The Multi-State Non-Compete Agreement – Part 3

Our most recent article in this series (May, 2015) addressed the first step of the analysis necessary for the multi-state employer’s design and implementation of a manageable, limited number of noncompete agreements compliant with most, if not all, applicable state laws. That article addressed the identification of the “protectable interests” amongst all employees with the goal of matching the appropriate employee categories with the “right blend” of restrictive covenants needed for each employee group. With that background, we move to the next step in the process; identifying which of the employees’ resident states pose unusually difficult procedural hurdles to the enforcement of restrictive covenants at the onset.

There are essentially 2 such key hurdles. The first involves those state laws which require extra “consideration” beyond just continued employment for the enforcement of employee noncompete agreements. These states include South Carolina, North Carolina, Kentucky, Illinois, Virginia, Minnesota, Oregon, Washington and a few others. Most state laws of this type require employers to condition the actual hiring or promotion of the employee on his/her execution of the noncompete agreement or alternatively, for employers to provide some extra, material, monetary benefit in exchange for the employee’s signature. Some state laws such as Illinois go so far as to require “employer clairvoyance,” essentially stating that even signing the noncompete at the time of hire is insufficient if the individual’s employment does not ultimately last at least 2 years. Regardless, employees in these states compile a subgroup deserving of special consideration. For these employees, the multi-state employer can either choose to enter into noncompete agreements only with new-hires or provide the employees of these states with some additional incentive (i.e. bonus) in return for their execution of the noncompete agreement.

The second initial hurdle involves a very limited number of state laws which require that in order to be enforceable, a noncompete must be “ancillary” to an actual employment contract. Translated, this means that a stand-alone noncompete agreement will not be enforceable in these states. The contract must contain other terms covering the actual wages, hours and conditions of employment in order to be enforceable. Here, and for purposes of employee residents of these few states, the multi-state employer will either need to create a separate, all-encompassing agreement, bypass these employees altogether or use the stand-alone agreement knowing in the end, it will be unenforceable.

Stay tuned! The next article in this series will help narrow the field even more, taking a close look at those state laws which sanction the “blue pencil.”

The Chicago Cubs, Errors, and Arbitration of Florida Non-Compete Agreements

Some clients prefer to resolve disputes in arbitration. In theory, an arbitration proceeding can more quickly and — in some instances — more cost effectively resolve disputes. However because most arbitration clauses call for binding arbitration, many clients prefer to litigate disputes in court. At least a defeat in a courtroom carries with it the ability to appeal. If the court makes a clear legal error, the argument goes, an appellate panel can collectively correct the error and “set matters right.”

The Chicago Cubs are a National League baseball team. Perhaps you’ve heard of them? Like an arbitration panel, it is difficult to overcome some of their errors. The Chicago Cubs, by almost any standard, had an excellent 2015 baseball season. An impressive pitching staff, an optimistic and experienced manager, and a great second-half team effort allowed the Cubs to win the National League Wildcard Playoff and to beat the St. Louis Cardinals in the opening series. Instant replay may have decided some of the calls. None of those calls was subject to arbitration.

Getting back to Florida Non-Competes, a client recently asked the question: “Can parties agree to arbitrate, rather than litigate, an otherwise valid Florida Non-Compete agreement?” The simple answer is “yes.” The question gets more complicated when the sale of a business raises possible violations of the Non-Compete agreement and no arbitration clause exists in the purchase and sale documents relating to the sale. At least one appellate court in Florida determined that the question of whether or not the employee ran afoul of the Non-Compete agreement was subject to arbitration, despite the fact that the documents controlling the sale of the business contained no such provision.

In the matter noted above, the two-year Non-Compete agreement stated that during “the period of his employment… and for a period of two years immediately following the termination of such employment for whatever reason, Employee shall not have any direct or indirect ownership or other financial interest in any business which competes with the Business of the Company.” The employment agreement stipulated that the parties arbitrate disputes. The parties entered into the employment agreement commensurate with an agreement for the Employee to sell the business to the new employer. Unlike the Employment Agreement, the agreements related to the sale of the business did not contain an arbitration clause.

We all know what happens next. The parties have a dispute over their mutual contract performance and alleged breaches. Seller ultimately accuses the Buyer of misrepresentations intended to induce the sale and a series of other acts inconsistent with the agreement to purchase the company. The Seller sues in state court claiming that the Buyer violated the terms related to the parties’ sale and purchase of the business.

Citing the very broad language of the Non-Compete agreement, the Buyer (Employer) seeks to have the dispute resolved in arbitration in accordance with the Non-Compete agreement, despite the fact that the issues raised in the Seller’s Complaint did not specifically relate to the Employment Agreement or a breach thereof. (See generally Sunsplash Events, Inc., Fla. 4th DCA 2014). The trial court ruled against the Buyer, favoring the argument that the causes of action arose under the agreements to purchase the business (no arbitration clause) and not under the employment agreement (arbitration clause). The appellate court disagreed. In a detailed analysis, the appellate court ruled that the very broad language of the employment agreement was sufficient to encompass the claims Seller brought in the state court. The appellate court found a nexus between the disagreement over the sale of the business and the simultaneously-entered employment agreement. As a result, the appellate court ordered the parties to arbitrate the dispute (rather than litigate it in state court).

Readers of this blog are aware that courts favor arbitration clauses. Generally, courts give very liberal interpretation to arbitration clauses and favor resolving disputes in arbitration whenever the facts allow. In the case noted above, the appellate court surmised that an arbitrator could hear the entire dispute because the issue of whether the Buyer’s alleged fraudulent inducement occurred might also involve a determination of whether the Seller breached the employment agreement. As a result, the arbitration clause of the employment agreement mandated an arbitration proceeding rather than an action in state court.

As for the Chicago Cubs, after a fine season and a triumphant start to the 2015 Playoffs, the journey ended when the New York Mets swept the Cubs in four games to earn a trip to the 2015 World Series.

The take-away is this: the question of whether or not to arbitrate is worthy of discussion with your counsel. In some instances arbitration is required even when not anticipated (or preferred). And if you’re a Cubs fan, there’s always next year. At Burr & Forman we have lawyers throughout the southeast skilled in this area of the law. We do not have attorneys capable of predicting when the Cubs might win the World Series.

Eight-Figure Judgments in Trade Secret Cases – Do We Have Your Attention Now?

The conventional wisdom among attorneys and litigants in the noncompete and trade secret arena is that the cases are all about the injunctions, usually at the TRO and interlocutory injunction stage.  Some judgments handed down around the country in the last month, however, prove that the damages portion of these cases can be just as devastating to a defendant deemed to be unfairly competing.

In my home state of Georgia, a Savannah jury rendered a $30 million verdict in favor of an energy services company in a suit against its former president and other executives.  The plaintiff alleged, and the jury obviously agreed, that some of the defendants stole trade secrets and wrongfully solicited customers as part of a conspiracy to “hit the ground running” upon jumping ship to their former employer’s rivals.

In St. Louis, a state court judge slammed a husband-wife team with a judgment of $10MM — $1.6MM in compensatory damages and $8.4MM in punitives — for misappropriating trade secrets from the husband’s former employer and working with a Chinese company to make and sell imitations of the plaintiff’s products — coatings for microchips.  The plaintiff and their attorneys, however, should hold off on the down payments for the victory Porsches — the defendants are reportedly nowhere to be found and may have left the country, most likely with pockets full of coated microchips.

Finally, a long-running, tank battle-like suit between two rival software companies finally ended (not counting the likely appeal) with the original plaintiff getting hit by a Nebraska jury with a $43.8MM award on the defendant’s counterclaim.  The plaintiff started the litigation by suing its rival for alleged software pirating, and those claims were rejected by a jury last year.  The defendant counterclaimed for breach of a nondisclosure agreement (entered, ironically, to try and head off the plaintiff’s pirating claims), antitrust violations, and tortious interference with business relationships, resulting in the crippling verdict. The moral of this story is that if you pick a fight, as the plaintiff did here, you better be prepared to finish it.

BURR POINT:  Former employees and businesses who are inclined to push the envelope on restrictive covenant agreements (“I’ll just do it until a judge shuts me down”) should be mindful of the potential exposure for tens of millions of dollars in compensatory damages, attorney’s fees and punitive damages to a party who thinks they’ve been wronged.

Florida Non-Competes: Physicians, Attorneys, Quarterbacks, Oh My…

Regular readers of this blog know that Florida law allows “valid restraints of trade,” under certain circumstances. Those restrictions apply to the employer-employee relationship when written and duly executed in accordance with Florida statutes. These restraints of trade are commonly called “Non-Compete” or “Non- Competition” agreements. There are similar restrictions that can prohibit a departing employee from using a former employer’s trade secrets.

Florida’s valid restraints of trade do not apply to attorneys. As a result, attorneys are not subject to non-compete agreements. Go figure.

Physicians, on the other hand, are often required to enter into non-compete agreements as conditions of employment. Recently a group of Florida physicians asked me whether Florida law recognizes a public policy argument that negates all non-compete agreements attempting to restrain doctors from practicing in the location of their choosing or seeing previous patients. The simple answer is “No,” however the analysis seldom ends there. Generally speaking, there is no statute or case law in Florida that negates the enforcement of an otherwise valid non-compete agreement against a physician or a physician’s practice. (There are cases that have disallowed the agreements, and there are cases in which the physician was found not to have violated the non-compete terms, however there are no cases that courts regularly cite or follow creating a public policy against restricting a physician’s practice after the physician departs from a prior employer.)

So what is a physician to do when she is attempting to relocate her practice or when she hopes to join a competitor? First, and perhaps most obviously, the physician can usually negotiate (read: pay money) to opt out of the non-compete agreement. Many times a physician’s non-compete agreement actually contains the manner and costs associated with the buy-out provision. The second vehicle to challenge a physician’s non-compete agreement is on the grounds of the definition of the reasonable restriction of geographic area. Some patients will travel great distances to see their doctor. The more specialized the physician’s practice, the more likely a court will recognize the need for a greater geographic restriction. (At the same time, the more specialized the physician’s practice, the more likely the physician can argue that an actual public policy concern justifies a court’s decision to allow an argument to render the non-compete void.)

What we have found over the years is that physician practices are not shy about enforcing non-compete agreements with departing physicians. At the same time, nearly all of these physician practice groups are far more interested in resolving these issues through (financial) negotiations than through the continuation of litigation. Either way, the law in this area is very nuanced and fact-specific. As with all non-compete cases, Florida courts are obligated to construe the written, executed agreements according to their plain terms, interpreting all ambiguities in favor of unrestricted employment.

Quarterbacks are entirely different. The typical non-compete comes in the form of untimely interceptions. As a life-long NY Giants fan it’s important to recognize that losing the first two regular-season games when holding a double-digit lead in the fourth quarter is simply non-competitive. This despite Eli Manning’s contract extension that included a guarantee of more than $60 million. Fortunately, the Giants held their fourth quarter lead in the third game. That’s more competitive. Note to Eli: please stay healthy. And Eli, if you suffer an injury, consider receiving your treatment down in Florida. We have some seriously great physicians here. They’re very competitive.