Delaware Employment Law Blog

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.

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. 

The employee brought sought suit seeking declaratory relief invalidating the non-compete provision in the agreement. The company filed a counter-claim alleging breach of the non-compete agreement based on the plaintiff's new contract position as a sales representative for a competitor.

The District Court denied the employer's request for a preliminary injunction, finding that the employer had more likely than not breached its obligations under the independent-contractor agreement.  The Third Circuit affirmed, finding that the requirements to which the plaintiff had objected were not consistent with requirements for an independent contractor.  As a result, the court held, the employer breached the agreement by treating the plaintiff as an employee. 

Well-informed employers understand the significance of properly classifying employees for tax and benefits purposes. The Third Circuit’s recent opinion gives employers another reason to avoid misclassifying their employees: failure to properly classify workers as employees or independent contractors may impact their ability to enforce restrictive covenants and non-compete agreements.

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.

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.

One of the most disturbing parts of this story is the allegation that Wimberly had planned to sell working modules to his employer's customers when their games failed--the failure, of course, was a direct result of Wimberly's programming. He'd even reserved a website, www.BobsUpgrades.com, for his new endeavor. And, all the while, he had been making extra money fixing infected computers. Oh, the web we weave.

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.

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:

First, under Delaware law, an employer must demonstrate a legitimate business interest before he can restrict an employee’s ability to compete in the job market. It appears that the DOJ felt that this interest was missing where many large employers joined forces to restrict the job opportunities for highly skilled workers. The outcome would likely be different had the non-solicitation agreements been linked to collaborative work between the defendants.

Second, the breadth of the agreements is significant. The six businesses named in the DOJ lawsuit are large, powerful businesses that operate on the cutting edge of technological development. To restrict a skilled employee’s access to these businesses seriously restricts his or her ability to make a lateral career move. A more limited restriction, with a less severe impact on job opportunities, might not be interpreted as anti-competitive because employees would maintain access to other desirable opportunities in the job market.

Third, we don’t know how the courts will hold. The DOJ based its lawsuit on an analogy to other anti-trust lawsuits based on customer allocation schemes. This analogy is untested, and might not be upheld by the courts after a trial on the merits. As a result, the DOJ’s position should be taken with a grain of salt.

Nonetheless, if you have a non-solicitation agreement with other businesses that does not arise from cooperative work, you may want to reconsider the agreement with an eye toward the DOJ’s concerns. Agreements that are limited in scope, and related to a legitimate business interest are least likely to draw scrutiny.

For more on non-competition agreements, see our sister blog, The Delaware Noncompete Law Blog, as well as these prior posts:

Employees' E-Mails Lead to Non-Compete Lawsuit

Why Restrictive Covenants Should Include Delaware Choice-of-Law and Forum-Selection Clauses

Employees who are considering leaving their employer for a competitor and taking with them trade secrets or proprietary information may want to think twice.  A suit filed by Performance Food Group Co., LLC, a food-service distributor, alleges that a former employee did exactly that.  The federal lawsuit, which alleges breach of contract, claims that the former employee sent confidential and proprietary information to a competitor, all from his work e-mail account. 

The leak was discovered after the employee gave two-weeks’ notice of his intent to resign.  He was terminated.  The competitor to whom the employee sent the confidential information had extended him a job offer at the time of the breach, but subsequently withdrew it.  Another competitor, however, hired the employee.  In its lawsuit, Performance Food Group seeks punitive and compensatory damages, as well as injunctive relief, barring the former employee from future violations of his non-compete agreement.

What are the lessons to be learned from this unfortunate story?  For one, it should be an absolute wake-up call to employers about the need to monitor emails.  And, by “monitor,” I actually mean monitor—not threaten to monitor.  Having an effective e-mail monitoring system in place and following it can sometimes help to prevent situations such as this while employees are still working. 

The second lesson is more of a procedural one.  Employers should have a procedure in place whereby, immediately upon the termination of any employee or upon receipt of notice from an employee that he or she intends to quit, the employer: (1) has its IT department (or consulting firm) preserve the employee’s email account; and (2) has management or HR personnel review the emails for critical information such as evidence of a leak of confidential information. 

The worst case is to lose evidence simply by failing to act quickly to preserve it. Emails are often an employer’s best defense against a lawsuit brought by a former employee. It is also, as in this case, sometimes the best evidence in support of the employer’s own claims that it wishes to pursue against the former employee.

Many companies require high-level managers, salespeople, researchers and other key employees to sign confidentiality, non-solicitation and/or non-compete agreements, also known as “restrictive covenants.” These agreements are intended to prevent key employees from capitalizing on proprietary knowledge they learned or developed and relationships with customers and employees that they formed in the course of their employment for their own benefit or the benefit of competitors and against the interest of their former employers.