Preparing for a Smack Down: Local Wrestling Company Sues Former Employee and World Wrestling Entertainment for Trade Secrets Violation

A local professional wrestling promotions company, TNA Entertainment, LLC (“TNA”), has sued former employee, Brian Wittenstein, and direct competitor, World Wrestling Entertainment, Inc. (“WWE”), for unlawfully using TNA’s trade secrets against them in unfair competition.  The case, entitled TNA Entertainment, LLC v. Wittenstein and World Wrestling Entertainment, Inc., was filed on May 23, 2012 in the Davidson County Chancery Court, Docket No. 12-746-III and alleges that Wittenstein and WWE violated Tennessee’s Uniform Trade Secrets Act.

According to TNA, Wittenstein was terminated from the company on August 3, 2011.  In connection with his separation, Wittenstein entered into a Separation Agreement and General Release (the “Agreement”), which expressly prohibited him from disclosing TNA’s confidential trade secrets, including information about TNA’s contracts with other wrestling talent.

TNA claims that Wittenstein violated the agreement by downloading TNA’s company policies, contractual agreements with other wrestling talent, and detailed information about its wrestling talent (including compensation). TNA then claims that Wittenstein disclosed the gathered information to his new employer, and direct competitor of TNA, WWE.  TNA asserts that WWE’s possession and use of TNA’s confidential trade secrets provide WWE an unfair competitive advantage regarding wrestling talent.

TNA alleges that WWE has used TNA’s confidential trade secrets to solicit wrestling talent currently, under contract with TNA, and encourage them to join WWE.  Wrestler Ric Flair is a recent example of a client that TNA claims attempted to terminate his exclusive contract with them to sign up with WWE.

To date, the court has entered a temporary restraining order, prohibiting WWE from using TNA’s confidential information.  Though this case is relatively new, it is a prime example of how costly unlawful use of trade secrets can be to former employees and new employers.  Under the Tennessee Uniform Trade Secrets Act, the unlawful user of trade secrets can be liable for the plaintiff’s actual loss caused by the misappropriation of trade secrets and any “unjust enrichment.”  In certain cases, the defendant may also be liable for “exemplary damages” resulting in up to twice the award for the plaintiff’s damages and the plaintiff’s attorney fees.

Ultimately, employers should always be aware of and protect themselves against potential liability when hiring an employee who may possess a former employer’s confidential trade secrets. If you need more information on confidential trade secrets and defenses against former employees, please contact any of the Burr & Forman Non-Compete & Trade Secrets team members for assistance.

“Full Time and Attention” Provisions Provide an Additional Weapon in Non-Compete Cases

An employer seeking to stop or slow down a former employee who is unfairly competing with business needs to examine every possible legal claim as options to use against the employee. In many cases, the employee spent time laying the groundwork for new employment or business ventures while still employed by the previous employer. These situations present another legal opportunity to employers, in addition to the usual considerations of non-compete, non-solicitation and trade secret violation claims. The employer and its attorney should consider a claim against the former employee based on a common provision in employment contracts: the requirement that the employee devote his “full time and attention” (or similar language) to the employment.

There’s not a lot of case law interpreting these provisions, but the cases that do show that this boilerplate language can potentially provide another arrow in the employer’s quiver. In example:

BURR POINTWhile non-compete claims focus on what an employee did after they left their employment, the employee’s activities prior to their departure could lead to a claim for breaching a contractual duty to devote their “full time and attention” to the former employer’s business.

The Implied Negative Covenant: Can a Fixed-Term Employment Contract Substitute for a Non-Compete Agreement?

Fans of professional football may recall the predicament faced by former Cincinnati Bengals quarterback Carson Palmer at the beginning of the 2011 season.  Prior to the season, Palmer had announced that he no longer wished to play for the Bengals.  Perhaps not surprisingly, the Bengals took him at his word, and Palmer did not play for the Bengals in 2011.  However, what seemed to be more surprising is that the Bengals did not rush to trade Palmer to another team.  Rather, for the first half of the 2011 season, Palmer played for no team — as reported by the Cincinnati Enquirer on July 27, 2011, Bengals president Mike Brown explained:  “Carson signed a contract, he made a commitment.  He gave us his word and we relied on his word and his commitment. . . .  If he is going to walk away from his commitment, we aren’t going to reward him for doing it.”  It was not until October of 2011 that the Bengals finally released Palmer from his contract and traded him to the Oakland Raiders.

An analysis of Carson Palmer’s predicament has implications beyond the world of professional football.  Although few employers have employment contracts as detailed as those used in professional sports, other employers may view a key employee’s departure the same way that Bengals president, Mike Brown, viewed Carson Palmer’s announcement.  Employers may ask the following question:  When a key employee leaves without notice, and there is no formal “non-compete agreement” in writing, is the employer completely without hope in preventing the departing employee from working for someone else?  Before answering this question, it is important to look at all agreements between the employer and the departing employee, and not just specific “non-compete agreements.”  One agreement that could impact such a scenario is a fixed-term employment contract.

The default rule in employment law in the United States is “employment at will.”  Under the common law as applied in most states, the default rule is that the employment relationship is “at will” and that either the employer or the employee can terminate the employment relationship at any time and for any reason (or for no reason at all).  Of course, a number of state and federal statutes and court decisions have created exceptions to this “default rule,” exceptions that limit an employer’s ability to act. For example, although an employer can terminate an employee’s employment “for any reason,” the employer cannot terminate employment based on reasons that have been declared illegal by statute (e.g., under the federal Title VII statute, an employer may not terminate employment because of an employee’s race, color, religion, sex, or national origin).  Similarly, although an employer can terminate an employee’s employment “at any time,” statutes may require some notice before certain terminations (e.g., the federal WARN Act requires 60 days’ notice before employees can be terminated as a consequence of a “plant closing” or “mass layoff,” as defined in the statute).

Perhaps the biggest exception to “employment at will” is when the parties of an employment relationship choose to contract for something else.  For example, in the collective bargaining context, most unions will bargain for provisions in the collective bargaining agreement requiring “just cause” for any terminations, and collective bargaining agreements may go into great specificity about what constitutes “just cause” and provide that disputes over terminations be resolved through grievance procedures, including arbitration.  Similarly, highly sought-after and specialized individual employees (e.g., executives, scientific researchers, physicians, entertainment personalities, and, yes, professional athletes) may have sufficient “clout” to insist on a written employment contract from their employer, so as to guarantee employment (and income) for a fixed term and require specific notice before the contract (and thus the employment relationship) can be terminated.

What may be less appreciated, however, is that such individually-negotiated “fixed-term” employment contracts can be a “two-way street.”  Depending on how it is written, a contract providing for a two-year term of employment (subject, perhaps, to “automatic” renewal provisions) and requiring four months’ notice before the contract can be terminated might be capable of being applied to both to the employer and the employee.  A provision requiring four months’ notice of any termination of the contract may provide protection not just to the employee (i.e., the four months’ notice provision ensures that the employee will have four months to look for other employment before her paychecks stop coming) but also to the employer (i.e., the employer will have four months to find a replacement if the employee chooses to leave).

The trickier question is what the remedy should be when an employee leaves employment without providing the notice required under a fixed-term employment contract.  Courts will not grant “specific performance” of an employment contract, insofar as there can be no “involuntary servitude” (i.e., an employee cannot be compelled to work against their will).  However, some courts have entertained the possibility of “negative specific performance.”  Although the court cannot compel an employee to work for “Employer A” against their will, the court may be able to enjoin (prohibit) the employee from working for any other employer during the specific time period that the employee had committed to work only for “Employer A.”  In cases involving entertainment personalities and professional athletes, for instance, courts have considered granting such “negative specific performance” where the employer shows that (i) there is a fixed-term employment contract, (ii) the employee left employment before the term was up, and (iii) the employee’s services are unique or extraordinary.  Courts have called this the “equivalent of a covenant not to compete.”

For employers, does this mean that fixed-term employment contracts are a perfect substitute for covenants not to compete?  Probably not; it should be kept in mind that courts prefer to award money damages and are often not inclined to issue injunctions depriving a departing employee of their ability to earn a living unless it is clear that this is what the parties bargained for.  Thus, employers who want to make sure that key employees cannot leave and work for competitors are better off specifying this when they negotiate contracts with the individual employees.  On the other hand, both employers and employees should keep in mind that a fixed-term employment contract can “cut both ways” and can be used to provide protections not just to the employee but to the employer as well.

If you are an employer and want more information on or wish to discuss non-compete agreements or fixed-term employment contracts, please contact any of the Burr & Forman’s Non-Compete & Trade Secrets team members and we will be happy to assist you.

Valid Non-Compete Agreement Declared Ineffective: Hard Lessons from Soft Language

Even a valid non-compete agreement can fail to provide the scope of protection that the drafter expects.  In March 2012, Florida’s Fifth Circuit of Appeal decided Heiderich v. Florida Equine Veterinary Services, Inc., 37 Fla. L. Weekly D759a, giving little effect to a valid non-compete agreement. The language in the non-compete agreement only prevented the employee from establishing an office located within a specified geographic area and did not prohibit the employee from conducting business within the geographical bounds. In Heiderich, the employee signed a valid non-compete agreement and was reminded of such upon termination. Within the period of non-compete, the employee established an office just outside the geographic radius, and then delivered services within the non-compete geographical boundaries.

In reversing the lower court’s temporary injunction, the appellate court found that the language in the non-compete only meant that the employee could not establish a physical business location within the 30 mile radius.

“[E]mployee shall not own, manage, operate, control, be employed by, assist, participate in, or have any material interest in any business or profession engaged in general equine veterinary practice located within a thirty (30) mile radius of [FEVS's business address]”

The court found that there was nothing in the non-compete agreement to stop the employee from establishing an office 31 miles from the company and then servicing the clients within 30 miles of the company, ruling that “the non-compete agreement does not prohibit [the employee] from providing . . . services within a 30-mile radius of [the company], so long as her business office is outside that radius.”

The clause only prohibits the employee from “owning or being employed by a business or profession engaged in equine veterinary practice located within a 30-mile radius of FEVs. It does not . . . prohibit [the employee] from practicing equine veterinary medicine anywhere within the 30-mile radius.”

Heiderich is consistent with previous Florida decisions on the issue. In Tam-Bay Realty, Inc. v. Ross, 534 So. 2d 1200 (Fla. 2d DCA 1988), a non-compete agreement stated that the sellers of a real-estate brokerage firm were not to compete with the business in any of the following ways:

“by opening, operating, serving as an officer, director or other employee of any real estate brokerage business located with the geographical boundaries of Pinellas County, Florida…” 

However, according to a Florida court the non-compete agreement did not prohibit the seller from advertising in the phone book, obtaining a local phone number, running advertisements for homes, or listing themselves in business directories within the area the non-compete purported to protect.

The court found that the sellers “did not breach the covenant because they had not competed by ‘opening, operating, serving as an officer or director of any brokerage business located within Pinellas County.’ Rather, the sellers had competed within Pinellas County ‘from a brokerage business located outside of Pinellas County thereby adhering to the literal meaning of the non-compete agreement.”

How does this affect your business?  There is the potential that your valid, negotiated non-compete agreement might leave you exposed to unexpected future competition.  In light of the March 2012 decision in Heiderich, it is more important than ever to re-examine existing non-compete agreements to ensure that they offer meaningful protection and do not just make competing less convenient.

Contact Burr & Forman today to ensure that your business is secure. Burr & Forman’s Non-Compete & Trade Secrets team members would be happy to review your company’s non-compete agreement or answer any further questions you have about protecting your businesses from unfair competition.