New Frivolous Lawsuit Statute May Chill Claims for Breach of Non-Compete Agreements

On May 21, 2012, Governor Haslam signed into law HB 3124, a bill amending Tennessee Code Annotated § 20-12-119.  The new law, effective July 1, 2012, requires the court in a civil case to penalize a plaintiff whose claim is dismissed as meritless.

Prior to the new law, a court had discretion in civil cases to adjudge costs between litigants.  Except when allowed by statute or a contract, the award of costs would not include the prevailing party’s attorney fees.  Now, the court must award costs and attorney fees to a defendant if the plaintiff’s case is dismissed as frivolous.  The award includes court costs, attorney fees, and court reporter fees.  The plaintiff’s liability is capped at $10,000.

Though viewed as part of Tennessee’s efforts at tort reform, the amendment to Section 20-12-119 could have an adverse effect on employers who attempt to enforce a contractual non-compete agreement.  An employer could be liable to a former employee for costs, including attorney fees, if its suit to enforce a non-compete agreement is dismissed as meritless.

Such was the case under South Carolina’s Frivolous Civil Proceedings Act (the “FCPA”) in Wachovia Securities, LLC v. Brand, 671 F.3d 472 (4th Cir. 2012).  In that case, the employer instituted arbitration proceedings against former employees before the Financial Industry Regulatory Authority.  The employer claimed that the former employees conspired with a rival broker to open a competing office using the former employer’s trade secrets and solicited the employer’s customers in violation of a non-compete agreement.

After more than a month of proceedings, the arbitration panel dismissed all of the employer’s claims and awarded the former employees $1.1 million in attorney fees under the FCPA.  The Fourth Circuit Court of Appeals upheld the federal district court’s refusal to overturn the arbitration panel’s award of attorney fees under the FCPA.

BURR POINT:  Though the amendment to section 20-12-119 is not as severe as South Carolina’s FCPA, with liability capped at $10,000 and other limitations, employers will need to ensure they have good grounds before bringing an action against former employees to enforce a non-compete agreement.  If the claim is dismissed as meritless, the employer could be liable to the former employee for up to $10,000.

For more information, if you have any questions about non-compete agreements, or if you have an unfair competition issue, please contact any of the Burr & Forman’s Non-Compete & Trade Secrets team members and we will be happy to assist you.

 

Court Ruling Helps Define Factors Used in Trade Secret Classification

What is an allograph? And why doesn’t a company’s sterilization process violate the trade secrets of another company that allegedly invented and protected the sterilization protocol?  And why, you might ask, do these questions appear on our blog?

First, an allograph is a transplant of tissue from one person to a genetically dissimilar person. To successfully complete this transplant, you must sterilize the human tissue. In April 2012, Florida’s Fifth Circuit of Appeal ruled on a case involving allographs: Duane Duchame, Tai T. Huynh, et al. v. Tissuenet Distribution Services, LLC, et al., 37 Fla. L. Weekly D875a.

This case established several factors that Florida courts now use in determining whether to uphold injunctions enforcing trade secrets. These factors are important when recognizing the undeniable link between success with a trade secret claim and the existence of a valid non-compete agreement.

The court ultimately decided in a reversal of the lower court’s temporary injunction in this sterilization case, based on several things.

  • The chemicals used in the case were well-known in the industry and therefore use of them did not constitute qualities of a trade secret.
  • The former employee who created the sterilization protocol did not use a direct replica of the system for a new employer. Rather, he “used his education, knowledge, skill, and experience” to formulate a protocol for his new employer, indicating it was a new creation instead of a stolen trade secret.
  • And most importantly, if the plaintiff wanted to prevent the departed employee from working for a competitor, then the plaintiff should have issued a non-compete agreement to the former employee—which they did not do.

This case stands demonstrates two propositions that all employers seeking to protect trade secrets should remember.  First, if a trade secret exists, it should be kept secret.  Additionally, verify that it does qualify as a trade secret. If you use industry-known materials and use them in a special or untraditional manner (i.e. the sterilization protocol in this case), make sure you can prove in court that your methods are significantly different enough to classify them as trade secrets, and not merely a variation of a widely-accepted process.

Second, if you have a key employee capable of taking their talents to a competitor which could adversely impact your business, then you should always consider executing a valid non-compete agreement to protect your company.  In the Tissuenet case discussed above, it is impossible to say whether or not a valid non-compete agreement would have justified the plaintiff’s claims, but it is likely that the lack of a valid non-compete agreement caused the fatal blow.  Are trade secret claims and non-compete claims different?  Of course! However, as this example has demonstrated, they are often compatible tools working with sensitive information and skilled employees.

For more information, if you have any questions about trade secrets or non-compete agreements, or if you have an unfair competition issue, please contact any of the Burr & Forman’s Non-Compete & Trade Secrets team members and we will be happy to assist you.

 

Other articles you may be interested in:

What is a Trade Secret?

Key Ingredients for an Effective Non-Compete Agreement

Results Matter Radio Discussion on Georgia’s New Non-Compete Employment Statute

Results Matter Radio host Lee Kantor sat down last week with State Representative Wendell Willard and Burr & Forman attorney Chip Collins to discuss the ins and outs of Georgia’s new non-compete employment statute.

Although Georgia has only recently enacted a non-compete statute, it’s not from lack of trying. Rep. Willard, the sponsor of the bill that became the new statute, discussed the difficulty that Georgia has faced trying to codify non-compete standards. Georgia first passed a non-compete statute in 1989, only to have it ruled unconstitutional by the Georgia Supreme Court shortly thereafter.   The state legislature passed another non-compete statute in 2009, which was supposed to become effective upon a majority referendum vote in November 2010 for a constitutional change that would authorize the new statute.   Following the approval of the referendum, however, Collins raised with Rep. Willard some technical concerns that he and other practitioners had with the new statute that potentially exposed it to a legal challenge.  As a result of those concerns, Rep. Willard sponsored what was essentially a re-passage of the statute in the 2011 legislative session, and Gov. Deal signed it into effect on May 11, 2011.  The new statute is codified at OCGA § 13-8-50 and applies to all non-compete agreements signed after May 11, 2011.

Collins and Willard agreed that the new statute dramatically shifts the legal landscape of Georgia’s non-compete law in favor of employers, with perhaps the biggest impact being a Court’s ability under the new statute to “blue-pencil”, or modify,  an overbroad agreement. Under the pre-statute rules, non-compete agreements were often deemed unenforceable by trial courts for being overbroad in scope—either in terms of duration, territory, or restricted activities. Now, however, almost any non-compete is potentially enforceable, at least to a degree deemed reasonable by the court tasked with enforcing it.

As reassuring as the effects of Georgia’s new non-compete law may be for employers, Collins and Rep. Willard give a strong warning to employers that this new statute only applies to non-compete agreements signed after May 11, 2011; the old pro-employee rules still apply to any agreements that pre-date the statute. Thus, if you are an employer who has not had a new agreement drafted and executed by your employees in the last year, they urge you to do so as soon as possible.

For more details, listen to Georgia State Representative Wendell Williard’s and Burr & Forman attorney Chip Collins Jr.’s full broadcast on Results Matter here.

Wendell Willard, State Representative 49th District Georgia House of Representatives, is the co-sponsor of Georgia’s new non-compete employment statute that became effective last year and drastically changed the legal landscape for non-competes. Read more about the Georgia House of Representatives

William (Chip) Collins, Jr. is the attorney who heads Burr and Forman’s new non-compete and trade secrets group. He continues to successfully help businesses of all types prevent unfair competition. Read more about Chip and his experience on the Burr & Forman site.

Burr & Forman LLP’s Results Matter Radio brings you pertinent business information and real life solutions to help drive desired results for you – whatever your business may be. Please join us right here every Tuesday 10:00 am Eastern for our LIVE Broadcast, and CLICK HERE to listen to our Archived Shows anytime.

Want more information on non-compete agreements and state legislation? Contact Burr & Forman for more insights on the enforceability of non-compete clauses.

Specific Limitation on Soliciting Class of Persons May Substitute for Territorial Limitation

Though disfavored in Tennessee, non-compete agreements can be enforced if an employer has a legitimate business interest to be protected and the time and geographical limitations are reasonable.

Non-compete agreements are not analyzed in the abstract, but in the context of the specific circumstances under which they are to be enforced. The question is whether the employer has a legitimate business interest to be protected by the non-compete agreement. Tennessee courts hold that there is no “legitimate interest in protection from competition, only from unfair competition.”  An employer must show special circumstances over and above ordinary competition creating an unfair advantage for the former employee without the non-compete agreement.

Hence, only if a court first finds the non-compete agreement protects the employer from unfair competition by a former employee, will it determine whether the non-compete agreement is reasonable. The time and geographic limitations of the non-compete agreement must not be greater than necessary to protect the employer’s interest against unfair competition.

A non-compete agreement may lack a geographic limit which, in some cases, is fatal to the agreement.

However, Tennessee courts have held a requirement prohibiting former employees from soliciting the employer’s customers and this can substitute for a geographic limitation.

In the most recent case examining this issue, the non-compete agreement lacked a geographic limitation, but prohibited the former employee from soliciting the same type of business for one year from any of the employer’s current customers, customers with whom the employee did business on behalf of the employer, and prospective customers with respect to whom the employee acquired confidential information from the employer. The employee argued that the agreement’s lack of any geographic limitation rendered it unenforceable.

The court held because the non-compete agreement prohibited the former employee from soliciting the same business from the employer’s customers, the agreement was enforceable even without a geographic limitation. The court reasoned that as the specificity of the class of persons with whom contact is prohibited increases, the need for a geographic limitation decreases. Additionally, the restriction on who the former employee may contact, rather than where the former employee may work, gives the former employee greater freedom to practice her profession in the same area as her former employer.

A non-compete agreement which omits a geographic limitation, but prohibits soliciting the same business from the employer’s customers, satisfies the threshold requirement of protecting the employer’s legitimate interest against unfair competition without imposing an undue restraint on trade. The risk, however, of not having a geographic limitation is that the former employee may directly compete for the employer’s potential customers which fall outside of the parameters of the agreement.

In some instances, the former employee could use specialized training received from the employer to compete for those potential customers. Therefore, careful consideration should be given when substituting a restriction against solicitation for a geographic limitation.

For more information on non-compete agreements and their state requirements contact Burr Forman for more insights on the enforceability of non-compete clauses.

Employee Non-Compete a New Requirement in Business Acquisition

When Is Your Continued Employment Contingent Upon Signing a Non-Compete Agreement?

Halifax Media Group recently bought a chain of newspapers known as the New York Times Regional Media Group. With the business acquisition came the requirement of Regional Media Group employees to sign a non-compete agreement. It seemed like a logical business decision.

While The New York Times Co. and Halifax Media Holdings, LLC were busy striking the deal, it brought some sleepless nights for quite a few New York Times media employees. Two days after Christmas the New York Times Co. informed its employees that the New York Times Regional Media Group (“NYTRMG”) was being sold to Halifax Media Group (“Halifax”), owner of the Daytona Beach News-Journal.

The Good News: Current employees would have the option of continued employment with Halifax.

The Bad News: Continued employment with Halifax was conditional on NYTRMG employees signing a non-compete agreement. The agreement would prohibit an employee whose employment with Halifax was terminated, voluntarily or non-voluntarily, to become employed with a competing media company for two years. This applies to any media company working in print, on the air, or online that works in a market that Halifax serves or plans to serve. Essentially, even if an employee was fired from Halifax, the non-compete agreement would prevent journalists and employees from working for any media enterprise in that city.

However, the sixteen newspapers being sold to Halifax are located in the states of Alabama, California, Florida, Louisiana, North Carolina, and South Carolina, all of which have varying laws regarding the validity and enforcement of non-competition agreements. These differences in laws immediately raised questions about the applicability and effectiveness of the non-compete agreement to all newspaper employees.

After receiving serious pushback and dissension from employees, Halifax reconsidered its position and announced that the non-compete agreement will not apply to existing New York Times Regional employees.

So, as existing NYTRG employees were assured that their continued employment with Halifax was not contingent upon the execution of a hefty non-compete agreement, they could now get some post-holiday rest. The employees who may seek employment with Halifax in the future, however, may find themselves counting sheep.

For more information on non-compete agreements and their state requirements contact Burr Forman for more insights on the enforceability of non-compete clauses.