The Missouri Court of Appeals recently ruled that an employee who resigns rather than sign a non-compete agreement is entitled to unemployment benefits.   Darr v. Roberts Marketing Group, LLC, , No. 13-07274R-A, (Mo. Ct. App. Apr. 22, 2014)  In this case, David Darr appealed a finding by the Missouri Labor and Industrial Relations Commission denying him unemployment benefits.

Darr began working for Roberts Marketing Group in October, 2012 selling life insurance.  In January 2013, Darr was informed that the employer would be requiring all employees to sign non-compete agreements.  The employees were required to sign the agreement by February 1, 2013.  Darr refused and said he wanted to speak to an attorney.  Darr was told signing the agreement was a condition of his employment.  Darr refused to sign the agreement and later resigned.

Darr filed a claim for unemployment benefits.  The Missouri Labor and Industrial Relations Commission ultimately ruled that Darr was disqualified from receiving unemployment benefits because he left his position voluntarily without good cause.  Missouri law permits an employee to leave a position voluntarily with good cause and still receive unemployment benefits.  The Commission ultimately concluded that the non-compete was no so restrictive of Darr’s employment prospects to warrant a finding of good cause.

The Missouri Court of Appeals reversed the Commission finding that the Commission had vastly understated the facts of the case.  The Court of Appeals began by noting that Roberts Marketing had given Darr an ultimatum to sign a non-compete or be terminated, combined with a limited opportunity to review the agreement and seek legal advice.  Roberts Marketing had also drafted a non-compete that was nation-wide, could have been extended for up to six years, and required Darr to waive any defenses in future litigation. The Court of Appeals implied that these restrictions were far more than permissible in Missouri.

The Court of Appeals ultimately concluded that it viewed the Agreement was one that “may significantly constrain a person’s future ability to earn a livelihood or to pursue a chosen occupation while simultaneously exposing the individual to potential litigation and liability.” Id. at *18.  The Court of Appeals concluded that Mr. Darr was faced with external pressures “so compelling that a reasonably prudent person would be justified in terminating his employment.”  Id.  The Court of Appeals reversed the Labor and Industrial Commission and remanded the matter back to them to process Darr’s unemployment claim.

Takeaways:  First, the Missouri Court of Appeals did not explicitly rule on the enforceability of the employment agreement in this case, but cast doubt on whether the employer could enforce it.  Restrictive covenants should be reviewed by an experienced non-compete lawyer before they are provided to employees.  Second, the Missouri Court of Appeals did not rule that it was impermissible for an employer to require an employee to sign an agreement as a condition of continued employment. Employers in Missouri may still terminate an employee who refuses to sign a non-compete agreement.  Third, employees in Missouri should be provided with sufficient time to review a proposed agreement, and be allowed to have their own lawyer review it if they ask. These failures of the employer, weighed heavily on the Court of Appeals’ analysis of whether good cause existed to permit the employee to obtain unemployment benefits.

A U.S. District Judge in the Eastern District of Pennsylvania has allowed several claims to proceed to trial following a motion for summary judgment by defendants in Ozburn-Hessey Logistics, LLC v. 721 Logistics, LLC, et al, No. 12-0864 (April 4, 2014). The allegations in the case go beyond the typical defection of an employee or two to join a competitor.  As the court noted:

[m]ost centrally, OHL accuses the defendants of sabotage. According to its allegations, the defendants participated in a coordinated plan to cripple OHL’s produce-clearing operations and convert its customers by arranging for OHL’s entire perishables division to quit, and join 721, at precisely the moment when it would be most damaging to OHL.

Plaintiff Ozburn-Hessey Logistics asserted counts of misappropriation of trade secrets, unfair competition, breach of contract (non-solicitation agreement), tortious interference with contractual relations, civil conspiracy, and breach of duty of loyalty against ten individual defendants as well as its competitor, 721 Logistics.  The Court granted a motion to dismiss in part, but allowed core provisions of the lawsuit to survive against the key actors. Specifically, the court held that whether customer contact information was a trade secret under the Pennsylvania Trade Secrets Act was questionable, but ultimately a question of fact as to three of the defendants.

Addressing the claim of unfair competition, the Court noted that under Pennsylvania common law, unfair competition is the “systemic inducing of employees to leave their present employment and take work with another to cripple and destroy an integral part of a business” or “for the purpose of having the employees commit wrongs, such as disclosing their former employer’s trade secrets or enticing away his customers,” rather than “to obtain the services of particularly gifted or skilled employees.” To determine the issue of intent, specifically the argument that the group resignation was timed in order to cause maximal harm, the court looked at various emails that said, in part, “After the first week of January – when all the ‘s’ will hit the fan . . . we’ll set a date!” and “how’s this for quickness? … snapping necks and cashin’ checks!” The court concluded that the unfair competition claim should be dismissed as to all but one individual defendant and the sole corporate defendant.  Similarly, the court declined to dismiss the civil conspiracy claim against the same parties based on the possibility of unfair competition.  The tortious interference claim was dismissed as to all defendants. The breach of contract claim survived as to one defendant. Finally, the breach of duty of loyalty claim was dismissed because the employees merely made arrangements to compete before resigning and did not use confidential information or solicit customers while still employed.

Overall, the decision provides a useful atlas of the geography of unfair competition law in Pennsylvania.

A recent Illinois federal court decision has called into question the much begrudged holding from the Illinois Appellate Court for the First District, First Division, in Eric Fifield and Enterprise Financial Group, Inc. v. Premier Dealer Services, Inc., 373 Ill. Dec. 379, 993 N.E. 2d 938 (Ill. App. Ct. June 24, 2013).

The Fifield Decision

 In Fifield, the Illinois Appellate Court heard an appeal from the Circuit Court of Cook County, which had granted a motion for declaratory relief filed by plaintiffs, an employee and current employer, against the defendant former employer. The Cook County Court held the nonsolicitation and noncompetition provisions of the employment agreement were unenforceable as a matter of law for lack of adequate consideration.  The Appellate Court, assessing the issue of consideration for post-employment restrictions, concluded, “there must be at least two years or more of continued employment to constitute adequate consideration in support of a restrictive covenant” – even in the case where the employee received an offer of employment, contingent on his agreement to the nonsolicitation and noncompetition provisions and the employee voluntarily resigned.  Id. at 944.  As Plaintiff had worked for defendant Premier far less than the two-year threshold, the Appellate Court affirmed the judgment of the Cook County court.

This holding was somewhat radical given the employee had received a conditional offer of employment and voluntary resignation, but the consideration was still insufficient to enforce the agreement.  Despite the stir caused by this decision, the Illinois Supreme Court declined to review it.

A Recent Federal Court Departure from Fifield

At least one federal judge does not agree with the Fifield decision.  Recently, the Northern District of Illinois decided Montel Aetnastak, Inc. and Montel Inc. v. Krstine Miessen a/k/a Kristine N. Schneider, Bradford Systems Corporation and Space Saver Corporation , No. 13 C 3801, 2014 U.S. Dist. LEXIS 11889 (N.D. Ill. Jan. 28, 2104), which is a departure from the holding in Fifield.  As to the issue of whether a fifteen month employment was sufficient consideration, Judge Ruben Castillo, stated that “Illinois law does not, however, provide a clear rule to apply in this instance.”  Judge Castillo cited to Fifield and agreed the former employee needed a “substantial period” of employment to generate consideration, but he also referenced other Illinois appellate court cases in which employment for a year was considered a “substantial period” of employment.  As such, Judge Castillo concluded, “Both the length of her term of employment, along with her voluntary resignation, led the Court to conclude that she was provided with a ‘substantial period’ of employment. Therefore, Miessen was provided adequate consideration to support the enforceability of the employment agreement.”  Id. at *46.

Lessons

The law in Illinois remains unsettled.  It is unclear if or when the Illinois Supreme Court will ever rule on this issue.  In the wake of these decisions, we are reminded that drafting a favorable forum provision and selecting the right courthouse venue may prove to be the critical difference until this issue is resolved.

The Fifth Circuit Court of Appeals has affirmed a finding of the National Labor Relations Board (“NLRB”) that a confidentiality clause that defines “confidential information” to include “financial information, including costs, prices . . . [and] personnel information” among other items was overly broad and restricted the rights of non-managerial employees to engage in concerned activity under Section 7 of the National Labor Relations Act (“NLRA”) to discuss the terms and conditions of their employment for “collective bargaining or other mutual aid or protection.”  The decision in Flex Frac Logistics, LLC v. National Labor Relations Board (5th Cir. March 24, 2014) is consistent with previous NLRB decisions and advice memoranda, but is significant because the Fifth Circuit Court of Appeals deferred to the NLRB on this interpretation.  The Court held, in part, that references to “financial information” could be reasonably viewed to include information about wages, and also found the reference to “personnel information” to be overly broad.

Non-compete counsel who do not practice traditional labor law and who have not been following these developments may be surprised to learn that seemingly innocuous confidentiality agreements may run afoul of the NLRA with respect to non-managerial employees.  For those who have been following this issue, the decision serves as a reminder that old fashioned confidentiality agreements given to non-managerial employees that include a laundry list of examples of “confidential information” may require a surgeon’s scalpel, either to remove generalized references to “personnel information” or “financial information,” and/or to utilize safe harbor language clarifying that the proscription is not meant to prohibit the non-managerial employees from discussing personnel information with other employees or with third parties who are not future employers or competitors of the employer.  The NLRB, however, has previously indicated that a simple statement that a policy “does not deny any rights provided under the National Labor Relations Act to engage in concerted activity” may not be sufficient to bring an otherwise unlawful policy into compliance. American Red Cross Blood Services, Western Lake Erie Region, case number 08-CA-090132 (June 4, 2013). These NLRA concerns would not apply to individualized executive agreements or policies for upper-level managerial employees.

Companies will therefore continue to struggle to reconcile the collision of collective bargaining rights of non-managerial employees, with the employer’s right to protect trade secrets and confidential business information, until further guidance is provided by the courts.

Jackson Lewis e-discovery guru Ralph Losey has posted an article about the Computer Fraud and Abuse Act (“CFAA”) on his e-discovery blog ediscoverylawtoday. Losey posits that more courts may be turning to the minority application of the CFAA as applying only to acts of unauthorized access, as opposed to unauthorized use. As he states in part:

A majority of courts have to date construed the meaning of “unauthorized access” in the CFAA to include access for unauthorized purposes, such as to steal an employer’s information. They applied the anti-hacker statute even though the employee was authorized to access the computer system, just not for purposes of theft. Now a growing number of courts are stepping back from the expansive construction of what it means to be a “hacker” under the statute. They are instead limiting the CFAA to situations where the access to the computer itself was unauthorized, and disregarding whether or not the access was for a permitted use.

A recent case out of the District Court in Pittsburgh provides an example of this new trend, and includes a good discussion of the law. Carnegie Strategic Design Engineers, LLC v Cloherty, March 6, 2014.  Judge Eddy points out that there is a split in the Circuits on the issue, and then follows the minority view that the CFAA was not intended to convert disloyal employees into hackers. The plaintiff employer’s case was dismissed with prejudice because there were no allegations that the employee was not authorized to access the computer system, just allegations of improper purpose.

 

In another example of out-of-state employers utilizing choice of forum and choice of law provisions to bind California employees to restrictive covenants, the Pennsylvania Superior Court recently held that a Pennsylvania choice of law and forum clause was enforceable as against a California resident.

The case, Synthes USA Sales, LLC v. Harrison, involved a sales consultant, Harrison, who worked for Synthes in the medical device industry. Harrison signed a non-solicitation agreement in 2007 in which he agreed not to solicit Synthes’s customers for a period of one year after his employment ended.  The agreement contained a clause stating,

CHOICE OF LAW AND FORUM: This agreement will be governed by Pennsylvania law applicable to contracts entered into and performed in Pennsylvania.  I agree that this agreement can be enforced by any federal or state court of competent jurisdiction in the Commonwealth of Pennsylvania and hereby consent to the personal jurisdiction of these courts.

Harrison quit his employment on November 2, 2012, and started working in a similar capacity for a competitor. Within a half hour of giving his notice, Harrison filed an action for declaratory relief in the U.S. District Court for the Eastern District of California.  On November 15, 2012, Synthes filed a complaint in Pennsylvania seeking to enforce the agreement with a preliminary injunction.  Synthes also moved to dismiss the California action, apparently on the grounds that it involved an earlier 2005 agreement between the parties.  The California federal court dismissed the action and an appeal is still pending in the Ninth Circuit Court of Appeals.

Meanwhile, the Pennsylvania Court of Common Pleas dismissed Synthes’s action and applied California law. That court held that the choice of law provision, by its own terms, only applied to contracts “entered into and performed in Pennsylvania.”  The Superior Court reversed this holding. It applied the “last antecedent rule” and interpreted the limiting language of “entered into and performed in Pennsylvania” to define the type of law that would govern and not limiting which contracts were subject to the choice of law.  The court remanded for further proceedings.

This litigation offers important lessons in careful contract drafting and contract interpretation. It also highlights an increasing willingness of courts to enforce restrictive covenant agreements against employees in California, based on a choice of law, choice of forum and consent to jurisdiction provisions.  This trend was bolstered by the U.S. Supreme Court’s decision in Atlantic Marine Construction Co. v. U.S. Dist. Court for the Western District of Texas.

Our colleague Jason C. Gavejian has written about an interesting case in New Jersey involving the criminal prosecution of an employee who took highly confidential documents from her employer to support her employment discrimination suit.  The decision distinguishes a 2010 New Jersey Supreme Court ruling in which the court held that an employee who copied employer records for use in a discrimination case may be insulated from discipline or termination.

The variation among states when it comes to non-compete law is a source of frustration for many employers.  And sometimes, similar facts can lead to opposite results depending on the jurisdiction.  A recent decision from the Southern District of Alabama, holding that a non-compete can only be signed after employment begins, shows how Alabama law differs from states like Minnesota and Oregon, which require a restrictive covenant to be signed before the inception of employment in order for the employment itself to constitute consideration.

In Dawson v. Ameritox, Ltd., No. 13-0614-KD-M (S. D. Ala. Jan. 6, 2014), the Court denied a motion by Ameritox to enjoin its former employee, Dawson, from working for a competitor.  Dawson, a pharmacist, signed a non-compete with Ameritox on March 29, 2011 in connection with an offer to start employment on April 11, 2011.  In denying the injunction, the court signaled that the non-compete was not enforceable under § 8-1-1 Alabama Code 1975. Subsection (a) of Section 8-1-1 states that “Every contract by which anyone is restrained from exercising a lawful profession, trade or business otherwise than is provided by this section is to that extent void.  The court held that pharmacy was a “profession,” and refused enforcement on that ground.

But the court also held that the non-compete was not saved by section (b) of Section 8-1-1 which states in part, “one who is employed as an agent, servant or employee may agree with his employer to refrain from carrying on or engaging in a similar business and from soliciting old customers of such employer within a specified county, city or part thereof so long as the . . . employer carries on a like business therein.” (Emphasis added.) Relying on the holding from the Alabama Supreme Court in Pitney Bowes, Inc. v. Berney Office Solutions, 823 So.2d 659 (Ala. 2001), the Court held that subsection (b) does not apply “unless the employee-employer relationship exists at the time the agreement is executed.” That certainly tracks with the plain language of the statute which refers to “one who is employed.”

By contrast, in Minnesota (which does not have a statute on non-competes), case law has evolved such that mere continuation of employment is not considered sufficient consideration to support a non-compete, but an offer of employment will suffice. E.g. Sanborn Manuf. Co. v. Currie, 500 N.W.2d 161, 164 (Minn. Ct. App. 1993).  Strictly construing this principle, Minnesota courts have held, for example, that a non-compete signed on the first day of employment is not enforceable (absent other specific consideration, such as money). See Cannon Services, Inc. v. Robinson Outdoors, Inc., No. 04-1597 ADM/AJB (D. Minn. April 30, 2004) (Plaintiff did not show likelihood of success to enforce non-compete signed on first day of defendant’s employment).

In Oregon, a non-competition agreement between an employer and employee will be deemed void and unenforceable unless: (a) the employer informs the employee in a written employment offer received by the employee at least two weeks before the first day of the employee’s employment that a non-competition agreement is required as a condition of employment; or (b) the employer and employee enter into the non-competition agreement upon the subsequent bona fide advancement of the employee.  See ORS 653.295(1).  Note, however, that the foregoing statutory provision does not apply to non-solicit and non-service agreements or confidentiality agreements.  See ORS § 653.295(4)(b).

In Alabama, therefore, employers are generally advised to have non-competes signed on or after the first day of employment and continued employment may be considered adequate consideration. In Minnesota, however, employers must be careful to have non-competes signed before the first day of employment (often with the offer letter, as occurred in the Dawson case in Alabama) so that the offer of employment can serve as consideration.  And in Oregon, non-competes must be provided at least two weeks before employment begins. Employers must continue to mindful of state law variances, not only in the content of restrictive covenant agreements, but in the manner in which they are implemented.

The use of forum-selection clauses in non-compete agreements received a possible boost from a recent U.S. Supreme Court ruling in the case of Atlantic Marine Constr. Co. v. U.S. District Court for the Western District of Texas, 187 L. Ed. 2d 487 (2013).  Cliff Atlas and Ravindra Shaw have writtten an article on the Jackson Lewis website explaining the decision.

In a recent Tennessee case, Fidelity Brokerage Services LLC v. Melissa Clemens, No. 2:13-CV-239 (E.D. Tenn., Nov. 4, 2013), the Court entered a preliminary injunction prohibiting a former employee from soliciting customers or prospective customers she served while working for Fidelity, from soliciting Fidelity’s employees, and from using Fidelity’s confidential information.  As  we previously stated regarding the Dill v. Continental decision, the Fidelity case serves as another reminder that reasonably drafted restrictive covenants are very much enforceable in Tennessee when reasonable under the circumstances.

Ms. Clemens was an account executive for Fidelity and managed at least 424 households representing over $466 million in assets under Fidelity management.  Over the course of her 12-year employment, Ms. Clemens signed two employment agreements meant to protect Fidelity’s confidential information and prevent her from soliciting certain customers, prospective customers and employees.

In its decision, the Court made several noteworthy points:

  • Even though the agreement did not identify a geographic territory from which Ms. Clemens was restricted, the customer-based restriction (prohibiting her from contacting customers and prospective customers she served) did not render the agreement unenforceable.
  • Because Ms. Clemens was acting as “the face” of Fidelity, Fidelity had an interest in protecting the information generated from her relationships with is customers and potential customers.
  • Mere telephone numbers and addresses for customers are generally not considered confidential in Tennessee.  However, the “aggregate of information” which the employee had access to as a result of her employment with Fidelity, including customers’ confidential, personal, and financial information, could be considered confidential.
  •  A factor to assess whether a preliminary injunction should be entered is whether the moving party would suffer from “irreparable harm.”  Customer referrals and the loss of goodwill are difficult to calculate or prove, and may be used to assess the possibility of irreparable harm under Tennessee law.