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.

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.

 

Sometimes Hiring a New Employee Can Invite an Unwanted Lawsuit

Let’s set the scene:  Your search for an employee with the required job skills and experience results in your Florida-based company’s decision to hire someone presently working for your competitor.  During the salary/benefit negotiations, you learn that your prospective employee executed a non-compete agreement with her present employer.  “Not to worry,” you tell her.  “If your present employer sues you to enforce the non-compete we will pay for your defense.  In fact, we’ll make it part of your contract if you come for us.”  Bad move.

Many prospective employers believe non-compete agreements only have legal consequences for prospective employees.  However if ─ as in the example above ─ the prospective employer is aware of the agreement before hiring the employee, then the prospective employer runs the risk of liability to the former employer for tortiously interfering with the non-compete agreement. While the past employer will have to prove the new employer had knowledge of the non-compete agreement as part of a tortious interference claim, a new employer makes this task easier when it includes a provision agreeing to indemnify the employee for any litigation over non-compete agreements.

To prove tortious interference with a non-compete, Florida courts apply a four-prong test:  1) existence of a business relationship; (2) knowledge of the relationship on the part of the defendant; (3) an intentional and unjustified interference with the relationship by the defendant; and (4) damage to the plaintiff as a result of the breach of the relationship.  Tamiami Trail Tours, Inc. v. Crosby, 463 So. 2d 1126 (Fla. 1985).

How then does a prospective or subsequent employer protect itself from the former employer’s tortious interference claim?  For starters, avoid agreements to indemnify the new employee and/or pay for legal defense costs associated  with possible breach of the non-compete agreement.  As recently as May 2012, a Florida federal court reasoned that the plaintiff was “substantially likely to prevail on the claim of tortious interference” in large part because the new employer “expressly acknowledged the Agreement between [the employee] and [the plaintiff] and the restrictive covenants contained therein.”  The new employer, as part of its agreement with the employee, “agreed to assume [the employee's] defense in the event she [was] sued by [the plaintiff] over the terms of the Agreement, and indemnify her from any and all expenses, fees, damages, judgments, and amounts incurred by her in connection with the action.” The court held that this express knowledge of the non-compete agreement was evidence that the new employer caused the employee to breach the non-compete agreement. See Electrostim Medical Services, Inc. v. Lindsey, (M.D. Fla. 2012).

And this isn’t the first time a federal court in Florida found that a former employer could sue a subsequent employer for tortious interference.  In a 1998 federal court opinion the  employee testified that he had informed the new employer about his employment agreement with the plaintiff without actually providing a copy.  When coupled with testimony that the new employer hired the employee to essentially recreate the former employer’s products, the court found enough evidence to reason that “the facts . . . support a substantial likelihood that Plaintiff [would] ultimately prevail on the claim of tortious interference.”  See Stoneworks, Inc. v. Empire Marble & Granite, Inc. (S.D. Fla. 1998).  In 2009 a court found that the new employer had knowledge of the non-compete agreement with the plaintiff because it “expressly acknowledged the existence of that agreement in the employment contract signed with [the employee].”  The result: an opinion that the plaintiff had “shown a substantial likelihood of success on the merits of its claim that [the new employer] tortiously interfered with the . . . contract for [the employee] not to compete with [plaintiff].”  See The Continental Group, Inc. v. KW Property Management, LLC (S.D. Fla. 2009).

Similar findings appear in Florida appellate courts.  In 2010, Florida’s First District Court of Appeal held that allegations that 1) the employee gave a copy of the plaintiff’s employment contract to the new employer and; 2) that the new employer “devised a plan to allow [the employee] to quit her employment with [the plaintiff] and to . . . work for [the new employer] . . . without compensating [the plaintiff] as required under [the contract]” stated a cause of action for tortious interference against the subsequent employer.  See  Southeastern Integrated Medical, P.L. v. North Florida Women’s Physicians, P.A. (Fla. 1st DCA 2010).

What now?  Well, if you’re subject to a non-compete agreement, read it carefully.  They are often narrowly tailored.  As we discussed in previous posts, even valid non-compete agreements can prove ineffective to stop future competition.  On the other hand, because Florida allows non-compete agreements, it is important to understand the restrictions of a particular agreement and the risks of violating it.  Do you have the right to employ someone seemingly subject to a valid non-compete agreement?  Of course you do.  Just keep in mind that knowingly hiring someone subject to a non-compete agreement can result not only in additional legal fees and costs resulting from the employee’s breach, it may also subject the new employer to substantial damages resulting from a claim for tortious interference with the former employer/employee relationship.  Remember that courts have determined that prima facie evidence of tortious interference exists when a subsequent employer agrees to indemnify the new employee and/or pay defense costs if the former employer files an enforcement lawsuit.

This is the part of the blog where we suggest you seek competent legal counsel when you face these issues.  The nuances of this area of the law and the specific factual circumstances surrounding each situation deserve a sound initial legal opinion. Our Burr & Forman attorneys would be happy to assist you in these matters.

Weeding through the Legal Uncertainty of Garden Leave

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

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

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

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

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