When Planning and Football Go Hand-in-Hand

As summer winds down and the temperatures cool, many parts of our economy and the business world tend to heat up.  The heat typically starts on the gridiron, where rabid fans of college football begin to analyze every important snap of every important play for their very important team.  The analysis continues for every snap of the rivals of their very important team (and perhaps some snaps of other conference foes or even – dare we suggest – the snaps of teams in other conferences).  My law firm opened its first office in Birmingham, Alabama more than 100 years ago and now has offices through the southeast.  Trust me on this: the heat starts on the gridiron.

College football aside, companies often want to conclude deals before the close of their fiscal year, or before the end of the calendar year.  Bank of America Merrill Lynch recently reported (amid questions of whether anticipated rising healthcare costs would impede growth) that “Economic optimism is the highest in five years, and global business abounds…”  Many companies assess their cash positions and take the opportunity whenever possible to purchase items at the close of the year in order to use the capital expenditure to reduce income taxes.  In the world of commercial litigation, summer schedules (and the inevitable summer vacations) give way to longer hours, increased numbers of evidentiary hearings and trials, and an array of settlement conferences and other forms of alternative dispute resolution intended to clear the slate of 2013 in preparation for the new business ahead.

Our clients typically take this opportunity to plan for the upcoming year.  Budgets are in the works.  Forecasts are made.  Among the forecasts is often the question: “Who will take over my business when current management decides to retire?”  And thus we segue into succession planning and the value of non-compete agreements to this discussion.

While a non-compete agreement is intended to ensure that a departing employee does not steal away to a competitor to the detriment of the former employer, it also provides an excellent opportunity to secure strong leadership in succession planning.  It goes without saying that an excellent employee who perceives little opportunity for future advancement is more likely to seek opportunities elsewhere than an employee who genuinely has an opportunity to advance within the company’s leadership.  When an employee’s contract limits the ability to compete within certain industries or within a certain geographic area for a defined period of time, the knowledge of that possible restraint can make the open door to advancement appear all-the-more attractive.

It is important, therefore, to regularly review your non-competition agreements.  Are there employees within your organization who are ready for more involved leadership positions?  Consider whether or not these employees are so vital to the business that their departure would immediately have a negative impact on the company’s bottom line.  Consider also whether the company would benefit from a planned, informed and intentional transition from current leadership to future leadership.  Although having a non-competition agreement in place is certainly no guarantee for a smooth transition from the existing regime to a company’s new leadership, the argument certainly exists that having a carefully drafted and impactful non-competition agreement in place can allow you to initiate important conversations without the fear that current employees will prematurely head for the doors.

Yes, the economy is heating up.  As is the football season.  If your company is also experiencing growth, consider this a good time to do some planning of your own.  If you believe it is important for your favorite football team to put together a game plan intended to defeat its weekend opponent, then you surely must also recognize the importance of planning for your own business.  This is the part of the blog where you are encouraged to seek a professional’s advice to discuss non-competition agreements and how they could impact and benefit your own business planning.

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.

Do Non-Competes Help or Hinder the Growth of Business?

With the increasing use of non-competes across the business spectrum, a debate is starting to rage in state legislatures and in business forums about whether the prevalence of such agreements helps or hinders economic growth.  The proponents say that the agreements are necessary to protect successful businesses from being harmed by unscrupulous employees and these agreements actually encourage employers to involve more employees in the inner workings and strategic decisions of a company (since, the argument goes, employers are more comfortable that key information won’t be used to compete against them).   Detractors, on the other hand, say that non-competes chill entrepreneurship.  An interesting four-minute version of the debate was recently aired on Fox Business.  Even the entrepreneurs concede, however, that trade secrets and confidential business information should always be protectable.

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.

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.

Tennessee’s “Rule of Reasonableness” Allows Courts to Modify Non-Compete Agreements

On August 22, 2012, we reported on the Veit v. Event Logistics, Inc., a case pending in the Davidson County Chancery Court, Docket No. 12-945, in which an employee challenged her employer’s non-compete agreement.  The agreement prohibited the employee for a period of two years from (1) engaging in activities competing with the employer within a 50 mile radius of employer’s office in Nashville; (2) soliciting the employer’s customers with whom the employee had contact while employed by the employer; and (3) soliciting any of employer’s employees to terminate his/her employment.

At the temporary injunction stage of the litigation, the Court did not completely enforce or reject the non-compete agreement.  Rather, the Court modified the agreement to allow the employee to engage in certain activities so she could make a living while offering some level of protection for the employer.  In particular, the Court allowed the employee to engage in the same activities she did with the employer (with a monetary cap), but prohibited her from engaging in those activities with the employer’s clients.

The Court’s modification of the non-compete agreement in Veit is a good example of the “Rule of Reasonableness” Tennessee courts apply to non-compete agreements.  Generally, there are four approaches courts around the country will take in enforcing or rejecting a non-compete agreement.

  1. The court will not enforce the non-compete agreement because non-compete agreements are void as a matter of law.
  2. The court will enforce the non-compete agreement as written.
  3. The court will “blue-pencil” the non-compete.  This means the court will only strike offending provisions from the non-compete agreement, but will not add new provisions or otherwise modify the non-compete agreement.  If the “blue-pencil” approach leaves the non-compete agreement incomprehensible or cannot eliminate the offending provision, the court will reject the agreement all together.
  4. The court will equitably reform the non-compete agreement which can result in rewriting the agreement.  This approach balances between the goals of encouraging a free market place and preventing unfair competition.

Recognizing that the “all or nothing” approach of either enforcing or rejecting a non-compete agreement in its entirety and the “blue-pencil” approach led to undesirable results, Tennessee courts adopted the Rule of Reasonableness (“ROR”).  Under the ROR, Tennessee courts may rewrite the non-compete agreement to balance between the employer and employee’s competing interests.  The ROR is consistent with and is an extension of the rule that the terms of the non-compete agreement, including time and geographical limitations, must be reasonable.  The restrictions of the non-compete agreement must be no greater than necessary to protect the employer’s legitimate business interest.  (For a further discussion on the “reasonableness” requirements, see our May 9, 2012 blog post.)

Applying the ROR, the Court in Veit modified the non-compete agreement to allow the employee to make a living while protecting them employer’s interest in its customer base.  Though Tennessee Courts have the power to modify non-compete agreements, employers should carefully draft their agreements to avoid costly and uncertain litigation.  Though the ROR seeks to strike a balance between the employer and employee’s competing interests, a modified non-compete agreement could result in significant harm to the employer.

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

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

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

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

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

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

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

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

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

The 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.

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.

“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.

Valid Non-Compete Agreement Declared Ineffective: Hard Lessons from Soft Language

Even a valid non-compete agreement can fail to provide the scope of protection that the drafter expects.  In March 2012, Florida’s Fifth Circuit of Appeal decided Heiderich v. Florida Equine Veterinary Services, Inc., 37 Fla. L. Weekly D759a, giving little effect to a valid non-compete agreement. The language in the non-compete agreement only prevented the employee from establishing an office located within a specified geographic area and did not prohibit the employee from conducting business within the geographical bounds. In Heiderich, the employee signed a valid non-compete agreement and was reminded of such upon termination. Within the period of non-compete, the employee established an office just outside the geographic radius, and then delivered services within the non-compete geographical boundaries.

In reversing the lower court’s temporary injunction, the appellate court found that the language in the non-compete only meant that the employee could not establish a physical business location within the 30 mile radius.

“[E]mployee shall not own, manage, operate, control, be employed by, assist, participate in, or have any material interest in any business or profession engaged in general equine veterinary practice located within a thirty (30) mile radius of [FEVS's business address]”

The court found that there was nothing in the non-compete agreement to stop the employee from establishing an office 31 miles from the company and then servicing the clients within 30 miles of the company, ruling that “the non-compete agreement does not prohibit [the employee] from providing . . . services within a 30-mile radius of [the company], so long as her business office is outside that radius.”

The clause only prohibits the employee from “owning or being employed by a business or profession engaged in equine veterinary practice located within a 30-mile radius of FEVs. It does not . . . prohibit [the employee] from practicing equine veterinary medicine anywhere within the 30-mile radius.”

Heiderich is consistent with previous Florida decisions on the issue. In Tam-Bay Realty, Inc. v. Ross, 534 So. 2d 1200 (Fla. 2d DCA 1988), a non-compete agreement stated that the sellers of a real-estate brokerage firm were not to compete with the business in any of the following ways:

“by opening, operating, serving as an officer, director or other employee of any real estate brokerage business located with the geographical boundaries of Pinellas County, Florida…” 

However, according to a Florida court the non-compete agreement did not prohibit the seller from advertising in the phone book, obtaining a local phone number, running advertisements for homes, or listing themselves in business directories within the area the non-compete purported to protect.

The court found that the sellers “did not breach the covenant because they had not competed by ‘opening, operating, serving as an officer or director of any brokerage business located within Pinellas County.’ Rather, the sellers had competed within Pinellas County ‘from a brokerage business located outside of Pinellas County thereby adhering to the literal meaning of the non-compete agreement.”

How does this affect your business?  There is the potential that your valid, negotiated non-compete agreement might leave you exposed to unexpected future competition.  In light of the March 2012 decision in Heiderich, it is more important than ever to re-examine existing non-compete agreements to ensure that they offer meaningful protection and do not just make competing less convenient.

Contact Burr & Forman today to ensure that your business is secure. Burr & Forman’s Non-Compete & Trade Secrets team members would be happy to review your company’s non-compete agreement or answer any further questions you have about protecting your businesses from unfair competition.