Articles Posted in Non-Compete Agreements

Employers face a serious challenge when trying to prevent employees from taking confidential and proprietary information with them when they leave to join a new employer-particularly when the new employer is a competitor.   When an employer becomes suspicious about an ex-employee’s activities prior to his or her last day of work, there are a limited number of safe avenues for the employer to pursue. privacy policy with green folder_thumb

Generally, an employer should not review the employee’s personal emails or text messages if they were sent or received outside the employer’s network.  But what if the employee turns over his personal emails or text messages without realizing it?  The answer is, as always, “it depends.”  A recent case from a federal court in California addresses the issue in a limited context.

After the employee resigned, the employer sued him for misappropriating trade secrets.  He filed counterclaims, accusing the employer of violating the federal Wiretap Act, the Stored Communications Act (SCA), and state privacy laws.  The employee alleged that the employer had reviewed his text personal text messages on the iPhone issued to him by the former employer after he’d returned it but before he unlinked his Apple account from the phone.

Whether a former employee breaches her non-compete and/or non-solicit agreement by publishing her new job with a competitor to her LinkedIn contacts, many of which include “prohibited customers” is an unsettled question.  As you may imagine, the cases that address this question are few.  A recent opinion issued by a Massachusetts Superior Court may have addressed it more than it realized, though.

In KNF&T Staffing, Inc. v. Muller, the defendant-employee was employed by the plaintiff staffing firm for several years.  When she resigned, she was subject to a non-solicitation agreement, which prohibited her from recruiting or referring potential employees for placement in certain fields and industries.  The prohibition was in place for 1 year and applied only to placement with clients within a 50-mile radius of the plaintiff’s offices.  And, as I mentioned, it prohibited only her recruitment efforts for certain fields that she’d been responsible for at her former employer. 

At the time she resigned, she initially took a position in HR, in which she apparently was not charged with recruiting and referral duties, and, therefore, was not in violation of her agreement.  But, about five months after resigning, she went back to the recruiting industry, this time working for a competitor of her former employer.  The former employer sued, seeking to have her enjoined from what the employer asserted was activity in breach of the agreement.

Delaware’s Court of Chancery is the court of choice for employers seeking to enforce non-compete agreements. As Delaware practitioners know, the Court has a long-standing practice of ruling from the bench, particularly in cases in which injunctive relief is being sought and where time is of the essence. See this post on the Delaware Corporate and Commercial Litigation Blog (“Regular readers will know that transcript rulings are often cited in this court as valid authority.”) And this practice means that transcripts are an important, if not critical, source of information about how the court is likely to rule.

Vice Chancellor Glasscock served as a Master in the Court of Chancery for 12 years before being appointed to Vice Chancellor in 2011. Having been on the bench as Vice Chancellor for just a year, his non-compete opinions are limited. Which is why the transcript from a recent preliminary-injunction hearing offers Delaware counsel important insight.

Bridgeport Tank Trucks, LLC v. Smith, involved a non-compete agreement that resulted from the buyout of a business. As a result of the sale, the defendant, Mr. Smith, was subject to a restrictive covenant for a five-year period. The agreement did not contain a geographic restriction.

Employee sues employer. Employer calls employer’s lawyer. Employer and lawyer discuss the case. They review the cast of characters. They talk about the chronology of events. They assess the potential exposure to employer.

And, as sure as eggs, employer asks lawyer the following question: “Can’t we sue him?”

And what, do you presume, employer proposes to sue employee for exactly? Oh, there are many options, of course. But the classic is a claim for defamation. Employer wants to sue employee for alleging that employer engaged in unlawful discrimination or harassment or retaliation, etc., etc. Ok, truthfully, employer doesn’t care much about what exactly the suit would be for–just whether employer can sue the bejesus out of employee.

Delaware’s Court of Chancery is the North Star of the noncompete-litigation universe in the State and, in many respects, in jursidctions around the country. It can also be a tricky galaxy to traverse due to the speed of litigation, the equitable principles that control procedural rules and, on an even more basic level, the fact that many of the court’s opinions are not reported. As a result, transcripts of rulings from the bench are commonly cited as binding authority.

But today’s post is not about a transcript ruling but about a letter decision, issued by Vice Chancellor Glasscock on October 12, 2012, in NuVasive v. Lanx, Inc., No. 7266-VCG (PDF). In this case, the plaintiff alleged that the defendant had “lured away a number of [its] employees to work for [the defendant], in breach of various duties owed to NuVasive by these employees.”

The opinion was issued on the plaintiff’s motion to compel the defendant to provide the identities of all of the plaintiff’s employees, past and current, with whom the defendant had communicated in the past year about possible employment.

Discovery of Social-Media Evidence is the topic that I’ll be presenting today at the annual Office & Trial Practice seminar. Despite my far-reaching popularity (kidding, just kidding), the real celebrity at today’s event will be U.S. Supreme Court Justice Scalia. Because I probably should be practicing my presentation instead of writing a blog post today, I’ll try to keep this brief, adopting the weekly-round-up approach used by Jon Hyman.

In Jon’s honor, we’ll start the list with one of his posts from this week. Yesterday, Jon wrote about a case from the Central District of Illinois, in which the plaintiff claimed he had not been hired due to his age. The twist, though, was that the plaintiff claimed that his employer must have learned the plaintiff’s age by looking at his LinkedIn profile, which included the year he’d graduated from college. Before you run for the hills, bear in mind that the plaintiff was proceeding pro se, meaning without a lawyer. The allegations are weak, at best, but they were sufficient to survive a motion to dismiss. However, pro se plaintiffs are given a lot of leeway in their pleadings, so the ruling doesn’t surprise me too terribly much. The case is Nieman v. Grange Mut. Casualty Co., No. 11-3404 (C.D. Ill. Apr. 26, 2012).

Next up on the list is an update to a case I wrote about earlier this week, Acordia of Ohio, LLC v. Fishel. In that case, decided in May, the Ohio Supreme Court held that the surviving employer in a merger or sale could not enforce its predecessor’s employees’ noncompete agreements as if it had stepped into the predecessor’s shoes–unless the agreement expressly provided otherwise.

The enforceability of a noncompete agreement can vary greatly by State. When drafting a noncompete agreement or restrictive covenant, a critical decision will be which State’s law should apply in an enforcement dispute. Delaware employers have very favorable law on their side, as noncompete agreements are enforced here to a much greater extent than many others. Here’s an example.

noncompete agreement In May, the Ohio Supreme Court considered the enforceability of a non-compete agreement by a successor of the original contracting employer. In other words, can a non-compete agreement be enforced after the original employer is acquired in a sale or merger. In Acordia of Ohio v. Fishel, four employees signed non-compete agreements with their employer. The agreements provided that the employees would not compete with the employer for two years following termination. The agreements did not contain language that would extend the prohibitions to the employer’s successors or assigns.

In 2001, the employer merged with Acordia of Ohio, LLC. Following the merger, only Acordia survived. The four employees continued to work for the new entity until August 2005, when, you guessed it, they went to work for a competitor. Within six months of their resignations, they’d managed to recruit 19 customers worth about $1 million to the competitor.

The Third Circuit gave employers new reasons to worry about misclassifying their employees in its decision in Figueroa v. Precision Surgical, Inc., (PDF), C.A. No. 10-4449.  A former employee brought suit seeking to invalidate the non-competition provision in his independent-contractor agreement (“ICA”).  The plaintiff alleged that his former employer had materially breached the contract and, therefore, could not enforce it against him. approved-stamp

During the course of his 6-years with the organization, the plaintiff’s relationship became more like that of an independent contractor.  For example, the company required that the plaintiff: (1) devote 100% of his energy to selling the company’s products; (2) report to his supervisors daily and attend monthly meetings; (3) abide by a dress code; and (4) obtain permission from before giving quotes to certain prospective customers.

As the supervision and reporting requirements became more onerous, the plaintiff objected and, eventually, requested a new contract that clarified his status as an independent contractor.  The company refused and stated that it intended to convert all sales positions to employees, eliminating all independent contractor positions.  When he refused to make the conversion to employee status, his contract was terminated. 

Employee sabotage can take many forms. Employees can take documents with them when they leave to work for a competitor, for example. More insidious examples can involve employee destruction of files, causing enormous harm to the employer. Here’s one unfortunate story involving both kinds of sabotage committed by an employee of Bob’s Space Racers, the manufacturer of the classic arcade game, Whac-A-Mole. Errors

Police arrested Marvin Wimberly, Jr., 61, last month, charging him with the unusual crime of  offenses against intellectual property–a felony. According to the Orlando Sentinel, Wimberly programmed a virus into nearly 450 computer modules. The virus caused the game to fail after exactly 511 starts. He is alleged to have begun his criminal mission in August 2008, the same year his employer converted him from a contractor to a full-time employee.

Once the virus hit, the computers were inoperable–unless, that is, Wimberly was sent to perform maintenance. Seven months after the viruses began, Wimberly raised his programming price from $60 to $150 per computer chip. He later told a coworker that he’d programmed another game to fail after 48 or 49 power cycles because he hadn’t been paid.

All employers want to protect the investment they make in their employees.   One strategy used to accomplish this goal is the use of non-competition and non-solicitation agreements. In closely integrated industries, some businesses have all but abandoned these agreements in favor of reaching a pact with competitors not to hire away one another employees.  This has been especially pertinent in California, where non-compete agreements are unenforceable. But a recent lawsuit brought by the Department of Justice’s Anti-Trust Division has called this strategy into question, as well as the idea of non-compete agreements as a whole. DOJ

After more than a year of investigation, the DOJ filed a lawsuit against Adobe, Apple, Google, Intel, Intuit, and Pixar Animation on September 24, 2010. The lawsuit challenged the legality of a group of contracts entered into between the tech firms to protect their investment in highly skilled technical employees. By these contracts, each company agreed not to solicit the other companies’ employees via “cold calls.” On its face, this is a fairly standard non-solicitation provision. According to the DOJ, though, the non-solicitation contracts were not related to any collaborative work between the companies.

As a result, the DOJ contended that the contracts were attempts by the defendants to limit competition and keep down payroll costs and filed an antitrust complaint.  The firms deny that the agreements had any impact on hiring practices. The DOJ and the firms reached a settlement agreement that would prohibit the firms from entering into any non-solicitation agreements for five years. So what does this lawsuit and settlement mean for you? There are several lessons that we can take away:

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