Non-Competition Agreements: Black Friday, Cyber Monday or Bust

This is one of those funny calendar years where Thanksgiving tucked itself deep into the month of November, leaving far too little time for people to contemplate the upcoming holidays and whether or not it’s actually appropriate to wear that 1980′s – style sweater to the office. (As an aside, you may have convinced yourself that your sweater still fits. Office tip: it doesn’t.) So here we all are, scrambling to make the perfect Thanksgiving celebration, wondering how we’re going to complete the year’s remaining tasks before year-end, and otherwise scrambling like we have in virtually all previous holiday seasons. Yes, this is the perfect time of year to practice the annual ritual of attempting a moist turkey using a never-before-tried recipe. If you’re an employer, this is also the perfect time of year to look at your company’s non-competition agreement and how you might enforce it. As with all of these blogs, it’s important to note that ̶ generally speaking ̶ each state has its own rules and laws on the legality and enforceability of employer/employee non-competition agreements. In Florida, the legislature has created a statute specifically on point (hidden as it is among other laws discussing “restraint of trade”). Under a defined set of circumstances, Florida law allows an employer and an employee to enter into a non-competition agreement that limits for a period of time a departing employee’s ability to directly compete with the former employer. Some states specifically disfavor these restraints of trade. Some states allow an employer and employee to enter into a non-competition agreement without the benefit of having a statute on the matter to help define the allowable scope of such an agreement. On Black Friday and Cyber Monday retail stores around the nation and across the internet severely discount their products and services in order to attract customers and in an effort to turn their fiscal year profitable. It is the ultimate competition for consumer dollars. Similarly, businesses of all types are also using the final month of the calendar year to maximize collections and increase annual profits. For many employers this is also a time to contemplate whether and in what amount employees will receive annual bonuses. Knowing this, many employees wait until after their employers distribute bonuses to inform the employer that the employee intends to soon start working at a competitor. For many employers, this is the first time all year that will they look at the terms of their non-competition agreement and attempt to determine whether or not the terms are easily enforceable against the departing employee. However, just like the retailers who plan far in advance for Black Friday and Cyber Monday, employers should also take this opportunity to look over their agreements to determine ̶ in advance ̶ the best corporate strategy for enforcement. Some agreements include a devaluation of company stock for departing employees. Some agreements forbid competition for a defined period of time within a restricted area. Keep in mind that states tend to strictly interpret non-competition clauses. When terms are not clear, courts usually give the benefit of the doubt to the employee, favoring free competition whenever possible. Just like with Black Friday and Cyber Monday, it’s difficult to know in advance whether or not your strategy will pan out. To give your company the best shot at success, it makes sense to look over your options in advance.

Burr & Forman attorneys in nine offices throughout the Southeast are available to consult with you on these issues, to develop your strategy, and to work with you when the need to enforce arises.

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.

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.

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.

Ice Storms, My Secret Internet and Other Myths

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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