Halloween Scares and Non-Compete Agreements

Halloween is always a great time for adults and children. Just think about it, for at least one night we intentionally abandon every notion we teach our children about taking candy from strangers, not acting deceptively, not scaring people unnecessarily and otherwise not acting like little hellions. Indeed, we encourage the opposite. Scary little monsters will roam my neighborhood seeking free candy from strangers who often try to frighten them. Under the pretense of nonchalance, parents will watchfully keep a respectful distance from all front doors as their children boldly explore what an unknown witch or werewolf might hand out as “trick” or “treat.”

And so it goes this season all around our great nation.

And so it goes in many an employment agreement as well. Many of our clients require their employees to execute a non-competition agreement as part of their continued employment. While not all states favor agreements that restrain trade (some essentially disallow non-competition agreements altogether), Florida has detailed statutes spelling out the requirements of a valid non-competition agreement and many cases considering the issue to help all parties involved determine how best to deal with a departing employee.

What remains unclear is whether or not the non-competition agreement in force is a “trick” or a “treat” to either the former employer or to the former employee, or to neither. The answer is that it depends on the circumstances. Florida law recognizes that under certain circumstances an employer has the right to protect its trade secrets, its customers and its remaining employees from the competition of departing employees. While this sounds as if it solely favors the former employer, under many circumstances the situation is ̶ to keep with the theme ̶ more tricky. Often the customers whom the former employer seeks to insulate prefer to continue to work with the former employee. We’ve seen circumstances where customers of the former employer actually pull their business because the former employer has initiated legal action against a former employee pursuant to a seemingly enforceable non-competition agreement.

So what is an employer to do? Remember Halloween. Even when it’s seemingly okay to “trick,” sometimes it’s better to offer a “treat.” In a recent matter, the former employer had a stock repurchase agreement in force for departing officers and managers. The repurchase agreement had a formula that discounted the share value for departing employees. The former employer also informed the departing employee that it intended to enforce the (rather restrictive) non-competition agreement. However, when the former employers’ customers complained about losing the person with whom they had forged a professional relationship, the former employer opted to enter into a consulting agreement with the departing employee rather than to initiate a lawsuit. The benefits of this were many and obvious. First, the former employer could mollify its customer and maintain continuity on the job. However additional benefits also resulted. For one, the former employer could both keep tabs on the former employee (and its customers) and at the same time profit from the continued relationship. A supplemental benefit was that it made any violation of the parties’ agreement other than through the consulting agreement seem all-the-more egregious. In that way, if the matter ever made its way to a courtroom, at least the former employer could argue that it took every possible step to act reasonably.

You might find yourself in a circumstance when there are better business alternatives available than simply initiating litigation to enforce a non-competition agreement. Even though it’s the Halloween season, don’t be scared. At Burr & Forman we have lawyers in offices throughout the Southeast that are experienced with these issues and able to advise you in even the most scary situation.

Be Careful What You Ask for: Selecting Forums for Arbitration

On October 2, 2014, the United States Court of Appeals for the Eleventh Circuit rendered its decision in Inetianbor v. CashCall, Inc. A copy of the slip opinion can be found here. Although this case did not involve a non-compete agreement, the Eleventh Circuit’s guidance regarding contractual arbitration provisions may have implications for those drafting and litigating non-competes.

The arbitration clause at issue in Inetianbor was a bit unusual (at least as to the specified forum), but the underlying dispute between the parties was not out of the ordinary. The plaintiff, Mr. Inetianbor, was a Florida resident who borrowed money from Western Sky Financial, LLC. The defendant CashCall, Inc. serviced this loan. Mr. Inetianbor sued the servicer in a Florida court, alleging, among other things, violations of the Fair Credit Reporting Act. After removing the case to a federal court, the servicer then moved to compel arbitration of the dispute pursuant to the terms of Mr. Inetianbor’s loan agreement with Western Sky. This loan agreement contained the following arbitration provision: “You agree that any Dispute … will be resolved by Arbitration, which shall be conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative ….

After the trial court initially compelled arbitration in accordance with this provision, Mr. Inetianbor contacted the Tribe in Eagle Butte, South Dakota. In response, Mr. Inetianbor received a letter from a Tribal Judge stating that the Tribe “does not authorize Arbitration,” but after some back-and-forth, a Tribal Elder was eventually chosen to arbitrate Mr. Inetianbor’s dispute. However, at the preliminary arbitration hearing, the arbitrator explained that “this is a private business deal” and that “[t]he Tribe has nothing to do with any of this business.” When Mr. Inetianbor brought the arbitrator’s statements to the attention of the trial court in Florida, the court was persuaded to reconsider its previous orders compelling arbitration.

The trial court determined that it was not possible to conduct an arbitration in accordance with the parties’ agreement, because the arbitration was not being conducted by an “authorized representative” of the Tribe. On appeal, the Eleventh Circuit affirmed the trial court’s decision. The dispute between Mr. Inetianbor and his loan servicer will now be resolved through judicial proceedings, not through arbitration.

So what does this mean for non-compete agreements? It is probably fair to say that most practitioners have never encountered a non-compete agreement specifying resolution of disputes through arbitration conducted by the Cheyenne River Sioux Tribal Nation. However, employment contracts sometimes contain both non-compete provisions and arbitration provisions. As an initial matter, such arbitration provisions may add additional steps to the process of obtaining injunctive relief from a court when an employer seeks to enforce its non-compete provisions. This said, when the arbitration provisions are enforceable, it is the arbitrator — and not a court — who will ultimately determine the scope and application of the non-compete provisions. The Eleventh Circuit’s decision in Inetianbor underscores the need to pay attention to the forum(s) specified for arbitration when drafting or litigating non-compete clauses subject to arbitration.

Derek Jeter Retires: Can He Compete?

For two decades Yankees fans and baseball aficionados everywhere have reveled in Derek Jeter’s statesmanship and poise. Jeter exemplified leadership. Despite having played alongside several teammates embroiled in controversy, Jeter remained above the fray. He spoke with his bat. He spoke with his glove. His ability to keep his tongue spoke loudly enough for all to hear. He was, as all baseball fans know, a fierce competitor. Yankees fans around the globe imagine a day when Jeter might return to the organization. Will he coach? Will he manage? Will he run the front office?

Jeter is not the first employee to retire after years of dedicated and valuable service. Nor is Derek Jeter a typical employee.   If a professional baseball team offered Derek Jeter the job of Manager ̶ any baseball team ̶ Yankees fans would likely collectively say “Good for you, Captain.”

This author is unaware of any instance in which a retiring baseball player was subject to a non-competition agreement. However not all successful retiring employees in Florida face as easy a path to continued success. Readers of this blog are well aware that under defined circumstances Florida law allows employers and employees to negotiate non-competition agreements that can restrict for a limited period of time the former employee’s future employment. Under Florida law, an employer and its employee can agree on future restrictions pertaining to location, specialty and time period. An employer and its employee can agree on what information constitutes a trade secret and on limitations to the former employee’s use of the employer’s trade secrets.

Can you imagine the trade secrets an athlete like Derek Jeter must possess? Insight on the various pitchers throughout the league could prove invaluable to a Yankees competitor. Jeter’s insight into the Yankees organization itself could prove invaluable to a Yankees competitor. Sure, professionals throughout baseball command high salaries to possess just such insight.   Professional scouts abound. Each Manager is aware of the characteristics of nearly every other player in the league. And yet how many of them has faced a 97 MPH fastball and deftly flicked it into right field with a runner in scoring position to win the game?

It’s true, an employer and employee in Florida can agree on limitations to the employee’s future employment upon his or her departure from a current job. If you’re subject to non-competition agreement in Florida and are restricted from working in your chosen field for a period of time, you need not panic. Rumor has it that a job is now available in the Bronx. The Yankees need a shortstop.

On the other hand, if you lack that particular talent and need legal advice on Florida non-competition agreements, make sure you call an attorney experienced in this area of the law. At Burr & Forman we have attorneys in nine offices throughout the Southeast experienced in dealing with these issues. And yes, Derek, we also need a shortstop…

Georgia Court of Appeals Provides Ammunition for Saving Unenforceable Non-Competes

In the World War II epic Saving Private Ryan, Tom Hanks and his platoon of grunts cross dangerous enemy territory to rescue an American soldier before he becomes the fourth member of his family to be a casualty of the Big One.  In similar fashion, a trial court and a Georgia Court of Appeals panel in Fab’rik Boutique, Inc. v. Shops Around Lenox, Inc., 2014 Ga. App. LEXIS 612 (Ga. Ct. App. Sept. 8, 2014), led by Judge McFadden, recently marched through 40-plus years of hostile Georgia non-compete law to save an equally vulnerable restrictive covenant.

If you’ve been paying attention to this Blog or Georgia non-compete law in general, you know that May 11, 2011, is Liberation Day for Georgia restrictive covenants.  Following the enactment of Georgia’s  new non-compete statute, O.C.G.A. §13-8-50, et seq., restrictive covenants in agreements executed on or after May 11, 2011, were freed from the often draconian constraints of the prior body of case law governing, and usually dooming, Georgia non-compete agreements.  Of most significance, the new law allows a Court to blue-pencil (or modify, for you non-lawyers out there) an overbroad covenant so that it can be reasonable and thus enforceable.  Agreements that pre-date Non-compete Liberation Day, however, must strictly comply with the applicable body of case law or else be deemed not worth the paper they’re written on.  Decisions from state and Federal courts following the enactment of the new statute made it clear that they understood that Georgia non-compete law now existed in two parallel but supremely disparate dimensions — a litigant seeking to enforce a post-May 11, 2011 restrictive covenant could expect a benevolent jurist with a newly-sharpened blue-pencil eager to assist the over-zealous drafter of the non-compete by softening the effect of the over-reaching contractual language.  For those non-compete plaintiffs with a an older covenant, however, the judge’s ruling would likely continue to be as deadly as the bible-quoting sniper in Tom Hanks’ platoon.

InFab’rik,the Court of Appeals construed a restrictive covenant in a lease that prohibited the tenant, a women’s clothing boutique, from opening or operating “another store” within five miles of the leased premises.  Read literally, the clause would prevent the tenant’s owners from opening up an ice cream shop or hardware store in the restricted area, even though such uses would not be competitive with the tenant’s clothing store in the landlord’s retail center.  The tenant argued that under the pre-2011 strict scrutiny to be applied by Courts to restrictive covenants, the provision was grossly overbroad as drafted and thus unenforceable.

If I were a gambling man, I would have put my money on the tenant in succeeding in this argument, having seen many a similarly vague restrictive covenant felled by the prior body of employee-friendly non-compete law. I’m glad Vegas doesn’t take odds on appellate cases, however, because my wallet would be a little lighter today.  The Court of Appeals, recognizing that it could not use the new statute to blue-pencil the covenant, instead applied the rules of contract construction to narrow what it deemed to be an ambiguous phrase and held that, following such judicial construction, the covenant was reasonable and enforceable against the tenant.  In rationalizing its decision, the Court said that “the application of the rules of contract construction, and not the ‘blue pencil’ method, resolve any ambiguity in the lease.” Id. at *7.  It would be interesting to see how many of the legions of unenforceable non-competes from past opinions could be saved in similar fashion, but alas, that is an endeavor well-beyond the scope of this casual blog post.

BURR POINT:  The prevailing thought among non-compete lawyers In Georgia has been that pre-May 11, 2011 non-compete agreements would not receive any benefit of the change in public policy towards restrictive covenants heralded by the 2011 statute.  The most recent Court of Appeals case on the issue perhaps signals that there may yet be hope for Private Ryan-like older non-compete agreements under attack by a barrage of unfriendly pre-statutory case law.

Joan Rivers and Non-Competition Agreements: Can We Talk?

Sadly, Joan Rivers ̶ the famous comedienne who was perhaps best known for sitting down with celebrities and asking “can we talk?” ̶ died recently at the age of 81. Ms. Rivers’ self-deprecating nature and ability to use laughter to put people either at ease or to otherwise coerce them to divulge information often resulted in her getting the scoop. This unique ability allowed her to remain popular and visible for decades. And how, you might ask, does Ms. Rivers’ story relate at all to Florida non-competition agreements? To borrow a phrase: let’s talk.

If you have followed this blog (or merely happened upon it through an internet search) you likely already know that under Florida law the legal bases for non-competition agreements are found in the statutes under the name “Valid Restraints of Trade.” After all, that is exactly what a non-competition agreement does: it restricts, for a defined period, a former employee from working in a field that might compete with the former employer. The result is a “restraint of trade,” which is to say an obvious restriction on the future employment of the former employee. If drafted properly, a non-competition agreement is legally enforceable against the former employee. The question is: Does it always make sense for a company to litigate a potential violation of an otherwise valid non-competition agreement?

This is certainly a topic worthy of serious discussion. Courts strictly enforce non-competition agreements. When interpreting any ambiguities within these agreements, courts are also compelled to reach an interpretation that favors the former employee’s right to unrestricted work. This is an important factor to consider, because almost all non-competition agreements include a provision for the prevailing party in any enforcement action to have the losing party pay its attorneys’ fees and costs. As a result, what might look like a very strong case for a company against a former employee for violation of a non-competition agreement can turn into a prolonged and expensive battle over potential ambiguities in the agreement.

And now the benefit of talking: Ask yourself why your company wanted its employees to execute a written non-competition agreement. Did the employee’s potential departure pose a unique business risk to your company? Ask yourself what exactly it is you want to protect. Is there a specific trade secret at risk? Is there a client relationship at risk? If the overarching reason for the non-competition agreement is a client relationship, then consider whether the client will react positively to knowledge that your company initiated an action to enforce its non-competition agreement, thus potentially keeping the client from working with someone familiar? Once you answer these and any other relevant questions regarding the need and origin of your non-competition agreement, ask yourself one more. Ask yourself: “What is in the best interests of my company right now?” If, after consulting with your legal counsel and the company decision-makers, you remain confident that the best strategy is to quickly file an enforcement action, then the best thing to do is to secure competent counsel and to work with counsel to immediately set a company budget line-item specifically intended to fund the effort. On the other hand, sometimes the best thing about having your employees execute a valid non-competition agreement is your ability to negotiate a reasonable pay-out at the time of the employee’s departure. If you decide to negotiate instead of seeking to enforce, then the manner in which your company can benefit is often limitless. This is also the time when you can exercise an extreme amount of corporate creativity. Will a simple cash pay-out accommodate whatever pecuniary loss your company anticipates with the employee’s departure? Will your company benefit from entering into a joint venture agreement with the departing employee (presumably on favorable terms)? Is there a realistic opportunity to protect existing client relationships in the absence of the former employee? What is the value to the former employee to continue to work with your company’s (otherwise restricted) clients and contacts? In other words, talk it out within the company. You might discover that early interventional negotiation you will better serve the company’s overall goals than an often-unpredictable legal battle.

And so, back to Joan Rivers, sometimes it’s best to ask: “Can we talk?” Litigating a non-competition claim certainly sends a message to all departing employees that the company is willing to seek strict enforcement of its employer/employee agreements. It’s just not always your company’s best legal strategy.

This blog ends, like most others in this series, with some advice. When it comes to a decision of how to enforce a non-competition agreement, to drafting an enforceable non-competition agreement, or to litigating over the validity of a non-competition agreement, it’s necessary to arm your company with competent legal counsel experienced in these matters. At Burr & Forman we have experienced attorneys throughout the Southeast ready to address your questions and concerns.

The World Cup of Non-Competes

Can you imagine if FIFA allowed or enforced non-compete agreements that limited the ability of a player to hold dual citizenship and play for either country?  Would the World Cup have suffered if brothers representing Ghana and Germany had to choose allegiance to only one nation rather than play against one another as respectful opponents?  For that matter, would the United States have survived the “Group of Death” and advanced to the knockout round if not for the array of talented “American” players who grew up in Germany, speaking German.  Whether or not the inclusion of these players aided America’s unquestionable success in this worldwide soccer feast (in case you’ve somehow avoided the news media for the last month, the answer is that “yes, these players were incredible assets for the US team”), you cannot deny that without the ability to utilize the best available talent, it’s difficult to put the best team on the field.

Which brings us to non-compete agreements in Florida.  If you follow this blog, then you already know that Florida law specifically allows employers and employees to enter non-competition agreements under circumstances set forth in Florida’s statutes.  As we’ve discussed many times, the more significant the employee is to the continued operational success of the business she intends to leave, the more restrictive a covenant not to compete she can expect. To continue the sports analogies, it’s a little bit like a no-trade clause in the contract of a professional athlete.  An athlete can leave a team at any time.  It’s just that the athlete cannot leave one team at his/her whim and join a competitor unless the contract allows it.

On the other hand, just like in professional sports, sometimes it’s better to renegotiate a contract than to fight over whether or not an employee is able to leave when an alternate opportunity calls.  In a recent matter, for instance, we represented a corporation that had hired an employee allegedly subject to non-compete agreement.  Our client testified under oath that it was completely unaware of the alleged non-compete agreement at the time of the hiring and terminated the new salesman almost immediately after the former employer filed the lawsuit (which was the first notice of the existence of the alleged non-compete agreement).  Despite the almost-immediate termination, the plaintiff continued the lawsuit against my client.  Instead of seeking an injunction, the lawsuit focused on alleged violation of trade secrets the short-term employee allegedly transferred.  After the parties endured a year of litigation, the matter settled.  Both parties might now agree that reaching an agreement earlier might have saved everyone involved significant time and resources.

Brazil hosted a splendid World Cup.  Its team advanced to the semi-finals until it ran into an indomitable German squad playing at its peak.  As an American soccer fan, it’s nice to know that as long as the rules remain the same, America’s team can benefit from the training some of our best players received in Germany.  As sports professionals, many of those players will join new teams, usually after the transferee team pays a considerable fee.  In the landscape of Florida non-compete agreements, things aren’t always as clear-cut.  When you’re faced with a non-compete question that can affect your business, be sure to consult with an attorney knowledgeable in that area of the law.  Burr & Forman LLP has nine offices in five states throughout the Southeast and a large team of professionals with non-compete experience.

My Non-Compete, Your Salary: Words of Caution for Business Owners and Employees

Without the ability to enforce it, a non-competition agreement can turn worthless, or ˗ perhaps far worse ˗ extremely expensive for an employer whose chooses to file litigation against a former employee.  One area that can turn tricky is the nuanced difference between a “dependent covenant” and an “independent covenant.”  Why does this even matter?  A recent Florida decision sheds some light on this issue.

In a scenario that will surprise no one who follows this blog, this story involves two high-level employees who left their former employer to start their own competing business.  Their employment agreements contained identical non-compete language.  (The differences in the agreements generally dealt with compensation.)  When the employees left to form a competing tower business, the former employer filed a multi-count complaint against them seeking an injunction, enforcement of the non-compete agreements, and damages.  The individuals and their newly-formed company filed a counterclaim seeking, among other things, a determination that the former employer’s prior breaches of the employment agreement (specifically, whether or not the former employer had properly compensated them during their tenure) rendered the non-competition agreement unenforceable.  (Richland Towers, Inc. and Richland Towers, LLC v. Tall Tower Ventures, LLC, et al., Fla. 2nd DCA, March 2014.)

Generally, under Florida law, when an agreement has several components and a variety of obligations from one party to another, one party’s breach of the agreement can cause the entire contractual relationship to terminate.  The logical argument, therefore, is that an employer’s breach of an employment agreement can result in the termination of the employment agreement.  To carry the logic of this argument one step farther: if the employer terminates the employment agreement, then under certain circumstances the employer would lose its ability to enforce the non-competition agreement against its former employee.  Makes sense, right?

As it turns out, whether or not the non-competition agreement remains enforceable is a matter of whether or not the former employer’s alleged breach was a dependent covenant or an independent covenant.  What’s the difference?  Well, for one thing, when a party breaches a dependent covenant “the entire contract is virtually destroyed.”  (See Steak House, Inc. v. Barnett, Fla. 1953)

Whether or not a covenant is dependent or independent is a legal question reserved for the court.  The general rule in Florida presumes dependent covenants.  That is to say, the entire contract is dependent on parties following each of the contract’s terms.  However, Florida law is also flexible in allowing parties to enter an enforceable contract that excludes this general interpretation.  In the Richland Towers matter mentioned earlier, the employment agreements contained “an explicit expression of a contrary intention.”  In fact, the non-competition agreement actually contained a paragraph entitled “Covenants Independent” that stated that “each restrictive covenant” was “independent of any other covenant or provision” of the agreement.

In the Richland Towers matter, the trial court denied the employer’s motion for the Court to enter a temporary injunction, and determined that because the former employer had not properly paid bonuses, the contractual non-competition agreement was unenforceable.  The appellate court reversed.  Based on the “Covenants Independent” paragraph discussed above, the appellate court found that ˗ whether or not the former employer properly paid bonuses ˗ the fact that the parties had contractually agreed that the restrictive covenants and non-competition agreements were “independent covenants” rendered them enforceable.

And the moral of the story is:  be careful out there.  In this case, the inclusion of a “Covenants Independent” clause allowed a former employer to retain the right to seek an injunction against former employees trying to compete within the same markets.  Without that clause, the allegation that the former employer failed to properly pay bonuses may have also led to the unenforceability of the non-competition agreement to which the employees freely agreed.  The scenarios can get complicated, and the litigation that results from these situations can put a financial burden on all parties involved.  Bottom line: if you need advice on how to draft your non-competition agreement, or with an issue attempting to enforce your non-competition agreement, be sure to seek legal advice from a professional familiar with this area of the law.

Burr & Forman LLP has offices throughout the Southeast with attorneys very familiar with these issues.

Peter Vilmos, is a Partner in Burr & Forman LLP’s Orlando office.

No Non-Compete = Public Ridicule?

We all know that a well-drafted non-compete agreement is necessary to protect a company’s customer relationships and confidential information when an executive jumps ship.  What you might not have considered is that an employment agreement with inadequate post-termination restrictions might subject a company to criticism by shareholders or others.  In the instance described in a piece in The Globe and Mail (Vancouver), an executive compensation expert blasts the B.C. Lottery Corporation for failing to limit the post-employment activities of the former CEO of the lottery, who moved from what is described as a “highly sensitive” government position to a private company developing a Vancouver gambling casino.

In his criticism, the expert, Professor Michael Graydon, called the CEO’s agreement “poorly drafted and negotiated” and a “failure on the part of the  . . . board of directors.”  The agreement was only 3 ½ pages with a “bunch of holes” and, according to Mr. Graydon, did not contain a non-compete clause, as he thought it should have.  For its part, the lottery company responded that its standards of ethical business conduct, to which the CEO was bound,  provided sufficient protection.

BURR POINT:  Failing to adequately restrict an executive’s post-employment competitive activities is bad business, but it also might result in bad publicity.

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.

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.