An Ohio appeals court recently held that an employee did not breach his non-competition agreement by creating his own business in the same industry as his former employer, despite the fact that the former employee contacted clients of his former employer and began compiling an inventory during his restricted period.  Berk Enterprises, Inc. v. Polivka, 11th Dist. No. 2012-T-0073, 2013-Ohio-4961.  While the court of appeals held that the non-competition agreement was enforceable against the former employee, it determined that the specific language of the non-competition agreement did not prohibit the former employee from taking steps during the restricted period of the non-competition agreement to create a business that would compete in the same industry following the conclusion of the restricted period.

Facts

In 2007, Robert Polivka was hired as a salesperson for Berkley Square, a division of Berk Enterprises, Inc., an Ohio corporation that imports plastic cutlery for re-distribution throughout the United States.  In that role, Polivka had access to a variety of confidential information, including sensitive pricing and customer information.  As a result, Berk required that Polivka sign a non-competition agreement which stated that, for one year following the conclusion of Polivka’s employment with Berk, Polivka could not:

(i) engage in or carry on, directly or indirectly, any activity or business as an employee, independent contractor or agent, partner or otherwise, which provides, designs, develops, markets, invests in, imports, produces or sells any products, services, or businesses, which are the same or similar to, or competitive with those designed, developed, produced, marketed, invested in, provided or sold by BERK and its Affiliates (a ‘Competing Business’); (ii) have a direct or indirect interest in, or be Affiliated with, or render any services for, any person or entity engaged or carrying on, directly or indirectly, any Competing Business in the Territory; (iii) induce or attempt to induce any client, customer or supplier of BERK to reduce the business done by such supplier, customer or client with BERK and/or its Affiliates; (iv) divert or attempt to divert any of the BERK’S’s and/or any of its Affiliates’ business to Employee or to any party on whose behalf Employee is acting, either directly or indirectly, or solicit any of BERK’S and/or any of its Affiliates’ customers/suppliers with whom Employee dealt on behalf of BERK and/or any of its Affiliates during the time the Employee is employed by BERK; (v) solicit or induce any Employee, distributor, sales representative, agent or contractor of BERK to terminate his, her or its employment or other relationship with BERK or any of its Affiliates; or (vi) engage in any practice, the purpose or result of which is to evade the provisions of this Agreement or to commit any act that is detrimental to the successful continuation by BERK and its Affiliates of its/their business.

While still employed by Berk, Polivka and a partner set up a business called R & G Packaging, LLC.  This business was created to import and sell plastic cutlery and other disposable products similar in nature to Berkley Square’s line of products.  In July 2010, approximately a month after forming R & G, Polivka resigned from his position with Berk.

Immediately following his resignation, Polivka communicated with three Berk distributors that were part of his clientele with Berk.  According to Polivka, he contacted these individuals solely to inform them that he was resigning from Berk.  In December 2010, while still subject to his noncompetition agreement, a broker with whom Polivka had worked while employed by Berk emailed Polivka regarding a quote on products, and inadvertently copied a current Berk employee. Once Berk learned of the email, it filed suit against Polivka alleging that he breached his noncompetition agreement.  At the time Berk filed suit, R & G had not yet made any sales.

At trial, Polivka admitted that: (1) he and his partner created their new corporation before Polivka quit his job with Berk; (2) the new business would sell the same line of products as Berkley Square; (3) immediately after leaving Berk, Polivka telephoned and/or visited three Berk customers to inform them of his decision to quit; and (4) the new business was already compiling an inventory of the plastic cutlery by importing it from China.  As a result, the trial court determined that Polivka violated his non-competition agreement even though R & G had not made any sales during Polivka’s restricted period, and enjoined Polivka from competing with Berk for one year following the date of the decision.

Non-Competition Agreement Did Not Prohibit Polivka’s Conduct

On review, the Eleventh District Court of Appeals stated that, because R & G had not actually made any sales during the restricted period, the issue was whether the terms of the non-competition agreement prevented Polivka from preparing to compete with Berk.  Importantly, the court of appeals construed the terms of the non-competition agreement against Berk because it was a standard Berk agreement that was not the result of negotiations between Polivka and Berk.

Ultimately, the appellate court overruled the decision of the trial court and held that Polivka’s actions did not violate any of the express provisions of his non-competition agreement.  The court determined that the prohibited behavior in Polivka’s non-competition agreement did not cover investing in a new entity that had not made any sales because the agreement only covered activities which would have an immediate adverse effect on Berk’s business.  In reaching this conclusion, the court stated:

 Taken as a whole, the evidence presented by Berk, as the plaintiff in the underlying action, did not establish that appellant had actually started to compete with the company by trying to sell plastic cutlery to the same type of customers. Rather, the company was only able to prove that he was merely preparing to compete for the same business after the one-year period had elapsed. Since mere preparation did not conflict with any express provision of the non-competition covenant, the trial court erred in finding that appellant had violated the covenant.

Conclusion

Berk suggests that Ohio employers should ensure their non-competition agreements explicitly prohibit activities ancillary to competition, including the formation of a competing business, if they want these activities to be restricted.  Additionally, Berk serves as a reminder that non-competition agreements will typically be construed against employers, and that it is often difficult to prove that a former employee is actually competing in a particular industry.

Shawn Kee has written on the Jackson Lewis website about a recent decision from the Court of Appeals of Tennessee, James F. Dill Jr. et al v. Continental Car Club, Inc., in which the Court held that a non-compete was narrowly enforceable under Tennessee law, although it declined to enforce a Florida choice-of-law provision which might have led to a broader restriction. Read more in Shawn’s post.

On November 12, 2013, A court in the U.S. District Court for the District of Massachusetts issued a decision concerning the ongoing debate about the meaning of “exceeding authorized access” under the Computer Fraud and Abuse Act. Moca Systems, Inc. v. Bernier, No. 13-10738-LTS (D. Mass. Nov. 12, 2013). MOCA Systems, Inc. filed suit against its former CEO and his newly formed company, Penley Systems, LLC, claiming Bernier improperly accessed MOCA’s computer systems to obtain confidential information and trade secrets for use at his new company.

MOCA alleged that within days of his termination, Bernier entered MOCA’s office, took a company-owned computer, downloaded MOCA’s trade secrets and confidential information, and then deleted a significant amount of information in an attempt to cover his tracks.

As this blog has previously noted, federal appellate courts are currently split on the interpretation of the term “exceeds authorized access” under the CFAA, and whether the term should be interpreted narrowly or broadly.  “Exceeds authorized access” is defined by the CFAA to mean, “to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled to so obtain or alter.”   The phrase “without authorization” is not defined by the statute, however, and courts are currently divided on whether the phrase should be interpreted broadly or narrowly.

The court concluded that MOCA’s allegations supported a claim that Bernier had accessed the computer “without authorization” under either the narrow or broad reading of the CFAA, and denied Bernier’s motion to dismiss.  Declining to weigh in on the split in authority, the court noted:

Resolution of the pending motion, however, does not require the Court to determine which line of cases is better-reasoned, since the allegations in this Complaint differ materially from these cases and suffice under either standard.

In situations such as this, when an employer suspects foul play and theft of corporate resources, employers should consider making a forensic copy of the computer in question immediately.  Turning the computer on before making a forensic copy can create difficulties in investigating the employee’s activities because it can alter the metadata relating to downloaded and deleted files.

The use of LinkedIn to notify professional contacts of a change in employment did not constitute competition. according to a recent Massachusetts ruling. In KNF&T v. Muller, No. 13-3676-BLS1 (October 24, 2013), the Massachusetts Superior Court denied a request for a preliminary injunction where an employer alleged that a former employee violated her non-competition agreement by, among other actions, using her LinkedIn profile to notify contacts of her new position. In denying the injunction, the court shed further light on the definition of competition and solicitation in the era of social media.

Charlotte Muller entered into a non-competition agreement with staffing company KNF&T which included prohibitions against competing with KNF&T and soliciting other KNF&T employees. Upon leaving KNF&T and taking a position with Panther Global/Total Clerical (a KNF&T competitor), Muller updated her LinkedIn page to reflect her change in employment. The update notified Muller’s 500 plus LinkedIn contacts, some of them KNF&T clients, of her new position.

In its motion for a preliminary injunction, KNF&T argued that the updated LinkedIn profile constituted “solicitation of business in direct violation of [Muller’s] non-competetion agreement.” KNF&T also attached a printout of Muller’s LinkedIn profile to its motion.

The court found “no evidence” that Muller had violated her non-competition agreement and denied the injunction. In a footnote, the court indicated it did not view the LinkedIn update as soliciting business competitive with KNF&T. The court further noted that, despite the updated LinkedIn profile, future violation of the non-competition agreement by Muller was not particularly likely.

The KNF&T decision comes on the heels of a First Circuit decision in Corporate Technologies, Inc. v. Harnett which held that an email blast to former clients announcing an employee’s new position constituted “solicitation.” The KNF&T decision indicates that LinkedIn updates may be treated differently than emails and that the definition of “solicitation” in the context of social media remains unsettled.

The use of LinkedIn was also a key issue in Eagle v. Morgan, No. 11-403 (E.D. Pa. March 12, 2013), where an employer was held liable for privacy claims after altering the LinkedIn profile of a former employee. KNF&T, along with the Eagle decision, shows that LinkedIn is becoming an increasingly prominent factor in non-compete litigation. Employers should therefore keep in mind the potential issues surrounding LinkedIn when drafting social media policies and non-competition agreements and when hiring new employees.

Robert K. Jones and Stephen B. Coleman from our Phoenix office have written on the Jackson Lewis website about a significant new court of appeals decision in Arizona striking down restrictive coveants in an employment agreement as overbroad. The article can be viewed here: Confidentiality, Non-Compete Agreements Held Unenforceable against Former Employee, Arizona Court Holds.

The Court of Appeal for California’s Fourth Appellate District recently confirmed that the California Uniform Trade Secrets Act (CUTSA), a broad statute intended to be the last word in trade secret misappropriation cases, does not preclude separate but related common law claims, so long as these claims are not based entirely on the trade secret misappropriation.  The ruling echoes similar decisions from other California appellate districts and is helpful to businesses seeking to protect against unfair competition.

In Angelica Textile Services, Inc. v. Park, case number D062405, (Order dated October 15, 2013), the plaintiff, Angelica, sued its former employee, Park, asserting causes of action for misappropriation of trade secrets under CUTSA, breach of contract, breach of fiduciary duty, interference with business relationships, unfair business practices, unfair competition, and conversion.  The claims generally arose out of Park’s alleged solicitation of Angelica’s largest customers for a new competing venture he had established while still employed by Angelica, allegedly with the help of hundreds of documents over which Angelica claimed trade secret protection.  The trial court granted Park’s motion for summary adjudication with respect to the non-CUTSA claims, holding that those claims were preempted by CUTSA, which, “[a]t least as to common law trade secret misappropriation claims . . . occupies the field in California.”  A jury then went on to rule against the company on its CUTSA claims.

The Court of Appeal reversed the dismissal of the non-CUTSA claims.  With respect to the breach of contract claim, the court relied on CUTSA’s language to hold that the statute “does not displace breach of contract claims, even if they are based in part on the alleged misappropriation of a trade secret.”  In preserving Angelica’s other claims, it held that “CUTSA does not displace noncontract claims that, although related to a trade secret misappropriation, are independent and based on facts distinct from the facts that support the misappropriation claim.”  Accordingly, to the extent Angelica’s claims were based at least in part on conduct other than the misappropriation of its trade secrets, its remedies were not limited to those under CUTSA.

The court held that Angelica’s claims were permissible because it did not allege that Park breached his contract with the company, and violated its duties to the company, by misappropriating its trade secrets.  Rather, its breach of contract claim was based on Park’s alleged violation of a noncompetition agreement with the company (while Park was still employed), its conversion claim was intended to redress Park’s acquisition of the company’s documents in the event they were not entitled to trade secret protection, and its other claims were based on both the breach of contract and the breach of Park’s duty of loyalty to Angelica.  Thus, because none of the claims depended on the trade secret claim, none were barred by CUTSA.

Angelica does not break new ground, but it is a helpful clarification of California’s developing law regarding trade secrets and unfair competition.  In particular, California businesses may be comforted to know that the state’s strong public policy against restrictions on competition does not leave them without the means to remedy unfair competition that does not involve the misappropriation of protected trade secrets.  In pleading non-CUTSA claims akin to those above, the victims of unfair competition should be careful to make clear exactly which conduct forms the basis of its claims and should consider making explicit the fact that such claims are not based on the misappropriation of trade secrets.

 

We have previously written about tolling provisions on this blog.  In a decision from the U.S. District Court for the District of Minnesota, Judge Patrick J. Schiltz held that, under Minnesota law, non-compete terms do not automatically reset upon violation. The decision in U.S. Water v. Watertech of America, No. 13-CV-1258 (PJS/JSM), concerned a motion for a preliminary injunction to enforce an 18 month non-compete signed by a former employee of U.S. Water, Sveinn Storm. At the time of the decision there were only four weeks left until the 18 month term expired on October 30, 2013. At the hearing on the motion, U.S. Water argued that the covenant not to compete should not expire on October 30, 2013 because the agreement contained a provision that tolled the non-compete during any violation and, in the alternative, that a contractual non-compete term automatically resets upon violation.  In rejecting both arguments, the court noted as follows:

First, contrary to U.S. Water’s assertion, the agreement signed by Storm does not include a tolling provision. Second, U.S. Water has not cited (and the Court has not found) any judicial decision holding that, under Minnesota law, a violation of a covenant not to compete automatically resets the term of that covenant. Given that “[i]n Minnesota, employment noncompete agreements are looked upon with disfavor, cautiously considered and carefully scrutinized,” (citation omitted), the Court doubts very much that any Minnesota court would give an employer a “fresh set of downs” every time a former employee violates a covenant not to compete.

The Court held the parties to their agreement that Storm would refrain from contacting any of U.S. Water’s customers before October 30, 2013, but denied the motion for a preliminary injunction. Unfortunately, it is not revealed in the Court’s decision what, if any, language the plaintiff was relying upon in its assertion that the agreement contained a tolling provision.  This case is a glass half-full and half-empty for plaintiffs relying on tolling agreements. On the one hand, it throws cold water on the argument that common law allows for automatic tolling, although other Minnesota courts have at least entertained the idea of equitable tolling. On the other hand, it does not directly say that a carefully written contractual tolling provision would not be enforceable.

The First Circuit Court of Appeals issued its most significant decision to date on non-solicitation provisions in restrictive covenants by upholding a preliminary injunction in Corporate Technologies, Inc. v. Harnett, No. 13-1706 (August 23, 2013). The court affirmed a decision from the District of Massachusetts granting a preliminary injunction to an employer whose former employee used a targeted email blast to announce his new position with a competing company. In upholding the injunction, the court took a much broader view of the meaning of “solicitation” than that argued by the defendant employee and shed light on the “hazy” line separating “actively soliciting” business from “merely accepting” it.

Brian Harnett, an account/executive salesman, signed an agreement containing non-solicitation and non-disclosure provisions when he joined the former employer nearly a decade earlier. Upon leaving to work for a competitor, Harnett sent an email to a “targeted list of prospects,” approximately 40 percent of whom were customers of his former employer. Based on their receipt of the email, customers contacted Harnett and at least one of the former employer’s customers eventually completed a sale with Harnett’s new company. Harnett also had significant business contacts with at least four of his former employer’s customers.

Harnett argued that because the customers were the ones initiating contact, subsequent business activity could not be considered solicitation. The court, however, held that solicitation “can take many forms” and found Harnett’s argument unpersuasive.  In forming its opinion, the court noted:

[t]he employer ordinarily has the right to enforce the covenant according to its tenor. That right cannot be thwarted by easy evasions, such as piquing customers’ curiosity and inciting them to make the initial contact with the employee’s new firm.

The court determined that in solicitation cases, placing an emphasis on who made the initial contact would undermine the former employers’ bargained-for protections, as the term “initial contact” has an “amorphous nature” and can easily be “manipulated.” Instead, the court announced a belief that the identity of the party making the initial contact should be “just one factor” in “drawing the line between solicitation and acceptance.”

The First Circuit’s decision follows Massachusetts appellate case law. In Alexander & Alexander, Inc. v. Danahy, the Appeals Court of Massachusetts also took a broad view of solicitation and described the difference between accepting and receiving business as “more metaphysical than real.” Alexander v. Alexander, Inc. v. Danahy, 488 Mass. App. Ct. 23, 30 (Mass. App. Ct. 1986).

The Corporate Technologies, Inc. decision is likely to be relied upon by employers seeking to enforce non-solicitation clauses, especially in the First Circuit.  It also offers important lessons for employers in the hiring context. Employers should advise newly hired employees with non-solicitation agreements to be careful in their dealings with former customers. Seemingly innocuous email blasts may violate their non-solicitation agreements, even if a former customer reaches out to them first.

The Wall Street Journal on line has taken a recent interest in non-competes in a pair of recent one-line articles (protected by pay wall) on August 12 and August 14, 2013. Both pieces cite to a study commissioned by the Journal showing that the number of lawsuits filed over non-competes went up 60 percent between 2002 and 2012 (from about 475 to 760). In “Litigation Over Noncompete Clauses is Rising,” authors Ruth Simon and Angus Loten theorize that non-competes are having a “damping effect on U.S. entrepreneurship.”  While there is little evidence for this theory, it does appear that non-compete litigation is at an all time high. Certainly adequate legal protections against unfair competition also are important for economic growth.

The article also points to proposed legislative changes in New Hampshire, Massachusetts, and, as reported here, New Jersey, to limit enforceability of non-compete agreements, in part based on arguments that this might spur employment and economic activity. What the article did not mention that is that it arguably has become easier to enforce non-compete agreements in other states, including Georgia and Texas, than it was just a few years earlier. Non-compete law continues to vary widely from state to state and it would be premature to say there is a national trend to impose greater limitations in this area.

In “Companies Loosen the Handcuffs on Non-Competes” (August 12, 2013), the Journal reported what it saw as a trend of employers taking a “looser attitude toward enforcing non-compete agreements” by invoking trade-offs between the old and new employer over duration, duties and compensation. Negotiated resolution to non-compete disputes is nothing new, but the Journal’s story is a good reminder that it often pays to be creative, and flexible, when faced with one of these issues.  On the other hand, readers of the Journal should not take away the misperception that non-competes are never enforceable or can always be resolved.  In appropriate situations, properly drafted agreements can be and often are enforced by the courts.

 

The Indiana Court of Appeals determined in an unpublished opinion that an employer presented a prima facie case that a five-year restriction in a non-compete agreement was reasonable.  Mayne v O’Bannon Publishing Co., 36 IER Cases 279 (Ind. Ct. App. 2013).  Elizabeth Mayne operated a small commercial printing business in Louisville, Kentucky for some time and decided to close the business and accept employment with O’Bannon Publishing Co. just across the Ohio River in Southern Indiana.  O’Bannon did not purchase Mayne’s business, but it did purchase at least one printing press from her and paid her a commission, over and above salary, for customers she brought over. Mayne settled into her new position as manager of O’Bannon’s print shop and developed close relationships with the company’s customers.  Because O’Bannon only employed one or two other employees at any given time (often teenagers), Mayne worked closely and directly with O’Bannon’s customers over the course of her five years of employment, particularly its repeat business clients.  Mayne was the go-to person for O’Bannon’s business customers and offered direct, personal assistance to them.  Indeed, the evidence established that Mayne became the face of the business and “customers loved [her].”

Mayne ultimately resigned her employment with O’Bannon and purchased a competing print shop business within one-half mile of O’Bannon’s shop.  O’Bannon filed suit and was granted a preliminary injunction on the basis of the non-compete agreement in Mayne’s employment agreement.  On appeal, Mayne argued that O’Bannon failed to establish a reasonable likelihood of success at trial in order to support preliminary injunctive relief.  Specifically, Mayne argued that the five-year restriction in her non-compete agreement unreasonable as a matter of law.  The Court of Appeals disagreed.

The Court conceded that a five-year restriction is longer than most such restrictions deemed reasonable under Indiana law, stating, “To be sure, five years is a lengthy period for these types of restrictions.”  And, in fact, the Court had to reach back to Indiana appellate cases decided in 1989 and 1964 to find other examples of a five-year restriction upheld as reasonable.  Nonetheless, the Court relied on the close relationships developed by Mayne during her employment with O’Bannon to uphold the restriction.  Additionally, the Court noted that the geographic scope of the non-compete agreement was limited to two Southern Indiana counties and cited the fact that Mayne previously operated a print shop in Louisville, Kentucky.

This case – albeit an unpublished decision – may give encouragement to drafters of non-compete agreements to reach further with regard to time restrictions.  However, it must be noted that the Court based its decision on the unusually close relationship Mayne developed with O’Bannon’s customers and also cited to the very limited geographic scope of the non-compete agreement.  Indiana courts will continue to review non-compete agreements for reasonableness as to the time, activity, and geographic area restrictions.