Indiana's Blacklisting Statute Reinterpreted on Certified Question

I have a handful of favorite moments from my legal career.

One is when I had a state court judge tell me during closing that my legal arguments were about as "helpful as a goose turd on a sidewalk", only to have that judge later get reversed on appeal - on those same goose-turdish legal points.

Another, and perhaps still my absolute favorite, is when I invoked Indiana's Blacklisting Statute to recover attorneys' fees for a prevailing defendant in a trade secrets/non-compete dispute. That statute, enacted around the turn of the century -- the 20th century, mind you -- was meant to provide some means of recovery during a period of hostile, violent activity between companies and burgeoning labor unions. Blacklisting a union or striking employee was a common tactic, and legislatures started enacting reforms to allow for aggrieved employees to recover damages.

Fast-forward 100 years or so, and courts in Indiana started fielding Blacklisting Statute petitions when an employer tried to prevent an employee from competing - usually through an overbroad non-compete agreement or a meritless trade secrets claim. To be sure, the Blacklisting Statute does not look like a particularly good fit, but the language of the statute itself -- viewed narrowly and quite literally -- seems to provide a narrow path to recovery.

Like many other attorneys before me, I saw a path to get my client its fees back under this Statute. And I did, though, I wanted the matter settled rather than decided so no appeal was taken. Turns out, this probably was a good decision.

The Blacklisting Statute, as held by the Supreme Court of Indiana, no longer applies to claims where an employer seeks to preclude an employee from competing.

The Indiana case is Loparex, LLC v. MPI Release Techs., LLC, and the Court seemed to have little trouble concluding that other remedies besides the Blacklisting Statute provided sufficient protection for baseless competition claims. The Court offered a few rationales:

First, the ordinary definition of "blacklisting" -- without question, the purpose of the statute was to prohibit this then-prevalent practice -- contemplated a very specific range of activity, such as circulating a list of people to avoid hiring.

Second, the more general language of the Blacklisting Statute, which clearly contemplates that a trade secrets defendant may have a claim, has to give way to the more specific references of "blacklisting." This is a canon of statutory construction which interests only lawyers, and for that reason, I will say no more on the matter.

Third, the Court found that applying the Blacklisting Statute in an unsuccessful competition suit would create bad policy and a "standoff between the former employer, potential employer, and the employee, and the threat of their own mutually assured destruction would deter everyone from seeking any redress whatsoever."

From my perspective, the real evil in competition litigation is the leveraging of legal fees, often when competitors field an asymmetry of resources. A better approach than applying statutes or torts which do not fit these types of disputes is to either (a) allow for one-way fee shifting clauses in non-compete agreements to be blue-penciled, or (b) encourage the use of a more flexible, realistic inquiry on bad faith fee petitions to determine what the true motives of the plaintiff were in bringing suit.

Is the decision clarifying the Blacklisting Statute correct? Probably. But at least I had my fun while it lasted.

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Court: Supreme Court of Indiana
Opinion Date: 3/21/12
Cite: Loparex, LLC v. MPI Release Techs., LLC, 2012 Ind. LEXIS 46 (Ind. Mar. 21, 2012)
Favors: Employer
Law: Indiana

Recent Decisions of Interest (No. 7): Court Orders Return of Bedbug-Detecting Beagle

Non-compete disputes tend to have some strange facts in them. The case of Western Industries v. Lessard, though, takes this to a new level.

Western Industries operates in what has to be a niche industry of providing to its clients canines who are able to detect the presence of bedbugs, presumably in hotels, hospitals, and the like. Each canine has a handler. You can see right now where this is going.

Blaine Lessard was one such handler, and his trusted ally was Dixie - a beagle. (This picture is not Dixie, by the way.) Lessard appears not to have thought much of his employer, as he started doing the same type of work on his own long before he was fired, going so far as to sell himself on LinkedIn under his new company's name. To make matters worse, he used Dixie to provide competitive services and promoted Dixie on his website. Figuring out Lessard was up to something not good wasn't especially tough. (Many non-compete disputes start this way, incidentally. The employee just doesn't seem to give a damn about whether he is caught or not.)

Predictably, Western Industries fired Lessard. But after the termination, Lessard refused to return Dixie. Western Industries moved for immediate temporary restraining order, and the court had little trouble ordering Dixie's return.

The court, in its TRO opinion, cited a document or corporate property return provision as a basis for ordering immediate relief. Though my wife would disagree that dogs are "property" (they are more like people, she would suggest), it seems safe to analogize Dixie to a corporate asset.

So-called "mandatory" injunctions are not all that common. Courts do not like to order parties to affirmatively take certain steps; they would rather say "don't do X." However, in competitive disputes, judges frequently will order the immediate return of corporate property. That's not all that burdensome. Often times, this includes documents, hard drives, source code, or other intellectual property. But it doesn't have to be IP-related, as the case of Dixie proves.

An employer must be prepared to present competent evidence to show that it owns the assets it wants back immediately. Unadorned assertions of who owns what won't do. Corporate counsel should prepare affidavits of persons knowledgeable about the assets the company wants back, making sure to authenticate any documents evidencing ownership.

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Court: United States District Court for the Eastern District of Virginia
Opinion Date: 3/13/12
Cite: Western Industries-North, LLP v. Lessard, 2012 U.S. Dist. LEXIS 33683 (E.D. Va. Mar. 13, 2012)
Favors: Employer
Law: New Jersey

The Reading List (No. 8): New Baby Arrives, But I Still Had Time to Read an Excellent Article

Changing diapers is way more difficult than litigating non-compete disputes. But now I am doing both. My wife and I welcomed our daughter, Langdon, into the world - 10 days early - on Friday night. We're obviously very excited and still trying to figure out exactly what we're doing.

So I won't be posting regularly for a week or two, and will need a bit more time to get my next podcast up. For now, I wanted to share a link to an excellent article on the Computer Fraud and Abuse Act, with a focus on the recent activity in the Ninth Circuit courts.

The link to the article by Bruce Samuels and Cindy Villanueva can be found here.

Declaratory Judgment Actions: Ensuring the Dispute Is Ripe for Decision

Clients and colleagues of mine will tell you that I am a big fan of resolving non-compete disputes in the quickest, most efficient manner possible. By definition, these disputes are time-sensitive because eventually the covenant will lapse - and usually the lapse period is a matter of months. Plus, from experience, the discovery process is completely overdone in non-compete disputes, with document production becoming more of a lawyer, than truth-finding, exercise.

For the employee who may be left twisting in the wind, the best way to resolve a non-compete dispute is through a declaratory judgment action. For those unfamiliar with the concept, both federal and state law allow a court to decide a case or controversy and declare the rights of the parties under a contract.

Non-compete disputes are generally ripe for resolution this way, because an employee and an ex-employer often have divergent views about what an employee is permitted to do following termination. From an employee's perspective, here are the benefits of going on offense and pursuing a declaratory judgment claim.

1. Cost. Non-compete litigation is incredibly and unavoidably expensive. An employee can reduce expense by suing in advance of competing, or "breaching." If the employee sues to have an agreement declared unenforceable, or inapplicable perhaps, then she has eliminated one of the biggest costs in litigation: discovery about what she has done in her new job. She won't have to produce client records, invoices, and e-mails. Handled correctly, an employee can get a final resolution of the covenant's enforceability for a fraction of the cost incurred in a defending a breach of contract case.

2. Perception. Don't underestimate how some judges view a party defending a breach of the non-compete agreement. The judge may decide early on the employee acted recklessly, flaunted her contractual obligations, or competed in a manner that just doesn't seem fair. By suing to have a court declare the agreement unenforceable, a judge is likely to look more skeptically at the employer, particularly if the pre-litigation letter writing campaign demonstrates the employer has taken an unreasonable position. One judge has told me that he viewed a declaratory action by the employee as the "honorable" way to get the case decided. That's powerful stuff to hear.

3. Certainty. If an employee decides to make a frontal assault on the covenant and "breach" it, she may be distracted and worried about what to do in the new position. She may not know what to say to potential clients. She may not even be contacting some blue-chip clients, and may try to decide for herself what clients are immaterial. None of this is good. Her supervisors or co-workers also may be trying to carefully avoid stepping on potential land mines. A judicial resolution before the employee breaches the contract can remove this uncertainty and get people refocused on growing sales and cultivating clients.

4. Risk Mitigation. If the employee loses (which does happen quite a bit), then a declaratory judgment before breach occurs will have avoided potentially significant liability.

So what does an employee need to do to ensure that a declaratory judgment claim will be heard and adjudicated?

Well, first, there needs to be a controversy. If an employee has no future job prospect in the industry (and therefore no present intent or ability to compete), a declaratory judgment claim does no one any good. Second, the employer must demonstrate some intent to enforce.

An employee has to set up the case or controversy correctly, so she can plead the required elements of a declaratory claim. She can accomplish this by requesting a release from the non-compete obligation and pointing out a concrete opportunity that awaits her upon the grant of such a release.

Ordinarily, the employer will write back a threatening letter, indicating its clear intent not to honor the request and stating that it intends to sue upon breach. This, alone, should be enough to establish a case ripe for decision by a court. (On the flip side, such a request may be granted! This has happened to me more than once, to my client's sheer delight.)

If an employee announces no plans to compete, then it becomes more likely that a court will decline jurisdiction. Without something concrete to decide, a court won't get involved.

Here is a list of non-compete cases that discuss this issue, with the recent New Jersey decision from last week being of particular interest.

Stryker v. Hi-Temp Specialty Metals, Inc., 11-cv-6384 (D.N.J. Mar. 2, 2012).

Arakelian v. Omnicare, Inc., 2010 U.S. Dist. LEXIS 84828 (S.D.N.Y. Aug. 18, 2010).

McKenna v. PSS World Medical, Inc., 2009 U.S. Dist. LEXIS 58292 (W.D. Pa. July 9, 2009).

Bruehn v. STP Corp., 312 F. Supp. 903 (D. Colo. 1970).

Non-Compete Radio Now Available Through iTunes

You can now subscribe (for free!) to my podcast, Non-Compete Radio, through iTunes. There, you will find me right alongside other pop culture icons such as Lada Gaga, Adele and The Black Keys. It's not a matter of if I will take home a Grammy, just when really...

The second episode should be available next week. You can also save in your favorites this link, where you will be able to see all podcast episodes. I will be embedding episodes into this blog as well so you can play them here. The previous post contains Episode 1.

Attention Listeners: Non-Compete Radio Is On the Air

Seriously, there hasn't been this much hype since "The Voice" premiered after the Super Bowl...

The first edition of Non-Compete Radio has arrived! My podcast should be available in iTunes within a few days.

For now, you can listen here to Episode 1, Non-Compete Agreements: Background for the Non-Lawyer.

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