Product Disparagement At Heart of Merge/Medstrat Lawsuit Over Lost Customers

As reported in Crain's Chicago Business on Monday, Merge Healthcare Inc. has filed suit against rival Medstrat for allegedly using unfair means to target a specific group of clients. Merge and Medstrat are competitors in the field of medical-imaging technology.

The central allegations it the Complaint revolve around a marketing plan Medstrat allegedly developed to poach customers away through a series of inaccurate or disparaging remarks, including claims that Merge was not "stable" and that Merge had retained an investment bank, ostensibly suggesting Merge was trying to combine itself with another industry player.

The meatier allegations of unfair competition concern a claim that Medstrat used improper tactics to poach away specific customers from Merge's prior acquisition of Stryker Imaging. Those so-called "legacy" customers had a different type of imaging system (that is, a hardware/software system that captured and stored medical images) that other Merge customers.

The crux of Merge's claim is that Medstrat was "scaring" customers into believing that Merge was going to convert these legacy Stryker customers into using (or migrating to) a different imaging platform. Ostensibly, the alleged purpose of these communications was to suggest the transition or conversion would be costly, painful, and difficult.

Merge's take is that no customer would be forced to convert to a single imaging product and that it would continue providing support for any legacy product that ex-Stryker customers use. Interestingly, Merge alleges that it is aware of nearly 40 accounts that have switched to Medstrat during the time period proximate to disparaging remarks. It claims that lost profits easily could reach into the eight figures.

The lawsuit seeks both injunctive relief and damages. Any time a court issues an injunction that ostensibly affects speech (which disparagement is), a First Amendment concern arises. And an injunction against speech could easily be deemed an improper prior restraint.

The law in Illinois is not particularly well-developed but it appears Merge recognizes the First Amendment difficulties that its injunction could pose. In my opinion, plaintiffs sometimes pursue a shotgun approach that seeks a broad injunction against false or misleading remarks - without specifically exactly what a court should enjoin. That clearly is wrong and would lead to significant legal problems crafting an injunction order.

Merge, though, was pretty careful. With its preliminary injunction motion, it has submitted a proposed order identifying what types of communications it wants enjoined. It outlined very specific comments that it believes should be enjoined and also wants the court to prevent Medstrat from distributing certain marketing communications that it believes incorporate disparaging material.

This is an example of a injunction request that affects speech, but which may be appropriately and narrowly crafted to avoid the latent First Amendment "prior restraint" problem that often crops up in disparagement cases between competitors.

Medstrat has not yet responded to the Complaint, but it will be interesting to see if the prior restraint issue is part of its defense at the preliminary injunction phase.

A copy of the Merge Complaint is embedded below. The case is No. 12-cv-9140 (N.D. Ill.). Judge Samuel Der-Yeghiayan.

Merge Healthcare v. Medstrat, Inc. - Complaint

Supreme Court of the United States Reverses Oklahoma Non-Compete Decision

It is not often - never? - that the Supreme Court of the United States renders a decision that impacts non-compete law.

But such is the case in one of the year's more significant non-compete developments. In Nitro-Lift Techs. v. Howard, the Court held that the Supreme Court of Oklahoma improperly decided the enforceability of a non-competition agreement between a company and two former employees. The Court held that the mandatory arbitration clause required an arbitrator, not a state court, to decide the enforceability question under Oklahoma law.

This is a rare Oklahoma non-compete case, because non-competes are not enforceable in Oklahoma. Some limited activity restraints are, to be sure, but general non-competition covenants are treated in Oklahoma like they are in California and North Dakota.

It is perhaps for this reason why the ex-employees decided to file suit against their former employer, Nitro-Lift Technologies, when they quit and joined a competitor. Faced with a demand for arbitration, the employees went on the offensive to a court of law. This is a common tactic in employee friendly states like Oklahoma or California.

But, with an arbitration clause in the underlying agreement, did the ex-employees pursue the wrong avenue? The Supreme Court of Oklahoma said "no." A year ago, it boldly declared that "[o]ur jurisprudence controls this issue." The Supreme Court of the United States did not like that, chastising the state court for disregarding the law and not bowing to the broad policy favoring arbitration (even in state court) under the Federal Arbitration Act.

Due to that minor little thing called the Supremacy Clause, Oklahoma had to follow the Supreme Court's interpretation of the FAA. And because there was no challenge to the validity of the arbitration clause, an arbitrator - not a court - had to pass on whether the covenants not to compete were enforceable under Oklahoma law. Whatever arbitration panel is seated just might be influenced, however, by the Supreme Court of Oklahoma's decision that the non-competes were void against public policy.

A copy of Nitro-Lift, a per curiam decision, is below.

Nitro-Lift v. Howard

Preliminary Injunction Order Cannot Be Used As Substantive Evidence at Trial

This one completely baffles me.

Lawyers have to make judgment calls at trial over evidence all the time. Just as important as deciding what to introduce by way of oral testimony or documentary evidence is deciding what to leave out - even if it may be marginally helpful.

In a South Carolina competition dispute, the plaintiffs tried to introduce for a jury the temporary injunction order that the judge entered at the start of the case. And the court agreed to admit it and let the jury review an 11-page order the judge signed after the case was filed.

The case arose out of a business divorce in the PEO industry. PEO stands for professional employer organization, and it is common now for firms to, in effect, outsource their human resources departments. When a shareholder of Allegro failed in his efforts to buy out the majority owner, he left to start his own PEO firm. Lawsuit follows. Injunction entered. Trial ensues.

But why would the grant of an injunction ever be something the jury should see? And how did this happen?

Those questions aren't answered by the Court of Appeals' decision, except for the following:

"It is hard for this court to determine an instance where admission of a preliminary injunction order into the trial record would not be highly prejudicial."

Truth.

It's not hard to see the prejudice. Injunctions are misunderstood. It takes a lot of effort, at least in this lawyer's experience, to explain to a client what a preliminary injunction is, and how that piece fits into the total litigation puzzle. Clients who prevail on an injunction motion think they've "won the case." Not so. They're surprised they may have to testify again. Injunctions are decided on truncated records. In some courts, the judge may not hear live evidence. And by their very nature, only part of the evidentiary record is developed.

Even if an aggressive plaintiff's lawyer wanted to trumpet its injunction order before a jury (which is something I can't come to terms with), a judge should know better. The court should have known its findings on a temporary injunction order would greatly influence a jury.

This was a basic mistake that never should have happened. And the plaintiff now has to retry its case at great cost. As I tell my clients, always expect the unexpected in competition disputes.

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Court: Court of Appeals of South Carolina
Opinion Date: 7/11/12
Citation: Allegro, Inc. v. Scully, 2012 S.C. App. LEXIS 334 (S.C. Ct. App. July 11, 2012)
Favors: Employee
Law: South Carolina

Court of Appeals of Colorado Overturns Jury Verdict on Abuse of Process Counterclaim

Employees aren't equipped with an overwhelming array of weapons to fight back anticompetitive lawsuits.

I have written many times on this blog about this topic. In this author's view, the legal system works most efficiently when parties can rely upon contract law to allocate rights and responsibilities with some predictability. Though non-competes are restraints of trade, they should be struck down only when patently overbroad and when the objective intent from the contract language is to deter fair competition.

I also believe that trade secrets law is a species of property law, and that if an employer can demonstrate a taking of protected (that is, valuable and secret) property, the law should honor that. But in the absence of protection efforts that place a third-party on objective notice that the property is truly something that is "secret", trade secrets law can be a destructive, overused weapon between competitors that disrupts parties' reasonable expectations in dealing with each other.

Employees sometimes assert abuse of process counterclaims when faced with a competition lawsuit appears to be filed as an end in itself - not as a means to an end. Abuse of process claims are tough to prove, but generally require the employee to show three things:

(1) an ulterior purpose to the suit;

(2) actions by the employer that are not proper in the course of the lawsuit; and

(3) damages.

There's another hurdle to clear, though, when an abuse of process counterclaim is based on the idea that the lawsuit itself is not proper. It's called the "sham litigation" exception, because lawsuits generally are protected by the First Amendment's clause enabling parties to petition the government to redress grievances. The sham litigation exception to First Amendment immunity further requires a counterclaiming party to show an objectively baseless suit brought in bad faith.

A recent Court of Appeals ruling in Colorado reversed a district court's jury verdict in favor of ex-employees who each obtained a $200,000 judgment on an abuse of process counterclaim. The problem that the district court made was not assessing the sham litigation exception properly on a post-trial motion by the employer. Instead of assessing whether the employer's competition claims were objectively baseless and devoid of factual support, it held a reasonable jury could have found for the employees on their counterclaim.

This conclusion missed the mark, since the court - not a jury - must pass on the First Amendment constitutional issue. Interestingly, Colorado rejected a bright-line gatekeeper rule. Specifically, it found that just because an employer's competition claims survive summary judgment does not mean the abuse of process counterclaim automatically fails. The court noted that trials may often be more efficient than resolving summary judgment motions, and that summary judgment denials often don't contain the type of exacting analysis that would automatically dispose of an abuse of process counterclaim.

One issue that is not discussed in the Colorado case - or in many cases like this - is the second element of the abuse of process tort. As listed above, an employee must generally show some action "not proper in the course of the lawsuit." When the theory is that the lawsuit is a sham, it is hard to identify something concrete that is improper, such as the misuse of subpoena power. However, my view is that the sham litigation analysis subsumes the second element. If a lawsuit is objectively baseless, then the process itself - the cost of discovery, disruption in the marketplace - has been subverted entirely.

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Court: Court of Appeals of Colorado, Division Three
Opinion Date: 11/8/12
Cite: Health Grades, Inc. v. Boyer, 2012  Colo. App. LEXIS 1842 (Col. Ct. App. Nov. 8, 2012)
Favors: Employer
Law: Colorado

Department of Justice Sues EBay Over No-Poaching Agreement With Intuit

Last week, the Department of Justice filed another suit against one of the nation's tech giants for entering into horizontal no-hire agreements. This time the suit is against EBay, and it generally alleges that EBay and Intuit engaged in an informal and formal contract not to hire each other's key employees.

The DOJ has sued under the Sherman Act, claiming that the no-hire agreement is both illegal under a per se and rule of reason analysis. Though the suit is pending in California - a state with a well-known and broad policy against enforcement of non-competes - the California law receives only one passing mention in the complaint. And the state public policy would appear not to have any impact on the Sherman Act analysis.

It is not clear what the imminent harm is, or whether EBay and Intuit have continued their understanding not to hire each other's people, however informal that understanding may have been. The DOJ had obvious access to e-mail communications and probably gained them from another suit that it brought in California federal court against other tech companies.

Intuit is not a defendant, as it is under an agreed order in a similar case. A copy of the Complaint is contained below.

US v. eBay, Inc.

Non-Compete Radio: Episode 4 Link

Today's episode (link below) features an interview with Rob Dean of the Roanoke, Virginia firm, Frith & Ellerman. Rob's practice includes the representation of employees in non-compete matters.

Rob and I discuss a wide range of topics including the use of social media evidence in non-compete cases, Virginia's trend against enforcement of non-competes, the blue-pencil rule, declaratory judgment suits, and (most critically) his bold prediction that Michigan will top Ohio State in this year's Big Game (at least to us alumni).

The 30 minutes flew by, and I thank Rob for joining me. I hope to have him back on the podcast to discuss the Urban Meyer era and how poorly he predicts college football games.

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Supreme Court of Illinois Recognizes Intrusion Upon Seclusion Tort in Non-Compete Investigation

Non-lawyers would be surprised at the type of feelings and emotions that run through competition cases. One only need to read Steve Jobs' biography to get a sense of how raw his feelings were on the upcoming smart phone patent wars he did not get a chance to see.

Non-compete cases are much the same way. Employers feel ex-employees are disloyal. Ex-employees feel entitled to do what they want. Suspicion and speculation abound. And, as a lawyer, I have always been amazed at how personal the lawyers take most cases.

Frequently (though not often), employers overstep their bounds in investigating a non-compete breach. It is hardly uncommon for companies to hire investigators to look into what an ex-employee is doing out in the field for her new company. But sometimes those investigations can go off-course. Real life, after all, is not an episode of The Good Wife.

The Supreme Court of Illinois in Lawlor v. North American Corp. recently recognized the tort of intrusion upon seclusion in the context of a non-compete investigation gone south. The tort is a branch of the invasion of privacy claim and is fairly flexible in what types of facts can give rise to the claim. It essentially provides for tort liability when one party intentionally interferes with another's private affairs, such as by examining bank account information or opening personal mail.

The Court had never recognized the cause of action until Lawlor. The case arose when North American's outside counsel retained a private investigation firm to investigate whether Kathleen Lawlor was improperly competing following her departure from North American. The firm obtained Lawlor's phone records to examine whether she was talking to competitors. Lawlor sued for the tort of intrusion upon seclusion. North American defended the case on the grounds that there was no principal-agent relationship between it and the investigation firm. Unfortunately for North American, the Court determined sufficient grounds existed for the jury to find that North American was intimately tied into what the private eye firm was doing.

The case is emblematic of the type of emotions that can run high in non-compete cases. Precisely because facts concerning competition are intended to be hidden, a company often resorts to creative means to find out what is happening in the field. Though not all pretexting may be illegal or tortious, a company must determine which tactics are vigilant and which are overzealous. And it is the job of outside counsel to ensure that the company is taking reasonable, yet appropriate and measured, steps to triage what happened.

A copy of Lawlor is contained below.

Lawlor v. North American

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Court: Supreme Court of Illinois

Opinion Date: 10/18/12

Cite: Lawlor v. North American Corp. of Illinois, 2012 IL 112530

Favors: Employee

Law: Illinois

Employer Unable To Condition ERISA Severance Payments on Signing Undisclosed Non-Compete

For those of you dying to know more about ERISA, here ya go.

First, the basics. ERISA is a sweeping federal statute that governs employee health, welfare, and benefit plans. Employers often institute ERISA-based plans and within those plans provide that terminated employees are eligible to receive severance benefits under certain condictions. For instance, employees who have been discharged without cause or who worked at the company for a certain number of years may be eligible for severance pay, even if that is not contained within an employment contract.

Simple enough. But ERISA-based plans almost always contain the requirement that an employee, as a condition of receiving severance pay, execute a release. That makes perfect sense, for it would be somewhat absurd for an employer to pay out benefits and not get some assurance that a Title VII charge won't arrive in the mail months later.

Severance plan documents often attach a form release for employees to see, and from there, it's just a matter of filling in the blanks at the time the severance benefit rights accrue. But what rights does an employer have to insert in a severance document the requirement that the employee sign a non-compete?

According to one Illinois federal court, none.

The case of Pactiv Corp. v. Rupert dealt with a case where the ERISA plan simply stated that the employee's separation agreement must "be in a form acceptable to the company." The plan documents mentioned nothing about a non-compete. Though Pactiv understandably was concerned that its ex-employee was in a position to capitalize on knowledge he gained while at Pactiv, the court refused to imply a requirement into the severance plan Pactiv adopted.

The court stated: "Reserving the right to have a separation agreement in a 'form acceptable to the Company' is not notice to an ERISA beneficiary that a non-competition covenant could be required as a condition to receive benefits." ERISA plans are not subject to ad hoc amendments or interpretation.

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Court: United States District Court for the Northern District of Illinois
Opinion Date: 11/1/12
Cite: Pactiv Corp. v. Rupert, 2012 U.S. Dist. LEXIS 158413 (N.D. Ill. Nov. 1, 2012)
Favors: Employee
Law: Federal/Illinois

Non-Compete Radio: Episode 3 Link

Today's podcast on Non-Compete Radio features a discussion with Bill Tarnow, chair of the Labor and Employment Law practice at Neal Gerber and Eisenberg. The topic is "Mistakes in Non-Compete Litigation." Bill and I discussed our thoughts on the blue-pencil rule, what percentage of non-compete agreements we think are poorly drafted, and the perils of adding weak trade secrets claims.

We also went over Vanko's "Three Pillars of Death" and even gave brief mention to the current state of Illini football.

Enjoy the discussion by clicking below. You also can subscribe to the podcast through iTunes.


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