It’s Not the Heat, It’s the Humidity

When you live in Florida, you tend to hear that expression for far too many months of the year.  Even during the winter, weather reports often include information on the “sun index” indicating the level of sunscreen you might need in order to survive your next trip to the local grocery store.  Visitors from the southwest, where temperatures earlier this month reached over 100°F, are quick to inform Floridians that it’s hot in Phoenix, “but it’s a dry heat.”

Well, if you’re looking for things other than the weather to make you sweat, you might take a look at your company’s policy on whether or not a departing employee can go to work for a competitor.  Presumably, your direct competitor will now reap the benefit of the many hours and significant financial commitment your business expended.  And as a business owner, you might ask: “What can I do?”  In many circumstances, your best business move is to protect your businesses’ interests with a carefully crafted non-competition agreement.

The rules for non-competition agreements vary from state to state.  Some states basically do not allow them (or greatly disfavor them).  Other states have no legislation concerning non-competition agreements, choosing instead to allow the legal system to define the issue on a case-by-case basis.  Indiana, for instance, recently allowed a five-year non-competition agreement, concluding that both the length of time (five years), and the restriction (a two county area) were reasonable.    See Mayne v. O’Bannon Publishing Co. d/b/a Corydon Instant Press.  In Florida, the legislature has created a statute that specifically defines the basic structure of contracts that Florida law allows to validly restrain trade.  Key among the allowed restraints of trade are non-competition agreements and limitations on the use of a company’s trade secrets after an employee leaves the company.

Although defined in the statutes, Florida law also requires that the courts interpret non-competition agreements in favor of the employee in those circumstances when the agreement is vague or missing terms.  Even when parties are careful to define terms in a non-competition agreement, the contract cannot confine future employment beyond the statutory guidelines, nor are non-competition agreements immune from legal challenges regarding their breadth, their validity, or their applicability to particular circumstances.

In the real world, employees leave for new positions every day.  They pursue opportunities at other companies.  They perceive opportunities to start companies of their own.  They move on.  Nonetheless, thoughtfully crafted non-competition agreements can significantly help a business retain key employees, or – at the very least – make it far more difficult for departing employees to immediately join a competitor or start a competing business.  As in most contracts, the more specific the limitation (and the more reasonable the limitation relative to the possible damage a departing employee might cause your business), the more likely a court will uphold the contract.  If, for instance, your business is confined to a particular county, then restricting a departing employee from working in an entirely different State makes little sense.  After all, how would that departure negatively impact your business?  So take care to have your attorney tailor your non-competition agreement in a manner that reflects your business and that provides you the protection you deserve for those inevitable situations when an employee critical to your bottom line decides to see if the grass is greener elsewhere.

Which takes us back to the heat and the humidity.  While it’s tough to argue that the humidity can turn your Florida summer from a sauna to a steam bath, it’s also tough to deny that – if nothing else – the rain and the humidity do an excellent job of keeping our lawns green year-round.  If keeping critical employees around makes sense to the financial health of your company, consider hiring an attorney familiar with drafting non-competition agreements.  Under certain circumstances, it could literally save your business.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Don’t Mess With Texas: Texas Appeals Court Confirms Arbitrator’s Authority to Equitably Extend a Non-Compete Agreement

On the eve of celebrating our nation’s independence and hence, presumably preparing for the fireworks to follow the next day, the Court of Appeals for the Fifth District of Texas at Dallas issued a ruling in Nationbuilders Insurance Services, Inc. v. Houston International Insurance Company, Ltd., 2013 WL 3423755 (Tex. App. – Dallas, Jul. 3), confirming that an arbitrator had the authority to grant a one-year extension of a non-compete agreement which prohibited insurance executives from planning a business competing with their former employer  . . . and consequently, reminding folks that you don’t mess with Texas.

Kevin Cunningham and Michael Leamanczyk became employed with Nationbuilders Insurance Services, Inc. (“Nationbuilders”) in 2006, and in conjunction therewith, each signed a non-compete agreement. When Cunningham and Leamanczyk left Nationbuilders in 2010 to work for another insurance group, Nationbuilders filed suit against them. The litigation was resolved via a May 4, 2011 settlement agreement (“the Agreement”) which restricted the men from “engaging in Competition” with Nationbuilders from May 4, 2011 through May 4, 2012.  “Competition” was defined, in pertinent part, as “plan[ning] to conduct” a competing insurance business. The parties to the Agreement consented to the application of Delaware law to govern any disputes, which disputes also would be arbitrated.

During the restricted period of competition, Cunningham and Leamanczyk began planning and preparing to sell competing insurance. For example, they marketed their new business, prepared regulatory filings, and developed underwriting guidelines. Not surprisingly, in January 2012, Nationbuilders filed an arbitration demand claiming that Cunningham and Leamanczyk were in violation of the Agreement.

After the arbitration hearing concluded on April 27, 2012, the arbitrator issued a May 31, 2012 award in Nationbuilders’ favor. The arbitrator concluded that as the two men had planned a competing business during the “dormant period,” they had breached the Agreement such that Nationbuilders should “be restored the benefit of the bargain it made pursuant to the May 4, 2011 settlement agreement.” The arbitrator awarded Nationbuilders an equitable extension of the non-compete agreement for one-year, effective May 5, 2012 through May 5, 2013.  Cunningham and Leamanczyk thereafter obtained an award from the trial court on grounds that the arbitrator went beyond the scope of his authority in fashioning the equitable remedy.  Specifically, the trial court vacated the award under Section 10(a) of the Federal Arbitration Act providing that arbitration awards can be vacated “where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.”  9 U.S.C. Section 10(a).  Nationbuilders appealed.

On appeal, as the men did not dispute that they had, in fact, breached the Agreement by planning a competing business during the restricted period, the Court noted that the only question to be answered in considering whether the award was appropriately vacated under Section 10(a) as a result of the arbitrator exceeding his powers “was whether the award . . . is rationally inferable from the contract.” In concluding that the arbitrator’s award was appropriately issued, the Court noted that the arbitrator simply required the parties to abide by the Agreement – in other words, that Cunningham and Leamanczyk refrain from planning a competing business for one year.  Further, despite Cunningham and Leamanczyk’s arguments to the contrary, the Court held that the arbitrator – although having issued the arbitration award after the restricted period had expired – had not ruled on a moot issue. Though the men argued that enforcement of the restricted period became moot after it expired on May 4, 2012 such that the arbitrator had no jurisdiction to enjoin their competing conduct, the Court differentiated specific performance  – providing that a non-compete enforcement is moot after the contractual period of the covenant expires – from equitable extension, where the award was simply an extension of the restricted period under the arbitrator’s power of equity. As both Delaware and Texas law allowed for equitable extension, the Court concluded that the arbitrator’s decision was in line with the choice of law provision in the Agreement and not in contravention of Texas public policy.

Though the Court reversed the trial court’s ruling vacating the arbitration award, it declined to render judgment in Nationbuilders’ favor confirming the arbitration award or remand the matter to the trial court to confirm the award.  In doing so, the Court noted that the trial court had not addressed Cunningham and Leamanczyk’s two alternative public policy arguments for vacation of the award: (1) whether the award violated public policy by effectively allowing Nationbuilders “up to four years of freedom from competition in an unrestricted geographic location;” and (2) whether the award violated public policy by improperly interfering with their business where Nationbuilders had not suffered any loss of customers or revenue. (Notably, the parties did not address the fact that by the time of the Court’s ruling on July 3, 2013, the equitable extension of the restricted period had expired; thus the Court declined to address that issue).

The take away from Nationbuilders is threefold. First, a non-compete agreement which includes an arbitration clause should specifically outline the penalties for violation of the agreement in the agreement itself. Where an arbitrator disregards the express penalty provisions of a non-compete agreement which were mutually agreed upon by the parties and reduced to writing in the non-compete agreement, an arbitrator very likely will exceed his equitable powers by fashioning alternate remedies. The Agreement in Nationbuilders contained no penalty provisions, hence the arbitrator was within his discretion to fashion an equitable remedy which gave effect to the purpose of the Agreement. Prudence similarly suggests that all non-compete agreements, even those not containing arbitration clauses, should outline the penalties for a breach.

Second, parties should be cognizant of the choice of law provisions in any non-compete agreement. Had the Agreement in Nationbuilders been subject to Louisiana or Massachusetts law where equitable extension is not allowed, for example, the Court presumably would have refused to allow the arbitrator to equitably extend the restricted period.

Third, Nationbuilders reminds us that parties to a non-compete agreement should consider whether it is wise to mess with a Texas arbitrator’s equitable powers.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Why Go to the Movies?

Summer has arrived.  The Hollywood blockbusters are here.  New animated features hit the big screens this week.  Superman is flying once more.  Sure, if the movies are your cup of tea, then summer is your annual thirst quencher.  However if you’re looking for drama, you need only scan the internet to find your daily dose of serious corporate espionage and the criminal theft of trade secrets from American corporations.

Just yesterday the San Francisco Chronicle ran a story of a scientist working on solar cell technology who pled guilty to several counts of wire fraud in an indictment claiming he stole trade secrets from his employer “and tried to take them to a competitor in China.”  The prosecutors in the case “estimate the total loss from the theft of trade secrets at nearly $22.7 million.”  The Telegraph – a British newspaper – reported this week that cyber espionage is rampant in the UK with “foreign hackers” secretly working in some companies for up to two years “discreetly stealing intellectual property.”  American newspapers recently published articles that our government systems are under constant attack not only from rogue hackers but also from foreign governments utilizing sophisticated programs and systems in an effort to steal American secrets and military information.  Same thing for recent stories of Chinese manufacturer Sinovel and two if its executives, recently indicted for alleged theft of wind turbine trade secrets.  Alleged financial loss to the owner of the trade secrets: approximately $800 million according to SecurityInfoWatch.com.

The problem is rampant and unlikely to go away.  Nor is this something new.  Corporate espionage likely began soon after the first business incorporated.  Of course, victimized businesses take little comfort knowing that others victims also exist.  So what can your company do to avoid, eliminate or minimize this potential loss?  First line of defense, of course, is education.  Educate the people in charge of monitoring the transmission of technical data on the best means to detect the “discreet stealing.”  Depending on the value of the intellectual property (and the potential loss to your business if a competitor was to receive the trade secret information without a license or without compensation), the potential losses could justify the investment in employees whose role is to oversee the data transferred to and from your company’s system.

As most of you who read this post already know, Florida employment is at will.  While termination for a discriminatory purpose is unlawful, termination for violation of company policies (or termination for violation of State or federal law) is common.  However, as these events (and the dozens of other recently reported events) indicate, the most difficult task for American companies lies in screening employees so as to minimize the possibility of trade secret theft, while at the same time ensuring that all potential employees are given an equal opportunity to apply for a position for which they are potentially qualified.

If your company faces a patient, technically savvy and stealthy employee, like the ones described who steal trade secrets with stealth for two years before they are discovered, a well-written policy is not likely to act as a significant deterrent.  On the other hand, Florida law specifically allows employers to create written policies regarding the protection of its trade secrets and to enforce those policies against its employees as appropriate.  In most circumstances, employee education (and continuing acknowledgement) of the employer’s policies, in concert with a method for your business to monitor activity and to “police” itself, can deter most of the individuals who might consider trade secret theft.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Is An Assigned Non-Compete Agreement Enforceable?

In the case of a merger or acquisition, the successor company might take an assignment of the current non-compete agreements in favor of the predecessor company.  The enforceability of an assigned non-compete agreement, however, varies from state-to-state, as is true with most issues concerning non-compete law.  Below is a quick survey of how some of the states in the Southeast address the issue:

Georgia – Non-compete agreements, similar to most contracts in the state, are assignable provided that the duties under the agreement do not materially vary from the performance required by the original parties and provided that the contract is not for personal services.  West Coast Cambridge, Inc. v. Rice, 262 Ga. App. 106 (2003) (finding that successor partnership could enforce noncompete agreement against doctor because the law provided no prohibition against the assignment of the agreement and the agreement was expressly binding on successors and assigns, and noting that contract was not for personal services because it only obligated the doctor to not take certain actions).

Tennessee – Tennessee law recognizes that covenants not to compete are assignable absent specific language in the covenants prohibiting assignment.  See Packers Supply Co. v. Weber, 2008 Tenn. App. LEXIS 226 (Tenn. Ct. App. Apr. 14, 2008) (citing Bradford & Carson v. Montgomery Furniture Co., 115 Tenn. 610, 92 S.W. 1104 (Tenn. 1906)).

Alabama – Because non-compete agreements are disfavored as a restraint on trade (see Ala. Code § 8-1-1), a successor employer cannot enforce an employee’s covenant not to compete.  Construction Materials v. Kirkpatrick Concrete, 631 So. 2d 1006 (Ala. 1994) (refusing to enforce noncompete agreement for successor of employer and noting that the legislature’s omission of a specific provision in Ala. Code § 8-1-1 establishing a successor employer’s right to enforce an employee’s covenant with the predecessor employer creates an affirmative interference that this code section was not intended to allow enforcement by successor employers).

Florida – In Florida, the question is answered specifically by  Fla. Stat. § 542.335(1)(f)(2), which provides that a “court shall not refuse enforcement of a restrictive covenant on the ground that the person seeking enforcement is . . . an assignee or successor” provided that “the restrictive covenant expressly authorized enforcement by a party’s assignee or successor.”  Recently, Florida’s First District Court of Appeal held that a general assignment clause (such as a statement that the agreement will “inure to the benefit of and be binding upon . . . assigns and successor) is sufficient to assign the agreement to a successor.  DePuy Orthopaedics, Inc. v. Waxman, 95 So. 3d 928 (Fla. Dist. Ct. App. 1st Dist. 2012).

BURR POINT:  Special attention should be paid when drafting a non-compete covenant to ensure that the assignability of the covenant is in accordance with the parties’ expectations and the applicable state law.

 

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.