Obtaining Enforceable Non-Compete Agreements: Timing and Geography Matter

Last month, a federal judge in Mobile, Alabama denied an employer’s request for a preliminary injunction seeking to stop that employer’s former employee from working for an alleged competitor.  See Dawson v. Ameritox, Ltd., Case No. 13-0614-KD-M, 2014 WL 31809 (S.D. Ala. Jan. 6, 2014).  The reasons for the court’s decision have everything to do with timing and geography.  Specifically, Judge DuBose denied the injunction after finding that the employer was not likely to succeed on the merits of its claims because the non-compete agreement was signed before the employee began his employment and was therefore void under Alabama law. The employer is presently seeking an appeal of this ruling.

The former employee in this dispute, Eric Dawson, lives in Alabama and is a pharmacist by training.  Back in 2011, Ameritox, Ltd., a Maryland-based company providing services to healthcare providers, offered Dr. Dawson employment, and he accepted the offer.  Dr. Dawson worked “remotely,” meaning that he was not required to report to a particular Ameritox office.

Ameritox’s offer letter (dated March 29, 2011) listed Dr. Dawson’s official start date as April 11, 2011.  However, even before this “start date,” Dr. Dawson signed two Ameritox non-compete agreements.  One of these agreements specified that Maryland law would apply.

On December 3, 2013, Dr. Dawson gave notice of his resignation and informed Ameritox that he had accepted a position with Millennium Laboratories, Inc.  Ameritox considered Millennium to be a competitor.  When Ameritox accepted Dr. Dawson’s resignation, Ameritox told him that his non-compete agreement meant that he could not work for Millennium in the position he had accepted.

Within a week of his resignation from Ameritox, Dr. Dawson sued Maryland-based Ameritox in an action filed in state court in Mobile, Alabama and asked the court to declare his non-compete agreement(s) with Ameritox void.  In response to this litigation, Ameritox removed the action to federal court, filed a counterclaim, and asked the court for a temporary injunction preventing Dr. Dawson from working for Millennium.

However, because Dr. Dawson had signed the non-compete agreement(s) before his “start date” of April 11, 2011, the court denied Ameritox’s requested injunction and found that the non-compete agreement(s) would likely be unenforceable.  Judge DuBose’s ruling relied on Alabama Code § 8-1-1 and the Alabama Supreme Court’s decision in Pitney Bowes, Inc. v. Berney Office Solutions, 823 So. 2d 659 (Ala. 2001).  Judge DuBose explained in her ruling:   “Non-compete agreements are valid only if signed by an employee.  Prospective employment is not sufficient because a person that has been offered employment to begin in the future does not have an employer-employee relationship.”  (emphasis added).

Judge DuBose’s ruling in Dawson serves as a cautionary tale that both timing and geography may matter in obtaining enforceable non-compete agreements.  The employer had tried to apply Maryland law (which would have avoided application of Alabama Code § 8-1-1 and the Alabama Supreme Court’s Pitney Bowes decision) and had also tried to distinguish Pitney Bowes using Alabama law.  Neither approach was successful.  It remains to be seen what will happen in this particular case, since litigation is on-going and the employer is seeking an appeal.  For the moment, some “take aways” from the decision are that timing and geography can be critical — there might have been a different result if the employee had signed the non-compete agreement on his “start date” or if the employer been able to have the enforceability of its agreements determined using Maryland (not Alabama) 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.

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.

Liquidated Damages and Non-Competes

In many disputes over non-competition agreements, the litigation focuses on obtaining the temporary restraining order and/or preliminary injunction to stop the competition before the real damage is done.  However, in cases where preliminary injunctive relief cannot be obtained and/or is not appropriate (e.g., because the competition has already taken place and the damage has been already done), the question of what damages were actually caused by the breach of the agreement can be a thorny one.  One possible way around this “thorny” issue, as recently examined by the United States Court of Appeals for the Fifth Circuit, is the inclusion of a liquidated-damages clause.

The non-competition agreement examined by the Fifth Circuit in International Marine, L.L.C. v. Delta Towing, L.L.C., 704 F.3d 350 (5th Cir. 2013), was not an employment non-compete but rather formed part of an agreement for the sale of tugboats.  Delta Towing was in the business of chartering tugboats and sold two of its tugboats to International Marine.  Delta Towing understood that International Marine was looking to purchase the tugboats for “in house use” only and that it would not directly compete with Delta Towing by chartering out tugboats to third parties.  The combined sales price for the two tugboats was $4 million, which, as noted in the district court’s ruling appealed to the Fifth Circuit, represented a significant discount on their fair market value.  However, Delta Towing got something in return for the lower price, namely, International Marine’s agreement that it would not use the tugboats to compete with Delta Towing.  As part of its agreement to purchase the tugboats, International Marine agreed to give Delta Towing the right of first refusal before International Marine could charter its vessels out to third parties.  International Marine’s agreement was backed by a liquidated-damages provision, under which International Marine agreed to pay Delta Towing $250,000 per violation of these non-compete provisions.

Following the sale, Delta Towing discovered, after the fact, that International Marine had been chartering out the tugboats it had purchased and had not informed Delta Towing of these charters such that it could have exercised its contractual right of first refusal.  Delta Towing sued in the United States District Court for the Eastern District of Louisiana, and the district judge ruled that the liquidated-damages provision was enforceable.  International Marine appealed this ruling to the Fifth Circuit, but the Fifth Circuit affirmed, noting the difficulty inherent in calculating damages for breaches of covenants not to compete.  Given this inherent difficulty, the Fifth Circuit determined that the liquidated-damages provisions were “reasonably related” to anticipated damages in this case and that International Marine had failed to show that these provisions provided for an impermissible “penalty.”

So what “take aways” can be made from an agreement for the sale of tugboats, and can these same principles be applied to employment non-competes?  Although “liquidated damages” clauses may be less helpful in the case of an agreement between an employer and employee — in part because a departing employee may lack the financial resources to pay monetary damages — similar provisions are often found in the agreements that staffing agencies and consulting companies enter into with their clients.  For example, a consulting company providing specialized “manpower” to a client may be concerned that the client might decide “to cut out the middleman” by hiring the consulting company’s employees directly.  As a result, the consulting company may require its clients to sign “no hire” agreements backed by a liquidated-damages clause.  In other words, what works for the sale of tugboats may sometimes work for employment-related agreements as well.

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.

Non-Compete Agreements Survive Labor Board Scrutiny — For Now

The National Labor Relations Act (the “NLRA”) has always applied to both unionized and non-unionized workplaces.  However, one of the priorities of President Obama’s appointees to the National Labor Relations Board (the “Board”) has been to maintain the NLRA’s relevance in today’s workplaces.  With union representation at historically low levels, this priority means making sure that the NLRA rights of employees in non-unionized workplaces are being protected.  For example, the Board has made clear that non-unionized employers’ “social media” policies can violate the NLRA — after all, such policies could, in theory, discourage employees from sharing (critical and unkind) thoughts about their employers online.  Likewise, the Board has said that mandatory arbitration agreements may violate the NLRA if such policies do not specifically inform employees of their rights to file unfair labor practice charges with the Board.  As might be expected, the Board’s latest decisions (and even the composition of the Board itself) have been challenged in numerous court cases, so all of this is something of a “moving target.”

Given current trends, it is natural to ask whether non-compete agreements might be next among common employment policies to be scrutinized by the Board.  The answer, for now, is no.  In 2012, the Director of Region 19 (covering parts of the Pacific Northwest) asked the Board’s Office of General Counsel for advice as to whether an insulation-installation company’s mandatory employment agreement — and in particular the non-compete and anti-moonlighting provisions of this agreement– might violate the NLRA.  Apparently, a union (the Heat and Frost Insulators and Asbestos Workers) had been trying to organize at this particular employer for some time.  The concern was whether the employer’s mandatory employment policies could interfere with union “salting.”  (A union “salt” is a job applicant who applies for work at a particular employer for the purpose of organizing the employer and who will, after being hired, try to persuade her co-workers to support the union.)  Because union “salts” may move from one workplace to another (and may also be on the union’s payroll), having an anti-moonlighting policy and a non-compete agreement could, in theory, interfere with “salting.”

The Office of General Counsel answered that, as to the non-compete provisions, these provisions “interfere[d] with employment in general,” but their effect on NLRA rights in particular was “too attenuated” to violate the NLRA.  The Office of General Counsel was, however, a little more skeptical about the anti-moonlighting provisions, especially if there might be evidence that such policies were discriminatorily enforced against union members.  For example, although a consistently-enforced policy barring the hiring of any job applicant currently on the payroll of some other employer (including a union) does not, in itself, violate the NLRA, an employer cannot suddenly adopt an anti-moonlighting policy for the purpose of weeding out union “salts” from other job applicants.  Thus, the Office of General Counsel suggested that the regional office investigate further the employer’s motivation for adopting the anti-moonlighting policy and the history of the employer’s enforcement of its policy.

In conclusion, an anti-moonlighting policy could, if adopted to keep the union out or enforced in a discriminatory fashion against union members, violate the NLRA, but for the moment, straight non-compete agreements have survived Board scrutiny.

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

Litigation Risks From Job Applicants With Non-Compete Agreements

When a job applicant discloses a non-compete agreement with a former employer, the prospective employer may already be aware that, if the applicant is hired, the former employer might sue for “tortious interference.”  However, as two recent decisions by federal courts in Alabama make clear, a prospective employer can also face claims brought by job applicants — especially if a job offer is rescinded or if the proposed employment does not go as planned.

In Jones v. Océ Imagistics, Inc., No. 1:12-cv-163-CG-M, 2012 WL 6014612 (S.D. Ala. Dec. 3, 2012), an employer (Océ Imagistics) allegedly hired an employee (Mr. Jones) knowing that he had a non-compete agreement with a former employer.  Océ Imagistics later terminated Mr. Jones’s employment when the former employer threatened to sue.  Following his termination, Mr. Jones sued Océ Imagistics.

Similarly, in Cochran v. Five Points Temporaries, LLC, — F. Supp.2d —, 2012 WL 5492597 (N.D. Ala. Sept. 28, 2012), an employer (Five Points) hired an employee (Ms. Cochran) who had a non-compete agreement with a former employer.  However, when the former employer filed suit, Five Points did not initially terminate Ms. Cochran’s employment, but instead hired attorneys to defend her.  Notwithstanding, when Five Points stopped paying for the attorneys, Ms. Cochran turned around and sued Five Points.

The employees in Jones and Cochran attempted to bring “misrepresentation” claims based on almost identical statements by the employers.  When Mr. Jones first told his new employer about his non-compete, the new employer allegedly told him that the “Legal Department says that the non-compete agreement is not enforceable.”  Likewise, when Ms. Cochran told her new employer about her non-compete, the new employer allegedly told her that the attorneys said the non-compete agreement was “not worth the paper on which it was written.”  Both courts, however, rejected such “misrepresentation” claims.  Under Alabama law, stating that a non-compete agreement is “not enforceable” does not necessarily misrepresent anything — this is a statement of opinion, not fact.

Unlike the Jones case, though, the Cochran case did not dismiss the employee’s claims in their entirety.  Ms. Cochran also claimed breach of contract, pointing to a document in which her employer had allegedly agreed to pay for her attorneys.  The court found the allegations in Ms. Cochran’s complaint sufficient to state a claim for breach of this alleged contract.

However, Ms. Cochran’s attorneys not only defended her from her former employer’s claims for breach of the non-compete agreement; her attorneys also filed counterclaims on her behalf.  According to the filings in the state court action initiated by the former employer, the countersuit included allegations that the former employer’s president had “grabbed Cochran’s right buttock” at a company Christmas party.  Her new employer did not believe there was any obligation to fund such a countersuit.  Although the litigation between the former employer and Ms. Cochran has since been resolved, her claims against the new employer (Five Points) are still being litigated.  Meanwhile, the relationship was further soured when Five Points subsequently terminated Ms. Cochran’s employment.

As Jones and Cochran both illustrate, too much focus on a non-compete agreement can lead to litigation exposure in other areas.  In Jones, the employer terminated the new hire (so as to avoid non-compete litigation with the former employer) and was sued by the new hire.  In Cochran, the new employer initially stuck by the new hire through funding litigation over alleged misdeeds at the former employer’s Christmas party.  However, the employer in Cochran was sued by the new hire, too.  Employers considering job applicants who have non-compete agreements should keep in mind general employment-law principles and evaluate the risk of claims by job applicants and new hires, as well as the risk of claims by former employers.

Potential Antitrust Implications in Resolving Disputes Over An Employee’s Non-Compete Agreement

Resolving non-compete disputes often involves more than just bringing an employee and her former employer together to reach some agreement; successful resolution may also require the involvement of the employee’s new employer as well. An employer who hires an employee subject to a valid non-compete agreement with a former employer is inviting legal claims by the former employer, including claims for “tortious interference” with contract. The new employer is often named as a co-defendant when a former employer sues the employee for breaching her non-compete. Almost by definition, therefore, when there is litigation between a former employer and a new employer over an employee’s non-compete agreement, this means that there are two competitors involved in the litigation. To resolve such a dispute out of court, an agreement must be reached among competitors. But when two or more competitors sit down and reach an agreement, there exists some risk of anti-competitive effects that could create potential liability under antitrust laws.

One potential antitrust predicament arising out of a dispute over a non-compete agreement can be illustrated by the following hypothetical: Suppose that Acme Widget Company, based in Arizona, has been selling widgets in the Southwest and beyond for 50 years.  As a result of its long track-record and reliable products, Acme Widget has a 90% market share in the Southwestern widget-market, although its market share is lower in the rest of the country (where the demand for widgets is not as great).  Acme Widget’s long-time sales manager, Mr. Wolf, is not sure about Acme Widget’s new business model (which would change the way he sells widgets) and is interested in finding new employment elsewhere.  He learns about a relatively new start-up venture based in Georgia, Coyote Widget Company.  Coyote Widget’s niche is finding customers who have never purchased widgets before, and Coyote Widget has been successfully exploiting the previously-untapped widget-market on the East Coast and in the Southeast.  Coyote Widget does sell widgets to a few customers located in Arizona and does sell to some former customers of Acme Widget.  However, because Coyote Widget’s business model focuses on exploiting previously-untapped markets, Coyote Widget is not particularly interested in selling widgets to Acme Widget’s existing customer-base.

Coyote Widget and Mr. Wolf think that they would be a good fit for one another, but Coyote Widget is concerned about the non-compete agreement that Mr. Wolf entered into with Acme Widget when he became Acme’s sales manager.  Acme Widget, for its part, would just as soon part ways with Mr. Wolf and wants to wish him well in his future endeavors.  Then again, Acme Widget is well aware that Mr. Wolf carries a lot of clout with its established customers and is wary about allowing any other widget-maker ready access to these customers.

The three parties (Acme Widget, Coyote Widget, and Mr. Wolf) remain interested in working out a solution.  At the start of negotiations, Coyote Widget and Mr. Wolf jointly propose that, if Mr. Wolf comes to work for Coyote Widget, he will not contact any customer with whom he worked while at Acme Widget for a two-year period (the term of his non-compete).  Acme Widget likes this proposal but is worried that it could be hard to police and might be subject to cheating.  For example, if one of Mr. Wolf’s former Acme customers contacts him at Coyote Widget, Mr. Wolf could refer him to another salesperson at Coyote Widget.  Mr. Wolf’s referral would likely carry significant weight with the customer, even if Mr. Wolf did not initiate the contact or manage the account himself.  Acme Widget also does not trust Coyote Widget’s representations that its business model is focused on previously-untapped markets and that it is not interested in Acme Widget’s customer-base.  Given Mr. Wolf’s long-time contacts in the industry, Acme Widget is concerned that the temptation could be too great for Coyote Widget; once Mr. Wolf is on staff, it would be too easy for Coyote Widget to start raiding Acme Widget’s customer-base.

However, following several rounds of negotiations, the parties reach what appears to be a solution:  Acme Widget will provide Coyote Widget with a list of customers serviced by Mr. Wolf, and Coyote Widget will agree not to accept business from any customer on this list for the next two years. For good measure, Coyote Widget has also offered to agree not to solicit any new customers in Arizona and has agreed to provide Acme Widget with a list of Coyote Widget’s existing customers in Arizona (a small number in any event). Such an agreement would be easy to enforce — if an Acme Widget customer later moves its account to Coyote Widget, Acme Widget will not have to worry about proving that Mr. Wolf initiated contact with the customer. All that Acme Widget would have to prove is either (i) that the customer moved its account from Acme Widget to Coyote Widget and is listed on Acme Widget’s list or (ii) that the customer is in Arizona and is not on Coyote Widget’s list. From Coyote Widget’s perspective, this agreement has few drawbacks, given Coyote Widget’s focus on the untapped widget-market on the East Coast and in the Southeast.

There is, however, a problem with this solution:  the federal Sherman Act and similar state statutes that may be on the books in states where Acme Widget and Coyote Widget do business. Indeed, whereas many potential antitrust violations are judged under a “rule of reason” analysis (wherein the court will conduct an analysis of potential anti-competitive effects), so-called “horizontal” agreements among competitors to allocate markets may be viewed as per se illegal. The potential antitrust violation in the above hypothetical could subject Acme Widget and Coyote Widget to both criminal and civil liability, and once a per se violation is shown, there are few arguments that either company could make in its defense.  For that matter, given that Acme Widget holds a 90% market share in the Southwestern widget-market and that Coyote Widget is a start-up that has made some inroads (however limited) into this market, this is exactly the sort of scenario that could invite antitrust scrutiny from regulators or from customers unhappy about Acme Widget’s high prices.

In conclusion, employers seeking to resolve disputes about non-compete agreements should be aware of other legal risks and exposures, including antitrust laws.  Too much focus on the non-compete agreement in dispute can sometimes lead to even greater exposures in other areas.

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

Alabama Supreme Court Reverses Overly-Broad Injunction Prohibiting Competition Among Defense Contractors

Earlier this year, the Alabama Supreme Court reversed a preliminary injunction entered by the trial court in a case involving competing defense contractors at the Redstone Arsenal in Huntsville. See Monte Sano Research Corp. v. Kratos Defense & Securities Solutions, Inc., — So. 3d —, 2012 WL 1890693 (Ala. May 25, 2012).  The underlying litigation remains on-going, but the Alabama Supreme Court’s ruling can provide insight for those involved in non-compete litigation in Alabama courts or in non-compete disputes involving government contracts.

By way of background to Monte Sano, the U.S. government awards certain defense contracts (in this case, “Army Aviation and Missile Command Express” contracts) via multi-year “blanket purchase agreements” awarded to “prime contractors” in four different “domains”:  (i) logistics, (ii) programmatic, (iii) technical, and (iv) business and analytical.  In 2005, the Army awarded one such blanket purchase agreement in the technical domain to Computer Science Corporation (“CSC”), who thus became a prime contractor for certain work to be performed at the Redstone Arsenal.  One of the plaintiffs in Monte Sano, Kratos Defense & Securities Solutions, Inc. (“Kratos”), via a predecessor corporation, was part of CSC’s team (i.e., a potential sub-contractor) in obtaining this blanket purchase agreement for the technical domain.  However, simply being a member of the team does not guarantee that individual tasks will be awarded to a particular sub-contractor; additional bidding is involved at the task level.

In Monte Sano, two of the defendants, Steven Thornton and Steven Teague, previously worked for Plaintiff Kratos.  Thornton and Teague both left employment with Kratos in 2011 to work for defendant Monte Sano Research Corp. (“MSRC”).  MSRC was formed in 2009 and was allegedly partially owned by Teague (but not Thornton) at the time of its formation.  Prior to the departure of Thornton and Teague, CSC had entered into various sub-contracts with both Kratos and MSRC to perform work for a “task” under its “blanket purchase agreement” for the “technical” domain at the Redstone Arsenal.   Upon the departure of Thornton and Teague, Kratos immediately filed suit against MSRC, Thornton, and Teague, and obtained from the trial court a preliminary injunction prohibiting MSRC, Thornton, and Teague from procuring work from any “prime contractor” at the Redstone Arsenal.

Notably, although Thornton and Teague had previously entered into non-competition agreements with Kratos, these agreements were of limited duration and expired at the end of 2010.  As such, there were no explicit non-competition agreements in force when Thornton and Teague left Kratos’s employment.  There were, however, more generalized provisions in Kratos’s employee handbook regarding the duty to maintain confidential information and not to solicit Kratos’s employees or otherwise encourage employees to leave Kratos’s employment.  The handbook provisions regarding the duty to maintain confidential information had no time limit, and the duty not to encourage other Kratos employees to leave purported to last one-year beyond the end of employment.  Moreover, in Monte Sano, Kratos alleged that Teague had arranged lunches in which Kratos employees were informed of new opportunities with MSRC.  In bringing claims against Thornton and Teague, Kratos alleged that they had (i) breached their duties of loyalty and their fiduciary duties; (ii) tortiously interfered with Kratos’s contractual relations with the “prime contractor” CSC; and (iii) breached their contractual obligations as set out in Kratos’s employee handbook and elsewhere.  Kratos also brought tortious interference claims against MSRC.

The Alabama Supreme Court, however, reversed the preliminary injunction, noting that the injunction was overly broad because it prohibited MSRC from performing work for any prime contractor at the Redstone Arsenal, in any domain, and not just the technical domain implicated by Kratos’s contract with CSC.  (The evidence in this case showed that MSRC had also been negotiating with prime contractors, other than CSC, in other domains.)  The Alabama Supreme Court also noted that the trial court’s injunction order did not comply with Rule 65(d)(2) of the Alabama Rules of Civil Procedure because it did not provide specific reasons for its decision and did not address why Kratos did not have an adequate remedy at law.  In a concurring opinion, Justice Murdock noted that, because the preliminary injunction would have prevented MSRC from performing its sub-contract with CSC, CSC should also have been named as a party to the litigation.

As to “take aways” from the Monte Sano decision, the Alabama Supreme Court’s holding demonstrates the importance of having written non-competition agreements, such that employers faced with departing employees are not forced to rely on more generalized duties of loyalty and more generalized handbook provisions.  Monte Sano also emphasizes the risks of bringing “tortious interference” claims against a competitor who hires away employees when such claims are not supported by non-competition agreements with specific employees.

This said, the fact that the Monte Sano litigation made it as far it did (and is still on-going) shows that employers without explicit non-competition agreements are not without hope.  Had the preliminary injunction in Monte Sano been limited to the technical domain work covered by Kratos’s contracts with CSC, the Alabama Supreme Court’s decision might have been different, even in the absence of a non-competition agreement.  Thus, perhaps the biggest take away from Monte Sano is that it helps to be specific (and not over-reach), whether in drafting a non-competition agreement at the outset of employment or in seeking relief from a court after a competitor has hired away a key employee. For more clarification on the topic of non-compete agreements and clauses, please contact one of the Burr & Forman team members for assistance.

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.