Does Bird’s Eye View Render Executive Non-Compete Unenforceable?

So here’s a good one for employers to ponder.  Let’s say you have an executive subject to a valid and seemingly enforceable non-compete agreement.  Because the agreement concerns an executive, we would normally presume that a court is likely to strictly read the terms of a non-compete agreement and enforce it accordingly.  Well, the Second Circuit Court of Appeals recently affirmed a decision that an executive whose level of seniority limited his knowledge of the details rendered him not subject to the terms of his otherwise-valid non-compete agreement.

In the typical case, an employee with specific knowledge – let’s use the example of an engineer – enters into a non-compete agreement that states, for instance, that he will not work for a competitor within the same geographic area of his current job responsibilities for one year after his departure, regardless of the reason for his departure.  If the agreement is otherwise enforceable, a Florida court would typically view the above-described restriction as valid.  After all, the engineer has specific knowledge the details of which could, in theory at least, give a competitor an advantage over the former employer.

Taking this analysis one step further, however, led at least one court to determine that the senior executive was so far removed from the mundane specifics of the actual work product, he was actually no longer subject to the non-compete agreement he voluntarily executed.  Which brings us to IBM v. Visentin, 2011 WL 672025 (SDNY 2011), aff’d 437 Fed Appx 53 (2d Cir. 2011).  I’ll keep the facts short, although the somewhat unique nature of the facts obviously resulted in a seemingly unexpected opinion.  Visentin worked at IBM, very successfully, for over a quarter of a century.  So successfully, in fact, that at the time he departed IBM for competitor Hewlett Packard he was in charge of a multi-billion dollar business unit.  He had executed a non-compete with a one year work restriction that on its face appeared to encompass his prospective employment with Hewlett Packard.  The agreement Visentin executed included a relatively standard three-year look-back stating that the agreement only pertained to those areas of IBM’s business in which Visentin worked in the three years prior to his departure.

When Visentin left, IBM sued, seeking injunctive relief based on Visentin’s alleged violation of the non-compete described above.  The federal district court denied the motion for a preliminary injunction.  (In cases to enforce non-compete agreements, denial of the preliminary injunction usually ends the dispute… unless the former employer appeals.)  IBM appealed, only to have the 2nd Circuit Court of Appeal affirm the lower court’s ruling.

While the denial of the preliminary injunction motion in Visentin presents a unique situation due to Visentin’s high level executive position, the district court’s lengthy holding contains some valuable insight in the analysis of non-compete issues.  Among the points raised was that the high level of the former employee’s position allowed him a supervisory capacity (he was a manager of a business line with expertise in making operations “efficient”), and yet insulated him from the specific technological goings-on and to detailed data potentially protected as a trade secret.  So in essence, because he maintained a bird’s-eye view of operations, rather than a position with direct creative input or a position “on the line,” he was insulated from information that would negate his former employer’s presumed competitive advantage.

The district court opinion went even further, at one point discussing that among known competitors with significant resources, the open flow of intelligence in the marketplace rendered the probability of harmful disclosure somewhat remote (if even possible).  Also interesting was the emphasis that success on a motion for preliminary injunction was challenging in the absence of known instances of disclosures of detailed information that clearly violated the non-compete agreement, or detailed information that the employee’s new position would require improper disclosure.  Given the bird’s-eye view Visentin had over the IBM business unit, pointing out specific instances of wrongful disclosures proved difficult.

So where does that leave employers seeking to enforce these agreements?  Certainly in Florida, there a many instances in which the courts uphold these agreements.  What is important to keep in mind, however, is the necessity of providing either enough detail in your non-compete/non-disclosure agreement to make enforcement easier, or to allege with enough specificity the actual information or trade secrets the disclosure of which could cause actual harm.  The case discussed in this article also points out that despite possible factual similarities, each non-compete rests on its own merits and brings to the dispute its own facts.  It is the nature of the information the employer seeks to protect and the factual circumstances surrounding the former employee’s duties and experience that will form the foundation of any successful argument regarding enforcement.

This is the part where I counsel you to get counsel.  Better yet, make sure you get counsel familiar with these issues.

Author Peter C. Vilmos, Esq. works in the Orlando office of Burr & Forman LLP, 407-540-6600.  Contact Peter or any attorney in Burr & Forman’s Non-Compete and Trade Secrets group for more information or for further inquiries.

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.

Two Recent High-Stakes Trade Secrets Decisions Demonstrate Broad Protection and Potential for Large Exposure

When a party breaches a confidentiality agreement, claims for misappropriation of trade secrets and breach of the confidentiality agreement are often asserted simultaneously. As two recent federal court decisions based on Texas law demonstrate, trade secrets law can sometimes protect employers where confidentiality agreements cannot. These cases also highlight the potential for very large exposure of violators.

On July 26, 2012, the U.S. Bankruptcy Court for the Western District of Texas entered a final judgment in the amount of $15,873,383 in favor of TXCO Resources, Inc. and against Peregrine Petroleum, L.L.C. for misappropriation of trade secrets. TXCO Res., Inc. v. Peregrine Petroleum, L.L.C. (In re TXCO Res., Inc.), 2012 Bankr. LEXIS 3425 (Bankr. W.D. Tex. July 26, 2012).  Both TXCO and Peregrine are oil and gas companies based in Texas.  Peregrine signed a confidentiality agreement that allowed it to obtain information about certain of TXCO’s properties. TXCO alleged that Peregrine breached the confidentiality agreement and misappropriated TXCO’s trade secrets, among other causes of action.  In a lengthy opinion issued after a 41-day bench trial, the Court found Peregrine was not liable for breach of the confidentiality agreement since TXCO could not prove that its damages were proximately caused by Peregrine’s breach. The Court did find, however, that Peregrine misappropriated TXCO’s trade secrets by using confidential information about TXCO’s land subsurface data, production data and operations data to acquire oil and gas leases formerly held by TXCO, which gave Peregrine a competitive advantage over TXCO and other companies.

In Raytheon Co. v. Indigo Sys. Corp., 2012 U.S. App. LEXIS 15892 (Fed. Cir. Aug. 1, 2012), the U.S. Court of Appeals for the Federal Circuit reversed the decision of the U.S. District Court of the Eastern District of Texas, which granted summary judgment against a misappropriation of trade secrets claim to Indigo and against Raytheon.  Raytheon and Indigo, who are both manufacturers of infrared imaging equipment, entered into a series of confidentiality agreements in 1996 in connection with consulting services to be provided by Indigo to Raytheon.  In 1997, Raytheon became concerned that Indigo was recruiting Raytheon personnel to gain access to Raytheon’s trade secrets, but Indigo assured Raytheon that these accusations were baseless.  Five years later, in 2007, Raytheon disassembled a camera of Indigo’s and discovered evidence of patent infringement and trade secret misappropriation and quickly brought suit.

In granting summary judgment to Indigo, the district court found that the confidentiality agreements were unrelated to the infrared technology at issue and found that Raytheon’s trade secret claim was barred by the three-year statute of limitations under Texas law. The appellate court discussed the “discovery rule,” which allows tolling for claims of trade secret misappropriation until when the plaintiff knew or reasonably should have known of the facts that give rise to the claim. The court also noted that the question of whether Raytheon “should have known” about its claims earlier was for the jury.  The Circuit Court held that the district court erred by resolving this factual question against Raytheon, the non-moving party, at summary judgment.

BURR POINT:  Trade secrets violations can lead to large judgments and the “discovery rule” can be used to preserve the ability to obtain these judgments for older claims.

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 Inevitable Disclosure Doctrine — A Glimmer of Hope in the Absence of a Non-Compete Agreement

In the hilarious movie Dumb and Dumber, the imbecilic and unattractive character played by Jim Carrey is told by the beautiful woman he is pursuing that the chances of them winding up together are about one in a million, to which he excitedly replies, “So you’re telling me there’s a chance!” Similarly, if an employer wants to enjoin a former employee from working for a competitor, but the employee is not under any sort of non-compete agreement with the former employer, has taken no company records and property, and has not revealed any confidential information or trade secrets to the new employer, the inevitable disclosure doctrine of trade secrets law provides the employer with at least a “chance” of getting the desired injunction.

The inevitable disclosure doctrine is used by employers to stop former employees from working for competitors, even in the absence of a non-compete agreement, on the basis that it is inevitable that the employee will use or disclose the former employer’s trade secrets in connection with the new employment. The significance of this theory is that the employer is not required to prove an actual misappropriation of a trade secret, but rather that the disclosure of the trade secret is inevitable based on the nature of the information and the circumstances of the employee’s new position.

As with all trade secret issues, the law on inevitable disclosure varies somewhat from state to state. For instance, California courts have rejected the doctrine as creating a “de facto covenant not to compete”, Bayer Corp. v. Roche Molecular Sys., Inc., 72 F. Supp. 2d 1111, 1120 (N.D. Cal. 1999), and held that the doctrine “cannot be used as a substitute for proving actual or threatened misappropriation of trade secrets.”  Whyte v. Schlage Lock Co., 125 Cal. Rptr. 2d 277, 294 (4th Dist. 2002). The Third Circuit Federal Court of Appeals, however, applied a relatively lenient standard under Pennsylvania law for successfully using the theory, holding that an employer need only show a “substantial likelihood” of disclosure of a trade secret. Bimbo Bakeries USA, Inc. v. Botticella, 613 F.3d 102,110 (3d Cir. 2010). (For an excellent nationwide survey of the doctrine, see Ryan A. Wiesner, A State-by-State Analysis of Inevitable Disclosure: A Need for Uniformity and a Workable Standard, 16 Intellectual Property L. Rev. 211 (2012)).

The Georgia Supreme Court has recognized the inevitable disclosure doctrine, although not referring to it by name, in the case of Essex Group, Inc. v. Southwire Corp., 269 Ga. 553, 501 S.E. 2d 501 (1998). In that opinion, the court upheld the trial court’s injunction prohibiting Southwire’s former employee from working for Southwire’s direct competitor’s logistics department for a period of five years. As the basis for its ruling, the court concluded that the competitor had “sought to obtain, by the simple act of hiring [Southwire's former employee], all the logistics information it had taken Southwire millions of dollars and years of testing and modifications to develop as part of Southwire’s plan to acquire a competitive edge over other cable and wire companies ….” Id. at 557. There was neither mention in the opinion of the employee having a non-compete agreement nor any mention of an actual misappropriation by the employee of the alleged trade secret. Instead, the implication of the decision was that disclosure of Southwire’s logistics system was inevitable because of the identity of Southwire and its competitor’s business.

BURR POINT: Even in the absence of an enforceable non-compete agreement, the inevitable disclosure doctrine provides a means for enjoining a former employee’s competitive activities in certain circumstances. For more information on the inevitable disclosure doctrine or how it might apply to your business, don’t hesitate to contact one of the Burr & Forman 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.

 

Court Says It’s Time to Pay The Piper, Even if the Piper Hasn’t Paid: Fee Provisions and Third Party Payments

Employers who have the foresight to draft a non-compete agreement often fail to consider some of the potentially adverse financial ramifications from enforcing the non-compete agreement through litigation. Most employers seeking to enforce a non-compete agreement unhappily discover that they may be on the hook to pay the attorney’s fees a subsequent employer funds in defense costs.  Yet that is exactly what could happen if the employer doesn’t correctly draft the fee provision in the non-compete agreement.

Substance of the matter aside, one of the key questions after non-compete litigation is a simple one:  who pays the often high attorney’s fees and costs?  Recent developments in Florida law highlight how important it is to properly draft attorney’s fee provisions in non-compete agreements.  In Rogers v. Vulcan Manufacturing Co., Inc., 37 Fla. L. Weekly D1309a (Fla. 1st DCA June 1, 2012), the Florida First District Court of Appeals found the language of the non-compete agreement at issue entitled an employee to attorney’s fees even though its subsequent employer, a third-party, wholly funded the non-compete litigation.  The non-compete agreement language at issue read: “In any action to enforce any term, condition, or provision of this agreement, the prevailing party shall be entitled to recover the reasonable attorney’s fee incurred to enforce the same.” (Emphasis added).  The court found this language demonstrated that the parties intended for the loser to pay attorney’s fees regardless of the source of the funds – even if the source was a subsequent employer.

The court noted that if the parties had intended to limit fee reimbursement to situations in which the prevailing party personally paid the attorney’s fees and costs ─ or incurred an obligation to pay the attorney’s fees and costs ─ then prevailing party language within the non-compete agreement should have clearly said so. In Rogers, the court gave the employee the benefit of the prevailing party fees despite the fact that the new employer, and not the former employee, actually paid the attorney’s fees and costs in response to the former employer’s lawsuit.  The Rogers court reasoned that the non-compete agreement entitled the former employee to reimbursement of attorney’s fees and costs because the clause provides that “the prevailing party shall be entitled to recover the reasonable attorney’s fee incurred to enforce” the agreement, rather than saying that the prevailing party is entitled to the attorney’s fees “it/he/she” incurred.  Thus, the court interpreted the provision as intending for the loser to pay the winner’s reasonable attorney’s fee, regardless of the source of the funds.

The Rogers court further noted that a non-assignability clause will not affect the obligation of attorney’s fees under the agreement. The court found it irrelevant whether the former employee was ultimately responsible to reimburse his new employer for advancing attorney’s fees on the employee’s behalf.  Because the former employee did not actually assign his rights or benefits under the non-compete agreement, the court found that no violation of the non-assignability occurred, despite the fact that the burden of paying attorney’s fees and costs rested solely on the new employer.

Losing valuable employees to competitors poses substantial business risks.  Carefully drafted non-compete agreements can help minimize these risks.  Among the risks are future litigation costs and the possibility that fee-shifting provisions can increase litigation expense, and thus add even more risk.  The Rogers case clearly illustrates the importance of properly wording non-compete agreements.  If minimizing financial exposure from an unsuccessful attempt to enforce a non-compete agreement is important to your business, then you should consider revising your agreement to limit the risk of paying attorney’s fees that subsequent employers advance or fund outright. Our team at Burr & Forman would be happy to aid you in such matters. Please contact any of the Burr & Forman Non-Compete & Trade Secrets team members for assistance.

Preparing for a Smack Down: Local Wrestling Company Sues Former Employee and World Wrestling Entertainment for Trade Secrets Violation

A local professional wrestling promotions company, TNA Entertainment, LLC (“TNA”), has sued former employee, Brian Wittenstein, and direct competitor, World Wrestling Entertainment, Inc. (“WWE”), for unlawfully using TNA’s trade secrets against them in unfair competition.  The case, entitled TNA Entertainment, LLC v. Wittenstein and World Wrestling Entertainment, Inc., was filed on May 23, 2012 in the Davidson County Chancery Court, Docket No. 12-746-III and alleges that Wittenstein and WWE violated Tennessee’s Uniform Trade Secrets Act.

According to TNA, Wittenstein was terminated from the company on August 3, 2011.  In connection with his separation, Wittenstein entered into a Separation Agreement and General Release (the “Agreement”), which expressly prohibited him from disclosing TNA’s confidential trade secrets, including information about TNA’s contracts with other wrestling talent.

TNA claims that Wittenstein violated the agreement by downloading TNA’s company policies, contractual agreements with other wrestling talent, and detailed information about its wrestling talent (including compensation). TNA then claims that Wittenstein disclosed the gathered information to his new employer, and direct competitor of TNA, WWE.  TNA asserts that WWE’s possession and use of TNA’s confidential trade secrets provide WWE an unfair competitive advantage regarding wrestling talent.

TNA alleges that WWE has used TNA’s confidential trade secrets to solicit wrestling talent currently, under contract with TNA, and encourage them to join WWE.  Wrestler Ric Flair is a recent example of a client that TNA claims attempted to terminate his exclusive contract with them to sign up with WWE.

To date, the court has entered a temporary restraining order, prohibiting WWE from using TNA’s confidential information.  Though this case is relatively new, it is a prime example of how costly unlawful use of trade secrets can be to former employees and new employers.  Under the Tennessee Uniform Trade Secrets Act, the unlawful user of trade secrets can be liable for the plaintiff’s actual loss caused by the misappropriation of trade secrets and any “unjust enrichment.”  In certain cases, the defendant may also be liable for “exemplary damages” resulting in up to twice the award for the plaintiff’s damages and the plaintiff’s attorney fees.

Ultimately, employers should always be aware of and protect themselves against potential liability when hiring an employee who may possess a former employer’s confidential trade secrets. If you need more information on confidential trade secrets and defenses against former employees, please contact any of the Burr & Forman Non-Compete & Trade Secrets team members for assistance.

“Full Time and Attention” Provisions Provide an Additional Weapon in Non-Compete Cases

An employer seeking to stop or slow down a former employee who is unfairly competing with business needs to examine every possible legal claim as options to use against the employee. In many cases, the employee spent time laying the groundwork for new employment or business ventures while still employed by the previous employer. These situations present another legal opportunity to employers, in addition to the usual considerations of non-compete, non-solicitation and trade secret violation claims. The employer and its attorney should consider a claim against the former employee based on a common provision in employment contracts: the requirement that the employee devote his “full time and attention” (or similar language) to the employment.

There’s not a lot of case law interpreting these provisions, but the cases that do show that this boilerplate language can potentially provide another arrow in the employer’s quiver. In example:

BURR POINTWhile non-compete claims focus on what an employee did after they left their employment, the employee’s activities prior to their departure could lead to a claim for breaching a contractual duty to devote their “full time and attention” to the former employer’s business.

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.