The Supreme Court’s Atlantic Marine Decision and Its Implications for Non-Compete Litigation

On December 3, 2013, the Supreme Court issued a unanimous opinion in Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas. A copy of the Court’s slip opinion can be found here. The facts in Atlantic Marine did not involve a covenant-not-to-compete, but all the same, the Supreme Court’s decision has potentially-significant implications for non-compete litigation and for the drafting of non-compete agreements.

The question before the Court in Atlantic Marine was the enforcement of a forum-selection clause. Atlantic Marine Construction Co., a Virginia company, had entered into a construction contract with the United States Army Corps of Engineers for a construction project at Fort Hood, Texas. Atlantic Marine, in turn, subcontracted with a Texas company, J-Crew Management, Inc., to perform some work on the Fort Hood project. The subcontract between Atlantic Marine and J-Crew Management specified that any disputes that might arise between them would be litigated in Virginia — this was, so to speak, Atlantic Marine’s “home turf.” However, when a dispute arose, J-Crew Management did not go to Virginia but instead sued Atlantic Marine in a federal court in Texas. Atlantic Marine then sought to get J-Crew Management’s lawsuit dismissed outright or else transferred to a federal court in Virginia. The lower courts, however, declined to dismiss or transfer the case, leading to a mandamus petition that eventually made its way to the Supreme Court.

The Supreme Court’s decision in Atlantic Marine is significant for two reasons: (i) the Supreme Court clarified the procedural mechanism for obtaining the dismissal or transfer of an action where the parties to the action also have an agreement with a valid forum-selection clause and (ii) the Supreme Court reiterated that such forum-selection clause are generally (albeit not always) enforceable.

As to the procedural mechanism, the Supreme Court explained that, when a particular federal forum is specified or permitted in the parties’ forum-selection agreement, the remedy when a lawsuit is filed in the “wrong” federal forum is a 28 U.S.C. § 1404(a) motion to transfer the action to the “right” forum. However, in cases where the forum-selection agreement requires resolution of disputes in a state court or in the courts of a foreign country, the remedy when a lawsuit is filed in the “wrong” forum is a motion to dismiss under the common-law doctrine of forum non conveniens. The analysis is the same on both types of motions — the distinction being that 28 U.S.C. § 1404(a) provides a mechanism whereby a federal court sitting in Maine can transfer an action to a federal court sitting in Hawaii, whereas there is no mechanism for a federal court in Maine to transfer an action to a state court in Hawaii, much less to a court sitting in Japan. Of course, following dismissal by a federal court in Maine on grounds of forum non conveniens, the plaintiff may re-file its suit in a state court in Hawaii, in a court in Japan, or in any other place specified in the parties’ forum-selection agreement.

As to general enforceability of forum-selection agreements, the Supreme Court explained: “When the parties agree to a forum-selection clause, they waive the right to challenge the preselected forum as less convenient for themselves or their witnesses, or for their pursuit of the litigation.” Thus, when a plaintiff files its lawsuit in the “wrong” forum, “the plaintiff must bear the burden of showing why the court should not transfer the case to the forum to which the parties agreed.”

What does this mean for non-compete agreements? Many non-compete agreements contain both choice-of-law and choice-of-forum clauses, and the Atlantic Marine decision arguably increases the likelihood (but does not guarantee) that choice-of-forum clauses will be enforced. Thus, if an employer is in a state that generally enforces non-compete agreements and is employing its employees in that state, the employer may want to give serious consideration to including choice-of-forum and choice-of-law clauses in its non-compete agreements, so as to specify that all disputes are to be resolved in the employer’s home state and under that state’s laws. That way, if an employee bound by a non-compete agreement quits his job and moves to another state to work for a competitor, the employer is more likely (albeit not guaranteed) to get “home turf” advantage in any litigation that might arise over the enforceability of the non-compete agreement.

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.

Ice Storms, My Secret Internet and Other Myths

Winter is around the corner.  On the calendar, however, it’s not yet here.  Surely Mother Nature is aware of this.  Still, an ice storm currently engulfs large swaths of our nation and is leaving many of us without power or heat.  If your new business was recently served with a lawsuit seeking an injunction against it to stop allegedly unlawful competition, then you can probably relate to those in the grips of the current storm.

The situation:  A successful closely held corporation sues a new competitor in its industry.  The complaint alleges that the new competitor hired a former employee with knowledge that the former employee and former employer had executed a non-competition agreement.  The complaint against the new competitor seeks an injunction.  If you’re familiar with this column, then you know that this scenario is rather commonplace.  Sometimes, however, the former employer/plaintiff can seek relief that a court deems unreasonable.  One such instance occurs with internet-based companies, or even with internet-reliant companies.

Here’s an example:  You own a company that sells goods over the internet.  You discover that your former employee is working for a new competitor seemingly in violation of his non-competition agreement.  Although there is no evidence that your business is damaged or will suffer damages as a result of the new competitor’s entry into the marketplace, your lawsuit seeks to enjoin the former employee from working for the competitor.  Your lawsuit also includes a claim against the new competitor for tortuous interference with your contract with the former employee.  So far, this legal action presents relatively straightforward issues.  Then you decide to make matters more complicated.

We often see former employers attempt to overreach when seeking damages.  You might, for instance, sue for alleged violation of trade secrets (claiming that the employee gave protected information to the new competitor).  Or you might sue for unfair and deceptive trade practices.  While this aggressive approach could potentially force the new competitor to agree to willingly close its business, it’s more likely than not that you’ve created a situation in which litigation (and associated litigation costs) could escalate.  Particularly with internet-based businesses, the capability to drive business to a particular website is seldom a secret.  While there are certainly professionals who claim that they can use unique search engine optimization (SEO) techniques to increase your exposure, many businesses discover that they can directly pay the search engines themselves to increase their traffic.  And that information is essentially available through the search engines for companies willing to pay for it.

As a result, your new competitor may actually get significant traffic to its website without ever attempting to steal your “trade secrets” in its efforts to do so.  Even if challenged, a “trade secret” that is dependent on information a search engine would otherwise make publicly available is difficult to uphold in court.  To some ˗ if your company is more financially capable of bearing the financial costs and personnel strain of the litigation storm ˗ this fight might seem worthwhile.  Consider, on the other hand, the possibility that if you lose in your efforts to prove unfair and deceptive trade practices you may actually have to pay prevailing party attorney’s fees and costs to the new competitor.  Why?  Because “deceptive and unfair trade practice” statutes usually contain clauses that allow courts to award prevailing party attorney’s fees and costs.  In other words, if the new competitor can hold on long enough to defeat your claim for deceptive and unfair trade practices, your company could end up paying your competitor’s legal bill (even if the court finds grounds to enter the injunction you sought).

Does that scenario denude or devalue your carefully drafted non-competition agreement?  No, it does not.  What the above scenario is intended to provide is a cautionary warning that when dealing with a pest, sometimes a fly swatter gives you a better result than a grenade.  Many times your well-pled motion for injunctive relief will achieve your business goals without having to prove the elements of the additional allegations.  Less cost to you, same effect on your newly-enjoined former-competitor.

Navigating the many laws and difficult language in the area of non-competition agreements can perplex even the most sophisticated business professionals.  This is the point in the blog when you are urged to seek refuge from this complexity with an attorney experienced in these issues and capable of both advising and litigating, if necessary.

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.

Declaratory Judgments in Non-compete Cases – Electing Offense over Defense

After a weekend of gorging on football as well as turkey, I’ve got offense and defense on my mind, and a recent Georgia appellate decision got me to thinking about how those basic gridiron principles apply to non-compete cases.  The case, Lapolla Indus. V. Hess, No. A13A1097, 2013 Ga. App. LEXIS 926 (Ga. Ct. App. November 15, 2013), involved a variation of the usual scenario of an employee subject to a non-compete agreement leaving his position for a new employer.  The old employer, ready to get its money’s worth for a non-compete agreement it paid good money to an attorney to draft, sends a cease and desist letter to its former employee threatening to sue the employee for breach of contract and seeking an injunction, damages, and attorney’s fees.  The old employer, as happened in Lapolla, often also sends a letter to the new employer putting it on notice of the existence of the non-compete agreement and threatening to sue the new employer for tortuous interference with contract if it continues to employ the employee in contravention of the employee’s  covenants.

What usually happens is that the employee and new employer either throw the cease and desist letter in the trash or fire back a response letter informing the old employer of all the reasons why their accusations are legally or factually wrong and that they’ll counterclaim or seek attorney’s fees if the employer actually sues.  The Lapolla case highlights another option available to employees and their new employers in instances of a potential breach of a non-compete — the filing by the employee and/or the new employer of a declaratory judgment lawsuit seeking a ruling by the Court that the non-compete covenants are unenforceable.  Instead of waiting around to be sued, i.e. playing defense, the employee and new employer take control of the proverbial litigation ball and file their own lawsuit.

There are several potential benefits to the employee and new employer in this strategy:

  • the psychological benefits of being the Plaintiff;
  • choosing the forum to litigate the dispute, which may also dictate which state’s laws apply, which may in turn dictate the result;
  • quickly testing how serious the old employer is about enforcing the agreement;
  • forcing an early resolution of the dispute; and
  • minimizing exposure to liability by getting an answer on the legal issue of enforceability before moving on a hire that might potentially be a breach.

In Lapolla, the tactic worked, because the trial court refused to apply the Texas forum selection and choice of law clause in the non-compete agreement and ruled that the employee’s non-competition covenants with the former employer were unenforceable, and the Georgia Court of Appeals upheld that part of the ruling.

Burr Point:  When being accused of non-compete breaches, employees and their new employers should consider filing a declaratory judgment action.  While defense may win championships in football, an offensive mindset usually pays off when it comes to non-compete litigation.

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.

Huge Verdict in Trade Secrets Case

It’s a little out of this blog’s Southeastern focus area, but a $22.7MM verdict in a Minnesota trade secrets and non-compete case, as reported by the West Central Tribune at wctrib.comshould be a reminder to all employees and employers that a violation in this area of the law can have disastrous consequences for a defendant. The plaintiff, a dairy and food processing equipment company, successfully argued that two former employees took confidential equipment designs from the company’s computer systems and used them on behalf of a Wisconsin-based competitor, Cheese Systems, Inc. The new employer was also found liable for interference with current or prospective contracts.

Maybe it’s just me, but my mental image of the defendants is this.

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.