New Hampshire Employer Alert: Notice Required for Non-Compete Agreements

A few years ago, Oregon enacted legislation requiring that employers give employees notice they will have to sign non-compete agreements. New Hampshire has just followed suit.

In a statute passed May 15 - to take effect July 14 - employers in New Hampshire must provide a copy of any "non-compete or non-piracy agreement" to an employee or potential new hire. The terms are not defined, but it seems obvious any restriction on competitive conduct or solicitation (or employees or customers) would fall within the statute. Less certain is whether a non-disclosure agreement would, though the text of the agreement suggests it wouldn't.

The statute also applies to a "change in job classification." As Seyfarth Shaw's blog points out, this too is not defined and could include a promotion, demotion, or lateral move. I doubt it would include a change in pay, since that doesn't seem to alter how one is classified.

The law is vague enough that crafty lawyers will soon litigate over its meaning.

I don't think it's worth reading too much into this, though. Smart employers should provide a copy of a non-compete to a new hire with reasonable notice. This helps mitigate any consideration defense, to be sure. But it also is a sound business practice. Experience shows that employees are more satisfied and less likely to leave if they feel as though they have been treated fairly by their employers.

Case Update...The Trade Secrets Edition

I've come up with a better way to differentiate between trade secrets (protected nearly everywhere by statute) and confidential information (somewhere protected by the common law; more often, by contract). I may be totally off-base on this, but here goes.

A trade secret is a form of intellectual property whose value can be monetized like a patent or trademark. Confidential information is information that generally is not available to outsiders but which lacks independent value as a firm asset.

(I actually thought of this yesterday while changing a diaper.)

We're in the dead of summer, but the law continues to churn out interesting cases for us nerds to ruminate over.

Inevitable Disclosure in Massachusetts

A preliminary injunction ruling out of the District of Massachusetts rejected a rather expansive view of the inevitable disclosure doctrine. U.S. Elec. Svcs., Inc. v. Schmidt, 2012 U.S. Dist. LEXIS 84272 (D. Mass. June 19, 2012), involved the departure of a national accounts manager who did not have a non-compete agreement with the plaintiff (he actually left to work for a subsidiary two years prior). When a project coordinator followed the manager to a competing electrical distributor, the distributor sued under a variety of theories. Surveying Massachusetts' interpretation of the inevitable disclosure rule, the district court held that the rule is best applied to establish irreparable injury - basically, a protectable interest - supporting a non-competition agreement. It did not approve of using the theory as the foundation for a trade secrets claim. Factually, the claim appeared to be a stretch since the manager had not dealt with the key customer at issue - Dollar Tree Stores - for over two years.

Royalty Damages for Misappropriation

Royalty damages are the back-up plan for victims of trade secrets theft who can't prove lost profits or gains the misappropriator realized. This is a derivative of patent law, and it seeks to figure out a hypothetical licensing price that the misappropriator would pay for the privilege of using the information taken from the owner.

An Arizona court has held that a trade secret owners license fees for other patents and investment costs in developing the trade secret can provide a basis for a royalty award. It also rejected the argument that because a product may never be brought to market - the product involved an intestinal sleeve to treat morbid obesity - damages were inherently speculative. Using corporate finance theory, the court stated that a risky future cash flow is simply discounted with a risk-adjusted rate. The case is W.L. Gore & Assocs., Inc. v. GI Dynamics, Inc., 2012 U.S. Dist. LEXIS 75055 (D. Ariz. May 30, 2012).

Attorneys' Fees In Non-Compete Agreements

What happens when an employee wins a non-compete case and tries to recover attorneys' fees he never was obligated to pay? In my experience, new employers pay the freight on non-compete suits about 1/4 of the time, depending on the employee's value and position within the company. (An executive, for instance, likely will be able to negotiate this as part of his employment agreement.)

In Rogers v. Vulcan Mfg. Co., 2012 Fla. App. LEXIS 8793 (Fla. Ct. App. June 1, 2012), the Court of Appeal of Florida reversed a $0 attorneys' fee award to the employee after he prevailed on the employer's non-compete claim. The fee-shifting clause provided the employee could recover fees "incurred to enforce any term, condition, or provision" of the contract. The court found the clear intent of the clause was that "the loser pays, and the winner does not." It did not matter who the source of the funds was, because the language in the fee provision was passive.

And who said never to use the passive voice??

The "Weekly" Posner, Starring Judge Easterbrook

A few years ago in Hess Newmark Owens Wolf, LLC v. Owens, Judge Frank Easterbrook of the Seventh Circuit explained in simple terms that the law's grudging attitude towards restrictive covenants is best explained by the fact employees often are tricked into signing, or feel compelled to sign, agreements that later turn out to be disabling.

There's good reason to cite to Posner and Easterbrook opinions, and it doesn't require lawyers to subscribe to a particular brand of law-and-economics analysis. Judge Easterbrook's affirmance rate by the Supreme Court is twice that of the average circuit court judge. And measuring a circuit judge's effectiveness by how often he or she is cited by other circuit court judges, Posner and Easterbrook rank 1 and 2 respectively - by a wide margin.

Plus, they just make sense.

The reason I bring up the Owens case is that it helps coalesce the various reasonableness factors into a very simple, straightforward analysis. In my previous discussion of the Capital One v. Kanas case, Judge Liam Grady in Virginia took special pains to differentiate that John Kanas was hardly the novice when signing a covenant he later challenged as unreasonable. Though it's sometimes hard to figure out where in the compartmentalized analysis this factor fits, it permeates the reasonableness test. In Kanas (as in Owens, for that matter), the individual signing the covenant was sophisticated and gained more than just a mere job opportunity in exchange for signing the restriction. It was hard for Judges Grady and Easterbrook to conclude either defendant was the type of individual the law meant to protect from disabling restrictions.

The Easterbrook formulation is helpful, too, to assess covenants from the employee's perspective. I think it's fair to say that when an employee signs a non-compete she may have a layman's understanding of what it means. For a sales person, the thought process likely is "stay away from my accounts." But she may not anticipate the actual scope of the restrictions beyond this, particularly if the covenant is written in dense legalese. A non-lawyer is not trained to think in hypotheticals, so the sales person may not appreciate what type of competition the covenant actually prohibits beyond what is foremost in her mind at the point of signing.

The overall point is this. Assessing reasonableness does not need to be highly fragmented, and lawyers don't have to always fit the facts into the little black boxes of three-part tests. Sometimes, as Judge Easterbrook points out, it is enough to hone in on the purpose of the law and argue your case around that.

John Kanas, What's In Your Wallet ($24M in Restricted Stock...)

Last year, I wrote about the non-compete case involving high-profile New York banker, John Kanas. Along with his associate, John Bohlsen, Kanas sold North Fork Bancorporation to Capital One Financial in 2006 for $13.2 billion. Along the way, Kanas pocketed $24 million in restricted stock (Bohlsen received $18 million).

Not long after the business deal closed, Kanas and Bohlsen - who had agreed to remain employed by Capital One for three years - split under a Separation Agreement. That agreement narrowed the non-competes in the restricted stock agreement to prohibit work in a competitive business only in New York, New Jersey, and Connecticut.

When Kanas and Bohlsen formed BankUnited in 2011, Capital One claimed a breach of the covenants. I described in a previous post the facts underlying Capital One's claim. Kanas and Bohlsen moved for summary judgment, requesting a federal court in Virginia to void the non-competes.

The court, in a very well-written opinion by Judge Liam O'Grady, found the agreements reasonable. He found the case highly unique, given the extraordinary amount of consideration the defendants received out of the North Fork acquisition and because they were highly sophisticated businessmen.

The interesting aspect of the case involved Capital One's claim that the covenants should be examined under the more lax sale-of-business standard. They weren't, as the court found two factors dispositive of that claim: (1) the covenants were triggered by the end of employment, not the closing date of the transaction; and (2) the covenants were not a condition to the North Fork acquisition. The points are debatable given that the covenants were, in effect, replacements for those that did get signed at the deal's closing. But the court was correct in that the terms of the contract were tied more towards the employment of Bohlsen and Kanas.

The court was tempted to apply the sale-of-business standard, but stated that "policy considerations, such as the bargaining power of the parties, are more properly considered as part of the Court's analysis of enforceability." For a long time, I have been saying that the sale-of-business/employment framework simply does not account for a lot of cases that fall within the two extremes. Cases that are more difficult to assess include covenants between:

(1) franchisor and franchisee;

(2) commercial transactions short of a sale of business (for instance, a staffing agreement); and

(3) executive employment contracts.

Often times you see courts apply a sale-of-business standard to situations where sale-of-business precedents don't fit. It would be far preferable if courts considered such factors as negotiations, bargaining power, commercial realities, and monetary benefits conferred on the promisor when examining restrictions under the traditional reasonableness test. Judge O'Grady's opinion did that, discounting the framework used and focusing more on the public policy aspects of what he was deciding.

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Court: United States District Court for the Eastern District of Virginia
Opinion Date: 5/17/12
Cite: Capital One Fin. Corp. v. Kanas, 2012 U.S. Dist. LEXIS 69385 (E.D. Va. May 17, 2012)
Favors: Employer
Law: Virginia