This week, I offer my second case-law update, highlighting a variety of cases from around the company on topics of interest.
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Indiana Court Affirms Nationwide Non-Compete Agreement
Last Friday, the Court of Appeals of Indiana addressed the enforceability of a nationwide non-compete agreement for an engineer in the glass container business. The facts follow a typical pattern and deal generally with a senior-level engineer's move from Ardagh Glass Containers to Owens-Illinois. (As an aside, my paternal grandfather worked at Owens-Illinois for something like 35 years, during which time he consumed approximately 364,000 unfiltered Camel cigarettes working the assembly line, kind of a poor man's Don Draper in this respect.)
The employee's non-compete barred his work anywhere in North America and covered products over which the employee contributed development knowledge. The Court of Appeals, applying Pennsylvania law, enforced the non-compete, reasoning that both Ardagh and Owens competed nationally for the same type of customers. The court also remarked on a few typical facts in enforcing the preliminary injunction: (1) the employee's lack of candor on a few important facts that pertained to consideration and his "paid-leave" status at Owens-Illinois; and (2) the employee's lack of urgency in contesting the preliminary injunction and the appeal.
Of greater concern was the court's breezy trade-secrets analysis, which seemed to excuse an improper trade secrets identification at trial. The court all but found the injunction order was too broad in finding that Ardagh Glass identified 16 categories of trade secrets that were at risk. And it found Ardagh Glass would need to do better at a permanent injunction hearing. But the court was not engaged at all in assessing whether the at-risk secrets were actually "threatened" from misappropriation.
A link to the Court of Appeals' decision in Vickery v. Ardagh Glass Inc. is available here.
Forfeiture-on-Termination Clause Found Unenforceable
This one is crazy.
Kelley Rieves took a job as an assistant manager at Buc-ee's - a convenience store chain in Texas. It was at that point that Buc-ee's and its cadre of lawyers foisted upon her a historically stupid agreement. Rieves had the ability to decide how she was going to get paid - but it had to be a split between hourly wages and a flat monthly amount.
The catch? The flat amount had to be repaid to Buc-ee's if Rieves (at at-will employee) left within 5 years and didn't give 6 months' notice. This is known (by me) as the stick-without-the-carrot approach. Rieves and Buc-ee's re-upped a year later with a similar arrangement. Rieves, of course, left before the 5-year period ended and filed suit to declare the repayment provision unenforceable. Somehow, Buc-ee's convinced a state court judge to enter an award for payment of the entire amount owed (less taxes) under the contract's repayment clause.
Rieves appealed and, mercifully, won. Common sense prevailed. The reason? A repayment clause inhibits employee mobility. And unless the contract is consistent with non-compete law, it's unenforceable. The salary disgorgement provision, here, was totally unlike a prototypical forfeiture clause that would, for instance, cancel unvested stock options if the employee leaves to compete. Instead, it had no connection to incentivizing the employee's future performance, imposing an illogical and disproportionate penalty on an at-will employee's election to find a better job.
Buc-ee's should be publicly shamed for requiring Rieves to sign such a manifestly stupid agreement. For now, at least we have a public opinion - available here - that will prevent any sort of spurious litigation like this in the future.
Federal Circuit Affirms $91 Million Trade Secrets Verdict
In an unpublished ruling, the Court of Appeals for the Federal Circuit affirmed a $91 million trade-secrets verdict arising out of a business transaction gone wrong in the mitral-valve implant market. The particular invention at issue in that case arose after Neovasc sought to collaborate with CardiAQ and provide CardiAQ with ancillary products. During the course of their relationship, Neovasc apparently designed a competing transcatheter mitral valve implant that was similar to the one CardiAQ had developed. Neovasc learned of the TMVI device after signing a non-disclosure agreement.
The Federal Circuit approved the district court's award of $70 million in compensatory damages and $21 million in enhanced damages (along with an 18-month head-start injunction). The court rejected several claims Neovasc had made concerning the trade secret instructions given to the jury. And it further found CariaAQ's royalty damages testimony was supported by the evidence. This is yet another in a series of high-damage trade secrets judgments we've seen over the past several years.
A copy of the unpublished disposition is available here.
Friday, October 20, 2017
Monday, October 9, 2017
Much Overdue Case Law Update, Part I
It has been a while since I surveyed new reported decisions. So over the next few weeks, I'm going to summarize very briefly some of the cases I've seen that piqued my interest. The topics are varied, which is kind of the point.
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Non-Recruitment Clauses in Georgia
Georgia courts have proved to be tough venues when it comes to enforcing restrictive covenants. The prevailing rule of non-severability (for older agreements) generally means that an unenforceable restrictive covenant will void other similar covenants, even if they (standing alone) might be considered reasonable.
But as the Court of Appeals in Georgia recently noted, this non-severability rule does not apply to non-recruitment/no-hire provisions that bar employees from soliciting co-workers. Simply put, those types of restraints to do not rise to the upper tier of restrictive covenants. And so a void non-compete will not invalidate a reasonable no-hire clause. Other courts in other States seen to equate no-hire clauses with more restrictive covenants.
The case is CMGRP, Inc. v. Gallant, and it's written by Twitter star Chief Judge Stephen Dillard. A link to the opinion can be found here.
Seventh Circuit Discusses Sale of Business Non-Compete Dispute
The Seventh Circuit hears about one or two non-compete cases per year. They generally involve questions of Indiana, Illinois, or Wisconsin law. And those States have non-compete laws that are interesting and nuanced.
But E.T. Products, LLC v. D.E. Miller Holdings, Inc. did not require the court to delve much into substantive State law (here, Indiana) because the case hinged on whether certain activity amounted to a breach of the non-competition clause. The case involved a business acquirer's attempt to enforce a sale-of-business non-compete against the seller, after the seller rendered post-closing assistance to the acquirer's distributor. The court found that the seller's conduct did not amount to prohibited competition, saying that "a firm whose sole conduct in the relevant market consists of distributing one manufacturer's product plainly isn't that manufacturer's competitor." The court also noted the seller terminated its relationship with the distributor and rendered no assistance at all once the distributor began competing on some product lines. The facts, as the court recited them, amply demonstrated the defendant's good faith and intent to adhere to the non-compete. The pursuit of the case appeared to be vast overreach.
The opinion, written by Judge Diane Sykes, is available here.
The Protocol for Broker Recruiting and "Good Faith"
Those of us who represent advisory firms and financial advisors have a good deal of familiarity with the Protocol for Broker Recruiting. But many don't. The Protocol's design is to foster client choice, a recognition of the intensely personal nature of the advisory relationship. More broadly, the Protocol represents an industry solution to expensive, uncertain non-compete litigation - in effect, a contractual way around flexible legal standards being applied by judges who generally lack deep knowledge of particular industries.
The Protocol's basic tenets allow an advisor to avoid liability if she takes client information to her departing firm (generally, it must be related to those clients she serviced and the information must be provided to her firm on departure). If followed in good faith, the employee will not be bound by any contractual restrictive covenant or held liable under trade secrets law pertaining to the taken (and disclosed) client information and subsequent solicitation efforts of those clients.
The term "good faith" is a bit nebulous and fact-specific. If an employee engages in bad faith, the she cannot avail herself of the Protocol and courts default back to any signed agreement the employee has. The district court decision in UBS Financial Svcs., Inc. v. Fiore, No. 17-cv-993, 2017 WL 3167321 (D. Conn. July 24, 2017), contains a lengthy discussion of good faith in the context of advisor departures. Ultimately, it found that despite some wrongful behavior, the defendants did not forfeit the Protocol's protections since their notice was proper and they took only information pertaining to their client lists. The court focused on the fact that UBS still had all the information it needed to contact the same clients.
In the past, courts have found that the Protocol did not apply when employees took information beyond what was allowed, altered information in a client database, or deleted contact information in a work e-mail account. Like most good-faith inquiries, each case turns on its facts. The Fiore decision is interesting and well worth a read because it is not particularly clear cut factually. The departing defendants complied with the Protocol in the most crucial ways but still did some things that appeared designed to hinder UBS' ability to retain its wealth-management clients.
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Non-Recruitment Clauses in Georgia
Georgia courts have proved to be tough venues when it comes to enforcing restrictive covenants. The prevailing rule of non-severability (for older agreements) generally means that an unenforceable restrictive covenant will void other similar covenants, even if they (standing alone) might be considered reasonable.
But as the Court of Appeals in Georgia recently noted, this non-severability rule does not apply to non-recruitment/no-hire provisions that bar employees from soliciting co-workers. Simply put, those types of restraints to do not rise to the upper tier of restrictive covenants. And so a void non-compete will not invalidate a reasonable no-hire clause. Other courts in other States seen to equate no-hire clauses with more restrictive covenants.
The case is CMGRP, Inc. v. Gallant, and it's written by Twitter star Chief Judge Stephen Dillard. A link to the opinion can be found here.
Seventh Circuit Discusses Sale of Business Non-Compete Dispute
The Seventh Circuit hears about one or two non-compete cases per year. They generally involve questions of Indiana, Illinois, or Wisconsin law. And those States have non-compete laws that are interesting and nuanced.
But E.T. Products, LLC v. D.E. Miller Holdings, Inc. did not require the court to delve much into substantive State law (here, Indiana) because the case hinged on whether certain activity amounted to a breach of the non-competition clause. The case involved a business acquirer's attempt to enforce a sale-of-business non-compete against the seller, after the seller rendered post-closing assistance to the acquirer's distributor. The court found that the seller's conduct did not amount to prohibited competition, saying that "a firm whose sole conduct in the relevant market consists of distributing one manufacturer's product plainly isn't that manufacturer's competitor." The court also noted the seller terminated its relationship with the distributor and rendered no assistance at all once the distributor began competing on some product lines. The facts, as the court recited them, amply demonstrated the defendant's good faith and intent to adhere to the non-compete. The pursuit of the case appeared to be vast overreach.
The opinion, written by Judge Diane Sykes, is available here.
The Protocol for Broker Recruiting and "Good Faith"
Those of us who represent advisory firms and financial advisors have a good deal of familiarity with the Protocol for Broker Recruiting. But many don't. The Protocol's design is to foster client choice, a recognition of the intensely personal nature of the advisory relationship. More broadly, the Protocol represents an industry solution to expensive, uncertain non-compete litigation - in effect, a contractual way around flexible legal standards being applied by judges who generally lack deep knowledge of particular industries.
The Protocol's basic tenets allow an advisor to avoid liability if she takes client information to her departing firm (generally, it must be related to those clients she serviced and the information must be provided to her firm on departure). If followed in good faith, the employee will not be bound by any contractual restrictive covenant or held liable under trade secrets law pertaining to the taken (and disclosed) client information and subsequent solicitation efforts of those clients.
The term "good faith" is a bit nebulous and fact-specific. If an employee engages in bad faith, the she cannot avail herself of the Protocol and courts default back to any signed agreement the employee has. The district court decision in UBS Financial Svcs., Inc. v. Fiore, No. 17-cv-993, 2017 WL 3167321 (D. Conn. July 24, 2017), contains a lengthy discussion of good faith in the context of advisor departures. Ultimately, it found that despite some wrongful behavior, the defendants did not forfeit the Protocol's protections since their notice was proper and they took only information pertaining to their client lists. The court focused on the fact that UBS still had all the information it needed to contact the same clients.
In the past, courts have found that the Protocol did not apply when employees took information beyond what was allowed, altered information in a client database, or deleted contact information in a work e-mail account. Like most good-faith inquiries, each case turns on its facts. The Fiore decision is interesting and well worth a read because it is not particularly clear cut factually. The departing defendants complied with the Protocol in the most crucial ways but still did some things that appeared designed to hinder UBS' ability to retain its wealth-management clients.
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