The North Dakota Supreme Court upheld a judgment finding two employees of SolarBee, Inc., a North Dakota corporation that manufactures solar-powered water circulators, liable for a total of $621,800 in damages for breaching a non-compete agreement while still employed.  The Court’s decision in SolarBee, Inc. v. Walker, No. 2012015 (June 24, 2013), is a reminder that employers are not completely without legal remedies in North Dakota, a state which generally bars restraints on solicitation or competition after employment ceases. (See North Dakota Century Code, Section 9-08-06.)

The decision in SolarBee is also remarkable in that the plaintiff did not plead breach of employment contract in its complaint. Plaintiff sued for breach of a proprietary information agreement (a separate document), misappropriation of trade secrets, breach of fiduciary duty, civil conspiracy and unlawful interference with business. At trial, the employment agreements were admitted into evidence without objection. Plaintiff argued that the defendants “breached” both the proprietary information agreements and the employment agreements. The trial court agreed and the North Dakota Supreme Court affirmed, allowing an “amendment by implication” where the claim was raised by plaintiff in pre-trial briefing and at trial without objection by defendants.

It also is interesting that the Court’s decision SolarBee  suggests that plaintiff’s claim for breach of fiduciary duty was dismissed because it was premised on a North Dakota statute, N.D.C.C. Section 59-01-09, that was repealed in 2007.  In many states, competing while employed would constitute a violation of breach of a common law duty of loyalty. It does not appear that the North Dakota Supreme Court has recognized a duty of loyalty based on common law, although it has found a similar duty under N.D.C.C. Section 34-02-14 (stating in part “[a]n employe who has any business to transact on the employee’s own account similar to that entrusted to the employee’s employer shall give the latter the preference always.”) See Warner and Company v. Solberg, 634 N.W.2d 65, 72 (N.D. 2001). Employers doing business in North Dakota should continue to tread carefully and consider the use of employment contracts which prohibit competition while employed, as well as other protections, in the absence of clarity on the scope of an employee’s duty of loyalty under North Dakota common law.

Earlier this year, Jackson Lewis opened a new office in San Juan, Puerto Rico serving clients throughout the Commonwealth. We thought we would take the opportunity to discuss the enforceability of non-competes under Puerto Rico law. As in many other jurisdictions, the validity and enforceability of non-competition agreements in Puerto Rico depends on the reasonableness of the restrictions imposed. Employers must also strictly follow  the requirements set forth by the Puerto Rico Supreme Court in Arthur Young & Co. v. Vega, 136 D.P.R. 157 (1994), to wit:

1.  The employer must have a legitimate interest to protect and the non-competition agreement must be drafted so as to not impose any limitations beyond those needed to protect the interest. The existence of the employer’s interest needs to be directly related to and will depend on whether the employee’s position in the company enables him/her to effectively compete with his/her employer in the future.

2. The restrictions on the employee must be circumscribed to activities similar to those the employee is engaged in. Thus, a non-compete that restricts a former employee from working in other capacities will be declared invalid.

3. The time span of the restrictions may not exceed a term of twelve (12) months after the employee’s termination date. Any additional term is deemed excessive and illegal per se.

4. The geographic area covered by the restriction must be strictly limited to that necessary to prevent actual competition between employer and employee.

5. When referring to clients, the non-compete clause should refer only to (i) those personally serviced by the employee during a reasonable period before his/her last date of employment; and (ii) which at the time, or for a period immediately before said date, were still the employer’s clients. The Puerto Rico Supreme Court has further suggested that restrictions applicable to potential clients would be considered to be excessively broad and, therefore, invalid. See PACIV, Inc. v. Pérez Rivera, 159 D.P.R. 523 (2003).

6. The employer must provide valid and sufficient consideration in exchange for the employee signing a non-competition agreement. As to newly hired employees, the offer of employment is deemed adequate consideration, provided the employee executes the non-competition agreement as of his/her hire date. As to current employees, additional consideration must be provided in order to secure a valid non-compete.  Additional consideration could consist of a promotion, additional employment benefits, or the enjoyment of substantial changes of a similar nature in the employment conditions. Mere job tenure, however, will not be deemed as sufficient and adequate consideration for the non-competition agreement.

7. The non-competetion agreement must be in writing.

It should further be noted that the Puerto Rico Supreme Court has expressly rejected the “blue pencil approach,” as well as the partial enforcement method, which allow the parties to modify non-competition agreements to adjust them to reasonable standards and further permit courts to enforce non-competition agreements as modified by the parties. Thus, failure to comply with any of the above-mentioned requirements will cause the entire non-competition agreement to be void and unenforceable. For this reason, we strongly recommend that employers conducting business in Puerto Rico secure legal advice in connection with the preparation and execution of non-competition agreements and other restrictive covenants for employees working in Puerto Rico.

A New Jersey federal court recently granted a defendant-company’s motion to compel arbitration pursuant to a non-compete agreement between the plaintiff-company and two former employees who had discontinued employment with the plaintiff and went to work for the defendant.  The case is Precision Funding Group, LLC v. National Fidelity Mortgage,  Civ. No. 12-5054 (RMB/JS), 2013 U.S. Dist. LEXIS 76609, 2013 WL 2404151 (D.N.J. May 31, 2013).

Precision Funding Group (“PFG”) and National Fidelity Mortgage (“NFM”) are competing mortgage brokerage firms.  This action arose when two PFG employees, John Itri and Matthew Prizzi, resigned from their positions and started working for NFM.  While at PFG, Itri and Prizzi had signed employment contracts containing a non-compete clause, prohibiting them from working for a competitor within two years from leaving PFG.  These agreements also contained an arbitration clause providing that “[a]ny controversy, dispute, or claim of whatever nature arising out of, in connection with, or in relation to … this agreement … shall be settled, at the request of any party by the final and binding arbitration … determined by the arbitrator….”

PFG brought suit against NFM and subsequently filed arbitration complaints against Itri and Prizzi, making similar allegations in each complaint, contending that Itri and Prizzi recruited PFG employees to join NFM and engaged in misleading activities to steal existing PFG clients. In a six-count complaint against NFM, Precision alleged defamation, commercial disparagement, conversion, unfair competition, intentional interference with a prospective contractual relationship, and intentional interference with a contractual relationship.

NFM, a non-signatory to the employment agreements, sought to compel PFG to arbitrate its claims pursuant to the agreements with Itri and Prizzi, arguing that the allegations arise out of the agreements and that the claims brought in the present case and those in arbitration are “inextricably intertwined.”  In response, PFG argued that there was an insufficient nexus between the claims and that the claims in the present case fall outside the scope of the arbitration clause, or alternatively, that the case should be stayed pending the outcome of the arbitration proceedings between Itri, Prizzi, and PFG.

The court noted that PFG had no contractual obligation to arbitrate claims against NFM because no agreement between the parties existed.  It held, however, that arbitration could be compelled in this case under a theory of equitable estoppel.  Specifically, a non-signatory to an arbitration clause may  compel a signatory to arbitrate if either (1) the issues to be litigated are “inextricably intertwined” with the arbitration agreement, or (2) there is a sufficient nexus as well as an integral relationship between the parties.  Here, the court determined that NFM had standing to compel PFG’s claims to arbitration because the claims arose directly from the actions of Itri and Prizzi which are subject to arbitration.

The court disagreed with PFG’s contention that a sufficient relationship for purposes of compelling arbitration requires a parent/subsidiary relationship, a successor corporation, or a signatory acting as an agent for a non-signatory.  Rather, a non-signatory merely needs to be “closely aligned” with parties to the agreement to compel arbitration, a standard satisfied by NFM’s employment of Itri and Prizzi and PFG’s claims having arisen directly from that employment relationship.

Concluding that NFM had standing to compel arbitration, the court then had to determine whether PFG’s claims fell within the scope of the agreement.  In responding affirmatively the court noted a general presumption in favor of arbitrability, the broad reading typically afforded to the “arising out of” language used in the arbitration clause, and that NFM’s liability depends on whether Itri and Prizzi have breached their non-compete agreements.

The court’s ruling in Precision Funding indicates a broad judicial inclination favoring arbitrability even when sought by non-signatories, particularly where claims against non-signatories are based on the actions of parties having an arbitration agreement with the plaintiff. Defendant-employers seeking to compel arbitration should consider this and explore employment agreements relating to a dispute notwithstanding their status as a non-party. Employers who could be potential plaintiffs may want to carve out non-compete provisions from their arbitration clauses as arbitrating non-compete issues can be awkward and injunctive relief may be more difficult to obtain on an expedited basis.

A California federal court recently dismissed a lawsuit seeking a declaration that a non-compete agreement is unenforceable under California law, upholding the parties’ Washington forum selection clause. Meras Engineering, Inc. v. CH20, Inc., No. C-11-0389 EMC (N.D. Cal. Jan. 14, 2013). CH20 is a Washington corporation with its principal place of business in Washington.  Meras Engineering, a competitor of CH20, is a California corporation with its principal place of business in California.  Rich Bernier and Jay Sughroue are citizens of California who used to work for CH20 almost exclusively  in California.  Their employment agreements with CH20 each contained a non-compete clause, a Washington choice of law clause, and a forum selection clause designating Washington as the exclusive forum for lawsuits over their agreements.

Bernier and Sughroue resigned from CH20, became employed by Meras, and along with Meras brought this lawsuit, seeking a declaration that the CH20 non-compete agreements are unenforceable under California’s well known public policy that non-compete agreements are not enforceable (with limited exceptions not applicable here) as established by Cal. Business & Professions Code section 16600.  Shortly thereafter, CH20 filed an action in Washington federal court to enforce its non-compete agreements and moved to dismiss the California action, contending the California court should enforce the parties’ forum selection clause.  In the interim, the Washington court held that it was appropriate in that case to enforce the parties’ choice of law provision – i.e. that the non-compete provision would be governed by Washington law, which generally permits enforcement of reasonable non-competes, rather than by California law.

The California court granted CH20’s motion, dismissing the California action.  Applying federal decisional law regarding the enforceability of forum selection clauses, the court held the issue was whether enforcement of the forum selection clause would contravene a strong California public policy.  Meras argued that enforcing the parties’ forum selection clause would violate California public policy against the enforcement of non-compete agreements, because the Washington court had already held that it was appropriate to apply Washington law under the parties’s choice of law provision.  The court disagreed, holding that argument incorrectly conflated the choice of forum issue with the choice of law issue.  The court noted that Washington and California apply the Restatement of Conflict Laws section 187.  Accordingly, the same choice of law test applies, whether the forum is Washington or California.

Meras Engineering exemplifies three trends among the Washington and California courts.  First, we have been seeing increasing non-compete litigation between Seattle-based employers and Silicon Valley-based employers and their employees.  Second, California federal courts have repeatedly rebuffed efforts to adjudicate the enforceability of non-competes between Washington-based employers and Californi-based employees in California, especially where the parties agreed to a Washington forum selection clause. Third, Washington federal courts have increasingly enforced Washington choice of law clauses in non-competes, giving an opening to non-California employers to chip away at California’s public policy prohibiting such restraints on employee mobility.

 

The inevitable disclosure doctrine is a common law doctrine that has been used by some courts to prevent a former employee from working for a competitor, even in the absence of a non-compete, because the former employee’s new job duties would inevitably require him to rely upon, use or disclose his former employer’s trade secrets.  This doctrine, however, remains the subject of considerable debate. Recently, the Georgia Supreme Court joined the debate in Holton v. Physician Oncology Services, LP, 2013 Ga. LEXIS 414 (May 6, 2013) and rejected the doctrine.

Background

Michael Holton was the vice president and chief operating officer of Physician Oncology Services, LP.  In that position and later as president, he was responsible for overseeing the operations of seven facilities. Physician Oncology eventually merged with Vantage Oncology, LLC (“Vantage”) and Holton was terminated several months later. He accepted employment with a competitor, Ambulatory Services of America, Inc. (“Ambulatory”).

Vantage immediately sought a temporary restraining order and then an interlocutory injunction, claiming that Holton was violating his non-compete agreement and, independent of that agreement, claiming that Holton would inevitably disclose and use trade secrets in his new position. The company sought an injunction to prohibit Holton from serving in an executive capacity for Ambulatory for at least twelve months.

There was no evidence that Holton had shared any of Vantage Oncology’s trade secrets or had shown an intent to do so. There was also no evidence that Holton had any documents in his possession related to the company’s trade secrets. Moreover, Holton’s attorney stated at oral argument that all company electronic documents had been permanently deleted from Holton’s computer.

Nonetheless, the trial court held that the likelihood of disclosure of information in Holton’s memory was a sufficient basis for finding of inevitable disclosure. As a result, the trial court enjoined Holton from working for Ambulatory in any executive capacity for twelve months. Holton appealed the trial court’s ruling, arguing that Georgia had not adopted the inevitable disclosure doctrine.

Supreme Court Ruling

The Georgia Supreme Court agreed with Holton and reversed.  The Court surveyed case law in other states and noted that the states were “inconsistent about whether the doctrine is recognized in their particular state and if [so], whether it is a separate claim, as Vantage alleged in this case, or instead evidence to support an element of a claim of threatened misappropriation.” Without explaining the rationale for its holding, the Court held that, “the inevitable disclosure doctrine is not an independent claim under which a trial court may enjoin an employee for working for an employer or disclosing trade secrets.”

Lessons Learned

Two lessons can be learned from Holton. First, if an employer wants to prevent an employee in Georgia from potentially working for a competitor, it should implement a non-compete.

Second, it remains unclear whether the inevitable disclosure doctrine – though not an independent claim under Georgia law – could still serve as the basis for the remedy of an injunction in the case of threatened misappropriation of a trade secret, considering that the Georgia Uniform Trade Secrets Act expressly provides that a court may enjoin the threatened misappropriation of a trade secret. The Court in Holton stated that it “decline[d] to address today whether the inevitable disclosure doctrine may be applied to support a claim for the threatened misappropriation of trade secrets.”

 

Texas has joined 47 other states and the District of Columbia in adopting the Uniform Trade Secrets Act. Jackson Lewis has posted an article on its website describing the new law which will go into effect on September 1, 2014. Now, only Massachusetts and New York have yet to pass some form of the Uniform Trade Secrets Act.

An article recently posted on the Jackson Lewis website describes a bill introduced in the New Jersey State Assembly that would invalidate non-compete, non-disclosure, and non-solicitation agreements for former employees who are eligible for unemployment benefits.  A similar proposal is under consideration in Maryland. We will continue to monitor this topic.

A federal court in California has held that a state law claim that a competitor engaged in unfair competition by creating infringing work after hiring former employees who stole proprietary information is preempted by the federal Copyright Act. Metabyte, Inc. v. NVidia Corp., et al., Case No. 12-0044 SC (N.D. Cal. April 22, 2013.

Metabyte employed individuals to develop computer code for 3D stereoscopic technology software, which is designed to enable a three-dimensional display by presenting images separately to the left and right eye through specialized eyeglasses that a viewer wears to look at a computer screen.  The employees had access to Metabyte’s source code and were bound by employee confidentiality agreements that prohibited them from disclosing Metabyte’s confidential information and required them to return all of Metabyte’s property in their possession upon leaving its employ.  The employees resigned and went to NVidia, a competitor.  Metabyte alleged that when they left, the employees copied its computer code and then took it to NVidia, who used it to create copies of Metabyte software and derivative works.  Metabyte sued NVidia for copyright infringement, unfair competition, trade secret misappropriation, and other causes of action. NVidia moved to dismiss the unfair competition claim on the ground it was preempted by the Copyright Act.  NVidia did not move to dismiss the trade secret misappropriation claim.  The court agreed with NVidia’s copyright preemption argument, and accordingly dismissed the unfair competition claim.

The court noted that state law causes of action are preempted under the Copyright Act if two elements are present:  (1) the rights that a plaintiff asserts under state law must be rights that are equivalent to those protected by the Copyright Act, and (2) the work involved must fall within the subject matter of the Copyright Act.  The court held both elements were satisfied.  The court reasoned the sole allegation underlying Metabyte’s unfair competition claim was that “NVidia created and sold products…that [were] substantially similar to the Metabyte Software and that included Plaintiff’s proprietary information by way of direct copies and derivative works, acquired through the Individual Defendants’ alleged theft and copying of Metabyte Software.”  However, “[r]eproduction of copyrighted works, preparation of derivative works, and distribution of copies to the public are all rights granted under the Copyright Act.”  As a result, the unfair competition claim was dismissed.

This decision is a reminder that employers should give careful thought to the causes of action they plead against competitors or former employees who have committed wrongdoing.  In an analogous context, a California court has held that an unfair competition claim is preempted by the Uniform Trade Secrets Act when the alleged wrongdoing consists of trade secret misappropriation. K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., (2009) 171 Cal. App.4th 939.  Employers should analyze potential preemption issues before seeking relief under unfair competition or other state common law causes of action, to avoid wasted time and resources on motions to dismiss preempted claims.

Plaintiff pro se Linda Eagle, the former president of banking education company Edcomm, Inc. ended up empty handed even though she prevailed on the merits of her claims of invasion of privacy by misappropriation of identity in her federal lawsuit filed over the alleged hijacking of her LinkedIn account by her former employer following the termination of her employment.

As indicated in our prior blog post, Edcomm was acquired by another company and subsequently terminated Eagle, along with other key executives. Eagle then sued Edcomm for allegedly taking control of her LinkedIn account, blocking her from accessing it, and replacing some information on her LinkedIn page with information about the new CEO, Sandi Morgan.  Eagle claimed that, by re-populating the profile with information relating to the new executive under a URL that included Eagle’s name, the company created confusion with Eagle’s roughly 4,000 contacts and misappropriated her identity for the company’s gain.

On March 12, 2013, U.S. District Judge Ronald Buckwalter ruled that while Edcomm was liable for three state law claims of (1) unauthorized use of name in violation of 42 Pa.C.S. Section 8316, (2) invasion of privacy by misappropriation of identity, and (3) misappropriation of publicity. Various other claims by Eagle and counterclaims by Edcomm were dismissed. Eagle v. Morgan, No. 11-403 (E. D. Pa. March 12, 2013).

In finding for Eagle on her claim of of unauthorized use of name, the court found that she presented sufficient testimony that the name of the “triple doctorate-holder” Laura Eagle had commercial value given her investment in developing a reputation in the banking education industry. Moreover, Edcomm used the name without her consent for commercial or advertising purposes. Similarly, Eagle also established invasion of privacy by misappropriation of identity because, by updating her LinkedIn account with the newely appointed  interim CEO’s information, Edcomm ensured that someone searching for Eagle on LinkedIn would be directed to a page with information about Morgan and Edcomm. Finally, Judge Buckwalter determined that the claim for misappropriation of publicity was legitimate on the grounds that, by blocking Eagle from accessing her LinkedIn account and then altering it with Morgan’s information, instead of merely creating a new account for Morgan, Edcomm deprived Eagle of the commercial benefit of her name.

The court, however, found that Eagle had failed to show she was entitled to compensatory damages with a “fair degree of probability.” Specifically, the court found that Eagle could not point to a specific business deal she lost out on due to her temporary lack of access to her LinkedIn contacts. In addition, at trial, Eagle did not call any employee of Edcomm or anyone else with personal knowledge who could provide evidence of the defendants’ state of mind to support her claims of malice or reckless indifference relating to the use of the LinkedIn account. The district court therefore held that Eagle was not entitled to punitive damages.  There is no indication that Eagle sought injunctive relief and indeed, according to the record, was only deprived of full access to her account from June 20, 2011 to October 7, 2011.

The decision in Eagle highlights that the ownership of social media accounts and attendant issues are becoming increasingly prominent in litigation. The case law in this area is rapidly evolving. In addition, this lawsuit should serve as a reminder for companies to consider developing social media policies and agreements detailing who owns social media accounts and who has what rights to access social media accounts post-employment.