives and sales managers from soliciting chemical sales business for any customers they served or supervised during the term of their employment with Share Corp.

The problem for the court was that the covenant contained no backward restriction. A customer one of the representatives serviced 10 years ago would still be off-limits. Under Wisconsin precedent, this lack of a backward restriction violated the rule of reason. That is not to say the lack of such limiting language makes the agreement per se unenforceable. Other mitigating factors may help offset that mistake. But the court found no such mitigating factors in the ex-Share employees' contracts. Accordingly, the court denied a TRO petition, finding Share was unlikely to prevail on the merits of its claims.

Employers who have sales-based employees sign non-solicitation covenants should always ensure that the restraint contains a backward restriction, so that the employee is prohibited from soliciting the business of customers with whom he or she has dealt or managed in the one year prior to termination of employment.

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Court: United States District Court for the Eastern District of Wisconsin
Opinion Date: 3/11/10
Cite: Share Corp. v. Momar Inc., 2010 U.S. Dist. LEXIS 22608 (E.D. Wis. Mar. 11, 2010)
Favors: Employee
Law: Wisconsin

Nationwide Restrictive Covenants In the Information Age (PrecisionIR v. Clepper)

Determining the proper geographic reach of a non-compete restriction is not simply a study in seeing what prior courts have upheld as reasonable. The economy is not what it was twenty years ago. The internet allows businesses in a wide range of fields to conduct work nationally, and even globally, with few barriers to entry. The advent of webconferencing allows salespersons to develop relationships with valued clients far away at low relative cost.

Still, courts almost uniformly examine the notion of non-compete's "reasonableness" with a view towards how far it extends. That usually results in a fact-intensive inquiry as to where an employer conducts sales and cultivates prospects, and where an employee has the ability to influence relationships or capitalize on access to proprietary information. The nationwide non-compete in Information Age-businesses is not only reasonable, but also necessary in many instances.

However, a business that chooses to implement a nationwide non-compete should consider other factors.

First, the time scope of the non-compete should be shorter. It is easier to justify a nationwide covenant if the restriction lasts 6 or 8 months as opposed to 2 years.

Second, a company implementing nationwide non-competes ought to carefully tailor its activity scope so that it prohibits employees from performing a narrowly defined list of tasks substantially similar to what they were doing for the employer. A broad non-compete that limits all types of work for a competitor is less likely to be viewed as reasonable and is at risk for being struck down as an overbroad restraint of trade.

Third, for sales-based employees, a non-compete may not be the best solution; a client non-solicitation covenant is always a good option and, by definition, need not have a geographic restriction.

As a federal district court in New York recently noted, the reasonableness factors - geography, time and activity - need to be analyzed together, and a wider geographic restriction may necessitate a shorter non-compete duration or a more carefully defined activity restraint. Because Information Age businesses seem to have shorter product cycles and go through rapid stages of innovation, it only makes sense to offset a geographically broad covenant with one that is shorter.

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Court: United States District Court for the Southern District of New York
Opinion Date: 3/1/10
Cite: PrecisionIR, Inc. v. Clepper, 693 F. Supp. 2d 286 (S.D.N.Y. 2010)
Favors: Employer
Law: Virginia

Termination of At-Will Employment Does Not Invalidate Non-Compete (Drummond American, LLC v. Share Corp.)

Most lawyers and judges would agree that involuntary termination of employment makes it harder to enforce a restrictive covenant. I wrote a law review on this subject some years ago, outlining different approaches courts across the country have taken on this issue. The law is not uniform by any means, and the cases are hard to reconcile.

In a recent federal district court case from (surprise!) Texas, the court held involuntary termination did not invalidate a non-compete clause. The court did not seem to graft onto this rule any particular standard of good faith (which other courts have done), instead holding that the method by which employment ended was simply not relevant. Remember: this is Texas we're talking about...

My advice to clients is that involuntary termination (without cause, of course) usually won't affect the validity of an activity restraint concerning solicitation of customers, recruitment of fellow employees, or use of proprietary information. It may, however, cause a court to rethink the equities of enforcing a general non-compete clause. Prohibiting someone from working in his or her line of work is fundamentally different than dictating what accounts he or she can solicit.

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Court: United States District Court for the Eastern District of Texas
Opinion Date: 3/8/10
Cite: Drummond American, LLC v. Share Corporation, 2010 U.S. Dist. LEXIS 20582 (E.D. Tex. Mar. 8, 2010)
Favors: Employer
Law: Texas

What to Make of the "White-Hat" Defense

Employees can manage their departure in such a way as to virtually buy themselves a lawsuit. Jay Shepherd, author of Gruntled Employees, sets this out in a very succinct and accurate way. As Jay notes, a departure gone horribly wrong normally has at its epicenter some physical taking or misappropriation of corporate data. The other common fact has to do with customer solicitation. There is often times some room here for employees - for instance, a customer may not fall within the terms of the non-compete agreement, or it may have terminated its relationship with the employer - but there is usually no justification for taking information and jumping ship to a competitor.

I always advise employees considering a transition to strive to wear the "white hat." By claiming the moral high-ground, an employee can shift the entire metric of a non-compete dispute. When employees seek to wriggle out of a non-compete on a technicality, they are in strict confession-and-avoidance mode. Never a good thing. It is much better to stake out territory on the moral high ground and make an employer prove its case without the typical smoking-gun evidence.

An employee can win a non-compete case, particularly if she has not taken information or sought to capitalize on the ex-employer's client goodwill. The case reporters are full of such suits. Courts will be quite hesitant to prohibit employment altogether if the ex-employer hasn't lost any customers or suffered a misappropriation of data.

What factors do I typically see in "white-hat" cases? Well, every case is different but here are the best steps that you, as a transitioning employee, can take to minimize risk:

(1) Leave Your Employer's Documents Where They Belong. Yes, this includes any electronic information, and good luck convincing a court that the sales report you took is no longer confidential. Judges are suspicious of employees who take documents with them, particular through surreptitious means and especially on the cusp of resignation. Any sort of taking of corporate information - trade secret or not - virtually guarantees the employer will establish a protectable interest in its non-compete clause. If you happen to have your employer's documents on your home computer or stored in your personal e-mail account, alert your manager on the way out the door so they can deal with it before you're employed with a competitor.

(2) Be Upfront and Candid. If you hide, or worse, misrepresent, your post-employment plans, this leads to an inference that you intend to compete unfairly. It also makes you look untruthful and leads to uncomfortable moments on the witness stand.

(3) Give Plenty of Notice. Notice policies may be in a contract, an employee handbook, or established through informal custom and practice. Whatever form it takes, follow it. An employer may accelerate your departure, but don't just disappear.

(4) Document Your New Relationship. If you jump ship to a competitor, make sure your new agreement outlines what it is you won't be doing for them. For instance, that new contract should prohibit use of your former employer's information and it should outline your duties such that you will be prohibited from soliciting away old accounts and former co-workers. This document will be one of the key exhibits in the case, and a judge will want to see something beyond mere verbal assurances between you and your new employer.

(5) Avoid E-Mail Discussions About Your Job. E-mail suffers from a terrible lack of context. What one person may say in an e-mail discussion is virtually impossible to explain to someone looking at it for the first time. E-mail evidence is often damaging in non-compete cases, particularly if an employee is trying to sell himself or herself to a new company. You have to be extremely careful not to disclose anything proprietary in discussions with potential managers and not to disparage the employer in any way.

(6) Ask for a Waiver. There is nothing wrong with asking for something you might not get. If you are bound by a non-compete clause, but won't be called upon to solicit your old accounts, ask your employer to modify the restriction. In exchange for a waiver of the general non-compete, you can reaffirm the non-solicitation restriction. If the employer balks, offer to keep it confidential so it can't be used as precedent within the company or offer to tack on a few extra months on the non-solicitation covenant. In the event of litigation, this will show the court how you've tried to exhaust all alternatives and work out a compromise.

(7) Don't Be a Prick. Ex-employers sue people who they feel have wronged them. And judges are people too - they don't like jerks.

Illinois Court Approves Forfeiture Provision in Management Incentive Plan (Viad Corp. v. Houghton)

A federal district court in Chicago recently granted summary judgment in favor of an employer on a forfeiture-for-competition claim against a Senior Vice-President in the trade show design business.

Typically, forfeiture-for-competition clauses are not viewed with the same degree of skepticism and scrutiny as garden-variety non-compete restrictions. Though the effect may be deter someone from jumping ship, courts have noted that the problem of depriving someone of his or her livelihood is absent in a forfeiture case.

Still, courts struggle. Some jurisdictions - a minority, to be sure - will examine forfeiture clauses under the same analytical rubric as non-compete clauses. Others clearly do not.

Illinois has a mixed bag of cases from which to glean guiding principles. Judge Dow in Viad Corp. v. Houghton examined a forfeiture provision in a management incentive plan. That plan contained a clause that required repayment of incentive income (called "special compensation") received within the year prior to departure if the employee quit to compete.

The court, though stating it did not believe a non-compete analysis applied at all, was nonetheless careful and held the clause reasonable under the admitted facts. Of particular importance was the fact that the special compensation was designed to incent a participant's future performance with the company, was not part of "regular wages", and was an entirely voluntary election. The court did not discuss the recent Kelly Bires case, which looked at a forfeiture provision in a royalty agreement. The court in Bires was likely persuaded by the lengthy forfeiture term - 10 years.

For employers, forfeiture-for-competition provisions are gaining in popularity, due in large part to their ease of enforcement and the fact they can achieve the same goals as a non-compete. Covenants tied to incentive-based income (e.g., stock options) are presumptively reasonable, and courts only will examine whether the employee's post-termination activities fell within the competition provision and whether the employer properly exercised a clawback or forfeiture decision.

One other point is worth noting for practitioners and clients alike. If the forfeiture concerns regularly earned income (such as commissions), not only is a court much more likely to examine the clause under a traditional non-compete test, but also it could be void under state wage payment laws.

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Court: United States District Court for the Northern District of Illinois
Opinion Date: 2/26/10
Cite: Viad Corp. v. Houghton, 2010 U.S. Dist. LEXIS 17447 (N.D. Ill. Feb. 26, 2010)
Favors: Employer
Law: Illinois

Citadel's Appeal Proves Unsuccessful In Extending Non-Compete Period (Citadel Investment Group v. Teza Technologies)

As I wrote last year, the dispute between Citadel Investment Group and a cadre of ex-employees in its high-frequency trading unit provided one of the year's most high-profile and interesting non-compete disputes.

Though Citadel has a strong case factually, the scope of the remedy it sought presented it with more challenging issues of law. Specifically, Citadel argued at a preliminary injunction hearing for equitable extension of the defendants' non-compete period for the length of time correspondent to their respective breach. The trial court did enforce the non-compete, but because so much time had passed after the wrongful competition started, Citadel did not gain much in the way of a remedy. In fact, Citadel elected a nine-month non-compete, and ended up with about 1 month in the way of an injunction.

The appellate court ruled that the trial court properly refused to extend the non-compete period. As with other cases in Illinois that have addressed this issue, the key to obtaining and equitable tolling remedy is the presence of a clear contractual provision allowing for extension of the non-compete period. The court did not hold that implied equitable tolling could never be ordered, but it declined to elaborate on when this might be available.

Because the preliminary injunction expired in November, the court did not address the merits of the defendants' cross-appeal.

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Court: Appellate Court of Illinois, First District
Opinion Date: 2/24/10
Cite: Citadel Investment Group, LLC v. Teza Technologies, LLC, 924 N.E.2d 95 (Ill. App. Ct. 1st Dist. 2010)
Favors: Employee
Law: Illinois