Is A Licensed Securities Dealer A “Professional” Under Alabama Law Prohibiting Enforcement of Nonsolicitation Agreements Against Professionals?

The Alabama Court of Civil Appeals released a slip opinion on May 16, 2014 addressing enforcement of a nonsolicitation agreement against a licensed securities broker.  See G.L.S. & Associates, Inc., and G.L. Smith & Associates, Inc. v. Keith Rogers, No. 2130322 (Ala. Civ. App. May 16, 2014) (Slip Opinion).  The defendant (Rogers) worked for a securities firm (GLSA) and had an employment agreement that contained a nonsolicitation provision which prohibited Rogers from soliciting GLSA’s clients for a period of two years after termination of employment.  Rogers resigned from his employment in January 2013.  Thereafter, GLSA filed a complaint against Rogers, attaching the employment agreement to the complaint, and arguing that Rogers had solicited GLSA’s clients in violation of the agreement.

At the trial court level, Rogers moved to dismiss the complaint under Rule 12(b)(6) for failure to state a claim, averring that he was a “professional” and therefore the nonsolicitation provisions were unenforceable under Alabama law, in particular, Section 8-1-1 of the Alabama Code and the factors for determining whether an occupation is a “profession” as set out by the Alabama Supreme Court in Friddle v. Raymond, 575 So. 2d 1038, 1039 (Ala. 1991) (factors are “professional training, skill, and experience required to perform certain services;  delicate nature of the services offered; and the ability and need to make instantaneous decisions”) (citing Odess v. Taylor, 211 So. 2d 805 (Ala. 1968)).

To read the rest of this article and others on securities litigation, please visit the Burr & Forman Securities Litigation & Arbitration blog.

Be Wary of Illinois Choice of Law Provisions in Non-Compete Agreements

Although this blog focuses on non-compete law in the Southeastern states, we often run into Chicago-based clients whose form non-compete agreements contain provisions requiring the contracts to be construed under Illinois law, even though the employees bound by the agreements are located in the Southeast.  A recent Illinois appellate decision, however, should make employers and practitioners think twice before voluntarily invoking Illinois law on non-competes.

In Fifield and Enterprise Financial Group, Inc. v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327, 2013 Ill. App. LEXIS 424 (June 24, 2013), the Illinois Appellate Court, First Division, held that non-solicitation and non-competition covenants were unenforceable where the employee resigned after being employed for slightly longer than three months.  The Court found that the restrictive covenants in the employee’s agreement were not supported by adequate consideration, and therefore could not be enforced, because “Illinois courts have repeatedly held that there must be at least two years or more of continued employment to constitute adequate consideration in support of a restrictive covenant.” Id., at *14.  It appears that the only way around this two-year requirement under Illinois law is to have separate, adequate consideration for the non-compete covenants, such as a promise of guaranteed employment for a specified term or an adequate payment solely for the covenants.

In contrast, Georgia courts have long held that merely the promise of new or continued at-will employment is sufficient consideration for a non-compete agreement, with no requirement for a minimum duration of employment before the non-compete will be enforceable.  See Breed v. Nat. Credit Assn., 211 Ga. 629, 631-33, 88 S.E.2d 15 (1955).

BURR POINT:  Employers in the Southeast should consult with an attorney well-versed in non-compete law to ensure that the choice-of-law provisions in their employment agreements are not unnecessarily reducing the chances of having the non-compete provisions enforced, especially if their agreements have Illinois law as controlling.

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.

Mass-Mailing To Public Employees Did Not Violate Non-Solicitation Agreement

A Florida court recently held a former employee’s “mass-mailing” to her former employer’s customers did not violate her non-solicitation agreement.  In Variable Annuity Life Insurance Co. v. Laeng, Docket No. 8:12-cv-2280-T-33MAP (M.D. Fla. Feb. 11, 2013), the employer, VALIC, marketed financial services to tax exempt organizations.  As a condition of her employment, the employee, Laeng, executed a “Registered Representative Agreement” under which the she promised to not use or disclose VALIC’s trade secrets and confidential and proprietary information at any time.  Laeng also agreed to not solicit VALIC’s customers for one year after leaving her employment.  However, Laeng was not prevented from competing with VALIC.

After leaving VALIC, Laeng began working at LPL Financial, VALIC’s direct competitor.  Laeng sent a mass-mail solicitation to employees of two local school districts.  The mass-mailing included VALIC’s customers to whom Laeng was assigned.

VALIC filed suit and a motion for a preliminary injunction alleging Laeng violated her agreements to not disclose VALIC’s confidential information, including its customer lists, and to not solicit VALIC’s customers.  VALIC asserted Laeng’s actions resulted in a loss of more than $629,113.32.

The court denied VALIC’s motion for a preliminary injunction on the grounds there was not a substantial likelihood VALIC would succeed on the merits of its case.  Other than its suspicions, VALIC presented no evidence that Laeng took or used any confidential information. Significantly, the court found that even though Laeng’s mass-mailing included VALIC’s customers, the customer information was not unique to VALIC.  Rather, the customers were public employees of local school districts whose identities were publicly available upon request.  The court found Laeng’s mass-mailing was achievable without the use of VALIC’s confidential customer information.

The court did not discuss Laeng’s non-solicitation agreement which, on its face, would prevent Laeng from soliciting VALIC’s customers regardless of how the customer information was obtained.  Rather, the court focused on the fact that the customer information was publicly available.  Hence, the court’s ruling could be read to support the position that a former employee does not violate her non-solicitation agreement when the employer’s customer information is not confidential.

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 Computer Fraud and Abuse Act, and Protecting Employer’s Electronic Data

The Southern District of New York recently joined a number of other jurisdictions in foreclosing one avenue of recovery for employers seeking to recover against employees who steal company information for competitors.  In Advanced Aerofoil Technologies, AG v. Todaro,  2013 WL 410873 (S.D.N.Y. Jan. 30, 2013), the court ruled that the Computer Fraud and Abuse Act’s private right of action does not extend to cover employees’ theft of information when it is stolen using channels of access that are authorized.  In doing so, the Southern District joined the Eastern District of New York and the Ninth Circuit in a narrow reading of the statute, while citing opposing holdings out of the First, Seventh, Fifth, and even other courts in the Southern District, which would give the CFAA a more expansive reading.

In Advanced Aerofoil Technologies, the plaintiff company Advanced Aerofoil Technologies (AAT) sued a number of defendants for procuring customer lists and proprietary information and funneling the information to their own new competing venture.  The list of defendants included former employees of AAT who allegedly used their unfettered access to divert clients and investors toward a new company that they formed while still employed.  According to the plaintiff’s summary judgment brief, the defendants continued their employment after the secret formation of their new company for the purpose of collecting information, and deleted entire swaths of information upon their departure in order to cripple AAT.  AAT brought a private suit (allowed under 18 U.S.C. § 1030(g)), citing violations of 18 U.S.C. § 1030(a).  Nevertheless, the court ruled that the language of this section of the statute hinges on subsection (a)(2), which disallows the intentional accessing of a computer without authorization to obtain information with the intent to defraud.  Because the defendant employees in AAT had “unlimited and unfettered access,” by definition they could not have exceeded their authorization.  The court therefore held that there was no violation of the CFAA, and dismissed the case.

What can employers take away from this case?  Simply this: that by carefully defining “authorized use” in personnel policies, employers may give courts that are reluctant to broaden the CFAA a reason to side with them in cases of blatant employee theft.

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

Live Events Agency Sues Former Employees And Independent Contractor For Breach Of Non-Solicitation Agreements

On March 18, 2013, TBA Global, LLC, a live events market and communications agency, sued LEO Events, LLC and several of its owners for breach of non-solicitation agreements and misappropriation of TBA’s trade secrets and confidential information.  TBA claims LEO’s owners are using confidential information they gained while working for TBA to solicit TBA’s clients, including Walmart and Exxon.  A copy of TBA’s complaint can be found here.

According to TBA’s complaint, LEO was created by two former TBA senior vice presidents and a former TBA independent contractor to directly compete with TBA.  TBA also contends LEO’s owners are using information and skills they gained from TBA, including customer information and relationships and specialized training, to solicit TBA’s customers.

Since forming LEO, TBA alleges, LEO’s owners have actively solicited TBA’s clients and/or prospective clients for the purpose of developing business relationships for themselves and LEO.  TBA contends, however, that LEO’s owners are bound by two-year non-solicitation agreements which prohibit them from directly or indirectly communicating with TBA’s clients or pursuing business relationships with them.  Further, the agreements prohibit LEO’s owners from utilizing TBA’s trade secrets and confidential information to compete with TBA.

TBA has also petitioned the court for a temporary restraining order and preliminary injunction to prohibit LEO and its owners from violating their non-solicitation agreements.  A copy of the TBA’s motion can be found here.  The court denied TBA’s motion for a temporary restraining order and set TBA’s preliminary injunction motion for a hearing.

We will follow-up on this post as the TBA suit unfolds.

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.

DuPont Wins the Battle Over Kevlar . . . But Has It Won the War?

After being slammed with a verdict of $919.9 million against it in September 2011, South Korean-based Kolon Industries suffered its second whammy in August when the United States District Court for the Eastern District of Virginia enjoined it from production of its Heracron aramid fiber line, a competitor to DuPont’s Kevlar aramid fiber line, on the basis of misappropriation of DuPont’s trade secrets.

The District Court’s rulings were the products of litigation instituted by DuPont against Kolon in February 2009, wherein DuPont alleged that Kolon stole trade secrets and confidential information about Kevlar, DuPont’s aramid fiber developed in the 1960s and used in military and first responder protective gear.  More specifically, the suit urged that Michael Mitchell, a former DuPont employee who had worked as a Kevlar marketing executive, stole the trade secrets and passed them along to Kolon when he became employed therewith.  (Side bar: the F.B.I. investigated, Mitchell plead guilty, and he ultimately was sentenced to 18 months in prison).  Kolon denied any wrongdoing.

Following the massive damages award to DuPont in September 2011, DuPont announced that it would press forward with an effort to secure injunctive relief prohibiting Kolon from profiting further from having stolen DuPont’s trade secrets

After being slammed with a verdict of $919.9 million against it in September 2011, South Korean-based Kolon Industries suffered its second whammy in August when the United States District Court for the Eastern District of Virginia enjoined it from production of its Heracron aramid fiber line, a competitor to DuPont’s Kevlar aramid fiber line, on the basis of misappropriation of DuPont’s trade secrets.

The District Court’s rulings were the products of litigation instituted by DuPont against Kolon in February 2009 in E.I. Dupont de Nemours and Company v. Kolon Industries, Inc., No. 3:09-cv-00058 (E.D. Va. Feb. 3, 2009), wherein DuPont alleged that Kolon stole trade secrets and confidential information about Kevlar, DuPont’s aramid fiber developed in the 1960s and used in military and first responder protective gear.  More specifically, the suit urged that Michael Mitchell, a former DuPont employee who had worked as a Kevlar marketing executive, stole the trade secrets and passed them along to Kolon when he became employed therewith.  (Side bar: the F.B.I. investigated, Mitchell plead guilty, and he ultimately was sentenced to 18 months in prison).  Kolon denied any wrongdoing.

Following the massive damages award to DuPont in September 2011, DuPont announced that it would press forward with an effort to secure injunctive relief prohibiting Kolon from profiting further from having stolen DuPont’s trade secrets.

And so it was.  On August 30, 2012, the District Court entered an Order requiring Kolon to return DuPont’s trade secrets by October 1, 2012, prohibiting Kolon’s use of DuPont’s trade secrets permanently, and enjoining Kolon from producing or selling any para-aramid fiber products worldwide for twenty years. In so doing, the Court stated that Kolon showed a “complete disregard for DuPont’s trade secret rights and a disregard for the law that protects such secrets,” further noting that Kolon engaged in stealing DuPont’s trade secrets as “a matter of corporate policy.”  Not surprisingly, Kolon voiced its disapproval of the injunction’s issuance and immediately moved to stay the order pending the appeal of the jury verdict, which was granted by the Fourth Circuit Court of Appeals.

Shortly thereafter, the federal government announced on October 18, 2012 an indictment in United States v. Kolon Industries, Inc., No. 3:12-Cr-137 (E.D. Va. Aug. 21, 2012), charging Kolon with theft of DuPont’s trade secrets, conspiracy, and obstruction of justice, and five of its executives with conspiracy and obstruction of justice, contending that Kolon engaged in a multi-year campaign to recuirt DuPont employees to Kolon for purposes of obtaining Kevlar-related trade secrets.  The United States Department of Justice is attempting to seize $226 million from Kolon, allegedly representing the proceeds of the sale of Heracron fiber from 2006 to June 2012, plus over $300,000 in payments allegedly made to former DuPont employees to provide trade secret information.  If found guilty, the Kolon executives face up to 30 years in prison, and both the executives and Kolon would face millions of dollars in fines. U.S. Attorney Neil MacBride, in discussing the indictment, stated that it “should indicate that industrial espionage is not a business strategy and will not be tolerated by the United States Department of Justice.”

As Kolon has been found liable for civil violations and charged with criminal action related to its alleged trade secret theft from DuPont, DuPont has won the battle.  However, since Kolon has now appealed the civil matter and will contest the criminal action, has DuPont won the war? We will have to wait and see.

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

New Hampshire Enacts Non-Compete and Non-Piracy Legislation Effective July 14, 2012

New Hampshire has joined the ranks of numerous other states with non-compete statutes. On July 14, 2012, New Hampshire’s non-compete and non-piracy law became effective and aims to ensure that advance notice will be provided to employees who will be required to sign a non-compete or non-piracy agreement as a condition of their employment or change in job position:

Prior to or concurrent with making an offer of change in job classification or an offer of employment, every employer shall provide a copy of any non-compete or non-piracy agreement that is part of an employment agreement to the employee or potential employee.  Any contract that is not in compliance with this section shall be void and unenforceable.

Under the new law, an employer is prohibited from sandbagging a new employee by presenting him/her with a non-compete or non-piracy agreement on his/her first day of work after he/she has already accepted the offer, particularly in situations where the employee has quit a job to begin work with the new employer only to learn of the “surprise” agreement at that time.  Now, not only must the employee be informed that a non-compete or non-piracy agreement will be a term of his/her employment should he/she accept an offer, but also the employee must be provided with a copy of the actual agreement itself.  The employee then has an opportunity to review and consider the agreement and the impact thereof, and decide whether to accept the offer and the agreement and if employed, quit his/her current job.  This same analysis applies in the case of an employee who is offered an internal job change (e.g., lateral move, promotion, etc.) which will require him/her to sign a non-compete or non-piracy agreement.

New Hampshire courts will continue to handle “traditional” disputes as to the reasonableness of the geographic scope and duration of non-compete agreements and whether the employer has a legitimate protectable interest.  But, after July 14, those same courts will undoubtedly be asked to decide and handle a variety of debacles arising as a result of the new law and the questions it leaves unanswered, such as whether non-solicitation, non-recruitment, and/or nondisclosure agreements constitute “non-piracy” agreements.  That said, as the penalty for noncompliance with the new law is steep – i.e., invalidation of the entire agreement – employers would be wise to act conservatively and avoid any missteps by ensuring reasonable advance notice is provided, written acknowledgment of the notice is given by the employee, and non-solicitation, non-recruitment, and non-disclosure agreements are treated as non-piracy agreements subject to the new law.

 

Weeding through the Legal Uncertainty of Garden Leave

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

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

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

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

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

Specific Limitation on Soliciting Class of Persons May Substitute for Territorial Limitation

Though disfavored in Tennessee, non-compete agreements can be enforced if an employer has a legitimate business interest to be protected and the time and geographical limitations are reasonable.

Non-compete agreements are not analyzed in the abstract, but in the context of the specific circumstances under which they are to be enforced. The question is whether the employer has a legitimate business interest to be protected by the non-compete agreement. Tennessee courts hold that there is no “legitimate interest in protection from competition, only from unfair competition.”  An employer must show special circumstances over and above ordinary competition creating an unfair advantage for the former employee without the non-compete agreement.

Hence, only if a court first finds the non-compete agreement protects the employer from unfair competition by a former employee, will it determine whether the non-compete agreement is reasonable. The time and geographic limitations of the non-compete agreement must not be greater than necessary to protect the employer’s interest against unfair competition.

A non-compete agreement may lack a geographic limit which, in some cases, is fatal to the agreement.

However, Tennessee courts have held a requirement prohibiting former employees from soliciting the employer’s customers and this can substitute for a geographic limitation.

In the most recent case examining this issue, the non-compete agreement lacked a geographic limitation, but prohibited the former employee from soliciting the same type of business for one year from any of the employer’s current customers, customers with whom the employee did business on behalf of the employer, and prospective customers with respect to whom the employee acquired confidential information from the employer. The employee argued that the agreement’s lack of any geographic limitation rendered it unenforceable.

The court held because the non-compete agreement prohibited the former employee from soliciting the same business from the employer’s customers, the agreement was enforceable even without a geographic limitation. The court reasoned that as the specificity of the class of persons with whom contact is prohibited increases, the need for a geographic limitation decreases. Additionally, the restriction on who the former employee may contact, rather than where the former employee may work, gives the former employee greater freedom to practice her profession in the same area as her former employer.

A non-compete agreement which omits a geographic limitation, but prohibits soliciting the same business from the employer’s customers, satisfies the threshold requirement of protecting the employer’s legitimate interest against unfair competition without imposing an undue restraint on trade. The risk, however, of not having a geographic limitation is that the former employee may directly compete for the employer’s potential customers which fall outside of the parameters of the agreement.

In some instances, the former employee could use specialized training received from the employer to compete for those potential customers. Therefore, careful consideration should be given when substituting a restriction against solicitation for a geographic limitation.

For more information on non-compete agreements and their state requirements contact Burr Forman for more insights on the enforceability of non-compete clauses.

Welcome to Burr & Forman’s Non-Compete and Trade Secrets Law Blog!

Welcome to Burr & Forman’s Non-Compete and Trade Secret Law Blog!

In an increasingly competitive and mobile workplace, non-compete agreements and trade secret laws have become necessary tools for employers to protect their valuable customer relationships and confidential information and to avoid unfair competition from former employees and competitors. Continual changes in non-compete and trade secrets law, as well as technological advances providing increasing avenues for unfair competition, make it imperative that businesses in all fields stay abreast of the latest developments in this area.

For these reasons, the attorneys of Burr & Forman’s Non-Compete and Trade Secrets Group have launched this blog to help employers, executives and attorneys keep up with news, statutory changes, legal opinions and practical tips involving all areas of unfair competition law:  non-competes, trade secrets, customer non-solicitation, non-recruitment, non-disclosure, confidentiality agreements, tortious interference with business relations, employee piracy, computer theft, breach of fiduciary duties, employee loyalty, and intellectual property rights.

Because the law relating to most of these areas is state-specific, we will focus on developments in Burr & Forman’s Southeastern focus of Georgia, Alabama, Tennessee, Mississippi and Florida. However, we will also cover any particularly impactful or interesting events in other parts of the country relating to unfair competition. If you need help in a state outside of Georgia, Alabama, Tennessee, Mississippi or Florida, let us know. We’ve aligned our firm with trusted practices across the country and around the world and we will get your questions answered at the right law firm.

We hope that our clients, as well as other employers, executives and their attorneys, will find this blog informative and entertaining and will make it a regular part of their business reading. If you ever have a question about something on the blog or have an unfair competition issue, feel free to contact any of the Burr & Forman’s Non-Compete & Trade Secrets team members and we will be happy to assist you.

Thanks for reading!