Sometimes Hiring a New Employee Can Invite an Unwanted Lawsuit

Let’s set the scene:  Your search for an employee with the required job skills and experience results in your Florida-based company’s decision to hire someone presently working for your competitor.  During the salary/benefit negotiations, you learn that your prospective employee executed a non-compete agreement with her present employer.  “Not to worry,” you tell her.  “If your present employer sues you to enforce the non-compete we will pay for your defense.  In fact, we’ll make it part of your contract if you come for us.”  Bad move.

Many prospective employers believe non-compete agreements only have legal consequences for prospective employees.  However if ─ as in the example above ─ the prospective employer is aware of the agreement before hiring the employee, then the prospective employer runs the risk of liability to the former employer for tortiously interfering with the non-compete agreement. While the past employer will have to prove the new employer had knowledge of the non-compete agreement as part of a tortious interference claim, a new employer makes this task easier when it includes a provision agreeing to indemnify the employee for any litigation over non-compete agreements.

To prove tortious interference with a non-compete, Florida courts apply a four-prong test:  1) existence of a business relationship; (2) knowledge of the relationship on the part of the defendant; (3) an intentional and unjustified interference with the relationship by the defendant; and (4) damage to the plaintiff as a result of the breach of the relationship.  Tamiami Trail Tours, Inc. v. Crosby, 463 So. 2d 1126 (Fla. 1985).

How then does a prospective or subsequent employer protect itself from the former employer’s tortious interference claim?  For starters, avoid agreements to indemnify the new employee and/or pay for legal defense costs associated  with possible breach of the non-compete agreement.  As recently as May 2012, a Florida federal court reasoned that the plaintiff was “substantially likely to prevail on the claim of tortious interference” in large part because the new employer “expressly acknowledged the Agreement between [the employee] and [the plaintiff] and the restrictive covenants contained therein.”  The new employer, as part of its agreement with the employee, “agreed to assume [the employee's] defense in the event she [was] sued by [the plaintiff] over the terms of the Agreement, and indemnify her from any and all expenses, fees, damages, judgments, and amounts incurred by her in connection with the action.” The court held that this express knowledge of the non-compete agreement was evidence that the new employer caused the employee to breach the non-compete agreement. See Electrostim Medical Services, Inc. v. Lindsey, (M.D. Fla. 2012).

And this isn’t the first time a federal court in Florida found that a former employer could sue a subsequent employer for tortious interference.  In a 1998 federal court opinion the  employee testified that he had informed the new employer about his employment agreement with the plaintiff without actually providing a copy.  When coupled with testimony that the new employer hired the employee to essentially recreate the former employer’s products, the court found enough evidence to reason that “the facts . . . support a substantial likelihood that Plaintiff [would] ultimately prevail on the claim of tortious interference.”  See Stoneworks, Inc. v. Empire Marble & Granite, Inc. (S.D. Fla. 1998).  In 2009 a court found that the new employer had knowledge of the non-compete agreement with the plaintiff because it “expressly acknowledged the existence of that agreement in the employment contract signed with [the employee].”  The result: an opinion that the plaintiff had “shown a substantial likelihood of success on the merits of its claim that [the new employer] tortiously interfered with the . . . contract for [the employee] not to compete with [plaintiff].”  See The Continental Group, Inc. v. KW Property Management, LLC (S.D. Fla. 2009).

Similar findings appear in Florida appellate courts.  In 2010, Florida’s First District Court of Appeal held that allegations that 1) the employee gave a copy of the plaintiff’s employment contract to the new employer and; 2) that the new employer “devised a plan to allow [the employee] to quit her employment with [the plaintiff] and to . . . work for [the new employer] . . . without compensating [the plaintiff] as required under [the contract]” stated a cause of action for tortious interference against the subsequent employer.  See  Southeastern Integrated Medical, P.L. v. North Florida Women’s Physicians, P.A. (Fla. 1st DCA 2010).

What now?  Well, if you’re subject to a non-compete agreement, read it carefully.  They are often narrowly tailored.  As we discussed in previous posts, even valid non-compete agreements can prove ineffective to stop future competition.  On the other hand, because Florida allows non-compete agreements, it is important to understand the restrictions of a particular agreement and the risks of violating it.  Do you have the right to employ someone seemingly subject to a valid non-compete agreement?  Of course you do.  Just keep in mind that knowingly hiring someone subject to a non-compete agreement can result not only in additional legal fees and costs resulting from the employee’s breach, it may also subject the new employer to substantial damages resulting from a claim for tortious interference with the former employer/employee relationship.  Remember that courts have determined that prima facie evidence of tortious interference exists when a subsequent employer agrees to indemnify the new employee and/or pay defense costs if the former employer files an enforcement lawsuit.

This is the part of the blog where we suggest you seek competent legal counsel when you face these issues.  The nuances of this area of the law and the specific factual circumstances surrounding each situation deserve a sound initial legal opinion. Our Burr & Forman attorneys would be happy to assist you in these matters.

The Court’s Broad Power To Enjoin Trade Secret Violations Can Be Costly

On June 27, 2012, we reported that TNA Entertainment, LLC (“TNA”), a local professional wrestling promotion company, sued its former employee, Brian Wittenstein, and a direct competitor, World Wrestling Entertainment, Inc. (“WWE”), for unlawfully using TNA’s trade secrets to unfairly compete against TNA.  (TNA Entertainment, LLC v. Wittenstein and World Wrestling Entertainment, Inc., Davidson County Chancery Court, Docket No. 12-746-III.)  The alleged trade secrets included information about TNA’s contracts with wrestling talent.  TNA alleged that WWE used TNA’s trade secrets to solicit wrestling talent already under contract with TNA.

In addition to the damages it claims to have suffered, TNA also requested that the Court enter a temporary restraining order (“TRO”) to prohibit WWE and Wittenstein from continuing to use TNA’s trade secrets.  Under Tennessee law, a Court may restrain an offending party from engaging in certain conduct when the injured party shows it will suffer immediate and irreparable harm.  TROs generally last for a short period of time, but may be extended if there is good cause to do so.  The Court may also issue a temporary injunction which can last during the life of the lawsuit.

On May 24, 2012, the Court in TNA Entertainment issued a comprehensive, far reaching TRO which could have had adverse effects on WWE’s business.  The restraining order prohibited WWE and Wittenstein from doing the following:

  1. Breaching or attempting to breach Wittenstein’s Separation Agreement with TNA, including disclosing, transmitting, or otherwise using TNA’s confidential, trade secret, and proprietary information;
  2. Retaining and failing to return TNA’s confidential, trade secret, and proprietary information or property in any form;
  3. Destroying, deleting, erasing, modifying, or otherwise failing to preserve TNA’s confidential, trade secret, and proprietary information;
  4. Soliciting or contracting wrestling talent identified in TNA’s confidential information or taken by Wittenstein; and
  5. Interfering with TNA’s contracts and prospective business relationships which WWE learned through TNA’s confidential, trade secret, and proprietary information.

In addition, the Court specifically required WWE and Wittenstein to not destroy or alter and to provide access information to any computers or similar devices which WWE and Wittenstein used in storing, transmitting, or receiving TNA’s confidential information and trade secrets.  The purpose of this requirement is to allow TNA to inspect WWE and Wittenstein’s computers for use of TNA’s confidential information and trade secrets.

As a condition to entering the Restraining Order, TNA was required to post a $30,000 bond.

The May 24, 2012 TRO was later dissolved as to WWE.  After a hearing, the Court determined that WWE posed no threat of immediate or irreparable harm to TNA and had already returned TNA’s property.  WWE also committed to not solicit TNA’s wrestling talent and to preserve its computers and other devices for inspection at a later date.

While the TRO seems to have had little effect on WWE, because WWE had already taken corrective action with respect to TNA’s confidential information and trade secrets, in other cases such a comprehensive TRO and/or temporary injunction could prove to be costly.  A new employer could suffer loss of business, damages for interfering with a competitor’s contracts, significant costs for litigation, and loss of reputation.  As we said earlier, 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 have any questions for your business on trade secrets or liabilities when hiring an employee, don’t hesitate to contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Weeding through the Legal Uncertainty of Garden Leave

Employers seeking to limit employees from taking customers with them to new jobs should consider including “garden leave” provisions in their form employment agreements, in addition to or in place of the more traditional non-compete and non-solicitation covenants. A garden leave clause requires an employee to provide a certain period of notice to the employer before voluntarily terminating employment (usually 30-60 days) and restricts the employee from competing against his or her employer during the notice period.  During the notice period, the employee is paid full salary and benefits and is usually directed not to report to work during the notice period. Thus, the  “garden leave” term comes from the notion that, at least metaphorically, the employee will stay at home and tend to his garden during the restricted period, while the employer secures relationships with its customers before the employee goes to work for a competitor.

The potential benefit to garden leave clauses is that they are viewed more favorably by Courts from an enforcement standpoint because the employee is still being paid during the restricted period. Because the concept is relatively new in the United States (as opposed to its common use in the United Kingdom), there is not a lot of case law guidance about their enforceability.   As with non-competes, the law controlling these provisions is very jurisdiction-specific.  For example, garden leave provisions have been regularly enforced in New York. See Estee Lauder Co. v. Batra, 430 F. Supp. 2d 158, 182 (S.D.N.Y. 2006) (granting preliminary injunction of five months against employee in charge of developing strategies for certain brands of employer’s skin care products and finding that risk of employee’s “loss of livelihood is entirely mitigated by the fact that [employer] will continue to pay [his] salary of $375,000 per year for the duration of the ‘sitting out’ period”); Ayco Co., L.P. v. Frisch, 795 F. Supp. 2d 193, 197 (N.D.N.Y 2011) (granting preliminary injunction against employee financial advisors and finding that agreement by employees to “give [employer] ninety days notice of termination, during which time they would remain . . . employees and continue to receive their base salary or salary draw, but would no longer participate in [employer's] compensation plan” was enforceable).

The law in the Southeast is significantly less developed.  The last word in Georgia, for instance, came in Carvalho v. Credit Suisse Securities (USA) LLC, 2007 U.S. Dist. LEXIS 80651 (N.D. Ga. October 31, 2007).  Carvalho indicates that courts applying Georgia law may view garden leave provisions less favorably than those applying New York law.  In Carvalho, the Northern District of Georgia considered the enforceability of a garden leave provision, which provided that the employees were entitled to their base salary and benefits during an unspecified notice period.  The court denied a temporary restraining order and preliminary injunction, reasoning that “[t]he income of these employees is substantially higher than their base salary [and] the employer has the ability to significantly reduce their income and prohibit them from working for another employer of any kind during the notice period.”  The Court also expressed doubt as to whether the covenant was enforceable in light of Georgia’s at will employment standard codified at O.C.G.A. § 34-7-1, reasoning that “because the employee may resign at any time, the Court questions whether he can be ordered to continue in his employment, especially under less favorable terms of employment.”

BURR POINT: Employers should consider adding garden leave provisions in addition to or in place of non-compete provisions in employment contracts.

If you would like to add a garden leave provision to your employee agreements, the Burr & Forman team would be happy to assist you. Please contact us at any time.

Court Says It’s Time to Pay The Piper, Even if the Piper Hasn’t Paid: Fee Provisions and Third Party Payments

Employers who have the foresight to draft a non-compete agreement often fail to consider some of the potentially adverse financial ramifications from enforcing the non-compete agreement through litigation. Most employers seeking to enforce a non-compete agreement unhappily discover that they may be on the hook to pay the attorney’s fees a subsequent employer funds in defense costs.  Yet that is exactly what could happen if the employer doesn’t correctly draft the fee provision in the non-compete agreement.

Substance of the matter aside, one of the key questions after non-compete litigation is a simple one:  who pays the often high attorney’s fees and costs?  Recent developments in Florida law highlight how important it is to properly draft attorney’s fee provisions in non-compete agreements.  In Rogers v. Vulcan Manufacturing Co., Inc., 37 Fla. L. Weekly D1309a (Fla. 1st DCA June 1, 2012), the Florida First District Court of Appeals found the language of the non-compete agreement at issue entitled an employee to attorney’s fees even though its subsequent employer, a third-party, wholly funded the non-compete litigation.  The non-compete agreement language at issue read: “In any action to enforce any term, condition, or provision of this agreement, the prevailing party shall be entitled to recover the reasonable attorney’s fee incurred to enforce the same.” (Emphasis added).  The court found this language demonstrated that the parties intended for the loser to pay attorney’s fees regardless of the source of the funds – even if the source was a subsequent employer.

The court noted that if the parties had intended to limit fee reimbursement to situations in which the prevailing party personally paid the attorney’s fees and costs ─ or incurred an obligation to pay the attorney’s fees and costs ─ then prevailing party language within the non-compete agreement should have clearly said so. In Rogers, the court gave the employee the benefit of the prevailing party fees despite the fact that the new employer, and not the former employee, actually paid the attorney’s fees and costs in response to the former employer’s lawsuit.  The Rogers court reasoned that the non-compete agreement entitled the former employee to reimbursement of attorney’s fees and costs because the clause provides that “the prevailing party shall be entitled to recover the reasonable attorney’s fee incurred to enforce” the agreement, rather than saying that the prevailing party is entitled to the attorney’s fees “it/he/she” incurred.  Thus, the court interpreted the provision as intending for the loser to pay the winner’s reasonable attorney’s fee, regardless of the source of the funds.

The Rogers court further noted that a non-assignability clause will not affect the obligation of attorney’s fees under the agreement. The court found it irrelevant whether the former employee was ultimately responsible to reimburse his new employer for advancing attorney’s fees on the employee’s behalf.  Because the former employee did not actually assign his rights or benefits under the non-compete agreement, the court found that no violation of the non-assignability occurred, despite the fact that the burden of paying attorney’s fees and costs rested solely on the new employer.

Losing valuable employees to competitors poses substantial business risks.  Carefully drafted non-compete agreements can help minimize these risks.  Among the risks are future litigation costs and the possibility that fee-shifting provisions can increase litigation expense, and thus add even more risk.  The Rogers case clearly illustrates the importance of properly wording non-compete agreements.  If minimizing financial exposure from an unsuccessful attempt to enforce a non-compete agreement is important to your business, then you should consider revising your agreement to limit the risk of paying attorney’s fees that subsequent employers advance or fund outright. Our team at Burr & Forman would be happy to aid you in such matters. Please contact any of the Burr & Forman Non-Compete & Trade Secrets team members for assistance.