As previously reported in a legal alert issued by Jackson Lewis on May 12, 2011, Georgia Governor Nathan Deal signed the Georgia Restrictive Covenants Act into law almost two years ago, on May 11, 2011.  Since that time, many employers have required employees to sign new covenants that comply with the law.

The Georgia Restrictive Covenants Act, O.C.G.A. § 13-8-50 et seq., drastically overhauled Georgia law in this area and set forth clear boundaries on who can and cannot be required to sign a non-compete or non-solicitation agreement, what length of time is considered to be reasonable restriction, and other requirements for an enforceable non-compete.

There have been only a few cases so far interpreting the new law.

In PointeNorth Insurance Group v. Zander, 2011 U.S. Dist. LEXIS 113413 (N.D. Ga. Sept. 30, 2011), Judge Richard Story was asked to enforce a non-solicitation covenant that purported to prohibit a former employee, Zander, from soliciting or accepting business from clients. Such a covenant would have been completely unenforceable under Georgia’s old non-compete law. Under the new law, however, Judge Story enjoined Zander from soliciting any of PointeNorth’s customers with whom she had contact during her employment.

Next, in Becham v. Sythes USA, 482 Fed. Appx. 387 (11th Cir. June 4, 2012), the Eleventh Circuit Court of Appeals cleared up some confusion and held that the first version of Georgia’s new non-compete law, which was passed in 2009 and ratified by voters in 201o during the general election, was unconstitutional. As a result, the second version of the law, which went into effect on May 11, 2011, is controlling.  Only restrictive covenants signed on or after that date are governed by the new law.

Finally,  in Cone v. Marietta Recycling Corporation (Fulton County Superior Court, Civil Action No. 2012-CV-223811, March 26, 2013), a former employee had signed certain restrictive covenants before Georgia’s new law went into effect, which would mean the old law applied. The former employee, however, also signed a severance agreement after the new law became effective. The severance agreement stated that it superseded all prior agreements, except for the restrictive covenants which would remain in effect.  The former employer argued that this language in the severance agreement brought the covenants under the new law.  In a March 26, 2013 Order, Judge Alford Demsey disagreed. He held, “there is only one way [Marietta Recycling] could have taken advantage of the May 11, 2011 change in Georgia’s law to secure enforceable restrictive covenants against Cone [the former employee] – requiring Cone to execute on or after May 11, 2011, a new contract with new restrictive covenants having a new effective date.” As a result, the old law applied.

Cone is an unpublished decision from one state trial court judge and, as such, is not binding on any other courts. It remains to be seen whether other judges will adopt the same reasoning.  In the meantime, Cone reminds employers that they should be careful to thoughtfully address this issue when they draft severance agreements for employees who signed restrictive covenant agreements before May 11, 2011.

There are many more questions about the new law that remain to be answered by the courts. For example, what type of blue-penciling of covenants is permitted? Will employee non-solicitation covenants be governed by the new law or the old common law? We will continue to monitor the case law and provide timely updates on our blog.

A Federal Court in Nebraska issued a preliminary injunction enforcing an employee non-compete agreement in a case that explains, for the first time, what a Nebraska court may consider “solicitation.”  The case, Farm Credit Services of America v. Opp, No. 8:12-cv-382 (D. Neb. 2013), involved a crop insurance salesman, Opp, who signed a non-compete agreement at the beginning of his employment. The employer, FCSA, provided crop insurance sales training, helped Opp satisfy licensing and continuing education requirements, and assigned him a set of policies to service. FCSA also helped Opp develop customers by providing him leads and financial support to entertain customers. Opp was eventually terminated in May 2012.

Following his termination, former customers contacted him with complaints about FCSA and questions about their policies and why he was no longer working for FCSA. Opp referred them to FCSA.  Within months after his termination, Opp incorporated his own crop insurance sales company as the president, owner, and sole crop insurance salesperson.  Opp published advertisements for his new company and as a result, some of his former customers asked him to transfer their business away from FCSA. Opp accepted business from certain customers after they signed a declaration stating, among other things, that they were soliciting Opp “of [their] own free will and that Mr. Mark Opp did not directly solicit [their] business.” With only one exception, all of the former customers were those with whom he did business and had personal contact while employed by FCSA.

FCSA sued Opp for breaching his non-compete agreement. The non-compete agreement prohibited Opp from “directly or indirectly” selling, soliciting, directing, managing or otherwise having any involvement whatsoever in the sale, marketing or solicitation of any customer of FCSA with whom the employee actually did business and had personal contact while employed by FCSA. The court found the non-compete to be valid  under Nebraska law because it only went so far as to prohibit contact with customers with whom Opp did business and had personal contact. Opp claimed that he did not breach the agreement because he did not directly solicit any of the customers with whom he had done business during his employment – rather they sought him out. Opp submitted the declarations from those customers to show that they had solicited him. The court found that Opp solicited the transferred customers’ business by publishing advertisements  that induced them to request transfers to his new company. The court deemed any argument about whether the advertisements were “direct” or “indirect” solicitation to be irrelevant because the agreement prohibited Opp from engaging in either type of solicitation.  Opp also argued that the transferred customers would have left FCSA anyway. The court rejected that argument as well, because the customers did not leave FCSA for some other company, they left for Opp’s new company due to the goodwill established by Opp’s employment.

Because reported decisions in Nebraska on non-compete agreements are rare, the case is a helpful guide to Nebraska law in this area, as well as an example of how the term “solicitation” might be interpreted in other jurisdictions. The two main takeaways from this case are:

  • Employers should make sure Nebraska non-competes comply with that state’s law and go no further than to prohibit a former employee from soliciting customers with whom he or she actually did business and had personal contact during his or her employment; and
  • General advertisements and continued inquiries from customers with whom a former employee did business and had personal contact may constitute “solicitation” and therefore constitute a breach of a non-solicitation agreement, even if the customer claims he or she was not directly solicited by the former employee.

 

When an executive search firm bought the goodwill and other assets of a similar firm and learned that the individual sellers took client lists and diverted business in violation of their non-compete agreements, it terminated the sellers’ employment and sued them and other third-party defendants for violating the Computer Fraud and Abuse Act (“CFAA”) as well as for fraud, breach of contract, tortious interference with contract, tortious interference with business relations, and an accounting.  A New York federal court’s decision to dismiss the former employer’s  CFAA claim in JBCHoldings NY, LLC v. Pakter, Civil Action No. 12 Civ. 7555 (S.D.N.Y. Mar. 20, 2013) continues a trend of district courts in the Second Circuit adopting a narrow reading of this statute.

The court held that when an employee who has been granted access to an employer’s computer misuses that access, either by violating the employer’s  terms of use or by breaching a duty of loyalty to the employer, the employee does not “exceed authorized access” or act “without authorization” as those terms are are defined in the CFAA.  Federal appellate courts are currently split on whether those terms should be interpreted broadly or narrowly.  The First, Fifth, Seventh, and Eleventh Circuits have adopted a broad construction and allowed CFAA claims alleging that en employee misused employer information that he or she was otherwise permitted to access.  The New York court chose to follow the Fourth and Ninth Circuits and other district courts in the Second Circuit, which have held that the statute does not reach the mere misuse of employer information or violations of company use policies.  The court found that the statute is concerned with the actions of employees who lack permitted access, not the actions of employees who exceed a permitted use of employer information.  Under this narrow reading, the CFAA does not prohibit the actions of employees who have permission to access certain information and proceed to use the information for an improper purpose.  The court noted that state law contract and tort claims were already available to address such misappropriation by faithless employees.

In reviewing the former employee’s complaint, the court found that absent allegations that the individual sellers lacked access to the computers that were used to take client lists or lacked authority to access electronic information that was used to set up a competing business, the former employer had no CFAA claim against the individual sellers.  The court also partially dismissed the former employer’s Lanham Act and tortious interference with business relations claims and dismissed fraud and tortious interference with contract claims.  Although pared down, the lawsuit will proceed against most of the defendants under various theories, including breach of contract.

The decision serves as a cautionary reminder that CFAA claims against employees who misuse employer information have been met with mixed success in federal courts.

Regardless of where one stands philosophically on the merits of working from a physical office where greater collegiality can be fostered, versus working from home where personal efficiency and convenience can be maximized, the fact is that most companies have some employees who work from home, and nearly all companies have employees who work remotely from time to time, especially with the use of tablets and smart phones.  And, in this increasingly mobile world, employers must continuously review policies to protect their confidential business information.

Here are a few tips:

* Published policies help make it clear that the employer’s business information, regardless of where it is located, is confidential and should not be used or disclosed other than for purposes of performing work for the employer. State-of-the-art policies should now address Bring Your Own Device (BYOD) guidelines, use of social media, employee monitoring and protection of private data as was well as standard protection of trade secrets and confidential information.  In a BOYD environment, the employer should emphasize that its business information does not lose protection just because it might reside on the employee’s device. Alternatively, certain categories of employees might be instructed to use only company-issued devices for work purposes.

* In addition to general policies, individual non-disclosure agreements addressing the permitted and prohibited use and disclosure of the employer’s business information should be considered for those employees who regularly work out of the office.  Working remotely is a privilege which carries with it obligations and responsibilities for the employee which should be memorialized.

* Employees who work remotely often are provided VPN or similar access to files and data on the employer’s otherwise secure server.  Protocols should be put in place to make sure that the access is secure and encrypted, if appropriate. Human Resources and in-house counsel need to team with the I.T. department on these issues. The employer should know if an employee is using a company-issued laptop or his or her own computer, or email, and monitor compliance. For example, an employee who regularly sends company files from her g-mail account should be warned about co-mingling work data and personal emails.

* Terminating employees who work from home should be handled with extra care, especially employees who work in another county. Last December, the Second Circuit Court of Appeals reversed the dismissal of a lawsuit for lack of jurisdiction by a MacDermid, Inc., a Connecticut company, against a former employee who worked from her home in Canada. After becoming aware of her pending termination, the employee allegedly accessed company servers in Connecticut and downloaded confidential and proprietary information to her personal email account. MacDermid, Inc. v. Deiter, 702 F.3d 725 (2nd Cir. 2012).  The case suggests that in certain circumstances employers might cut off access before terminating an employee and, in most cases, should consider requiring the employee to make an account of company property and sign a document confirming that he has not retained any company data.

Whether or not an employer requires personal appearance in the office, it seems clear that employees will work remotely, at least time to time, and today’s mobile workforce makes protection of trade secrets and company data more challenging than ever.

A recent study by three business and law school professors analyzed a random sample of 1,000 CEO employment contracts for 500 American companies over a seventeen year time span. The study determined how often the contracts included non-competes, whether the use of non-competes has increased over time, whether the use of non-competes is correlated to profitability, what industries are more likely to use the restrictions to protect their information and competitive advantage, and whether the use of non-competes is related to the enforceability of restrictive covenants in the company’s jurisdiction.  The findings are interesting for attorney practitioners and may be useful for in-house corporate attorneys.

After analyzing their data, the authors concluded that there was a “statistically significant trend toward more non-compete clauses in CEO contracts over time” and that the data suggest that employers are “more aware than ever of the importance of using [non-compete] clauses to protect against the loss of firm specific investments and knowledge[.]”  The finding is apparently the “first reliable evidence to confirm widely held assumptions in the academic and practitioner literature that non-competes are being used more in recent years.”  The data also showed that if a company uses a non-compete once in a CEO contract, it was much more likely to include one in subsequent CEO contracts. Over the entire time period, 79% of all CEO contracts reviewed contained a non-compete.  The use of non-competes increased in the mid-2000’s, peaking in 2008 when 88.9% of CEO contracts contained them, and dropping back to 78.7% in 2010.  The sample pool included contracts from jurisdictions like California where restrictive covenants are generally not enforced.  Not surprisingly, according to a multivariate regression analysis, CEOs were less likely to have non-competes in their employment contracts if they were being enforced in jurisdictions that did not permit such restrictions. Interestingly, the study also showed that approximately 65% of California firms did have non-competes in their CEO contracts, despite their unenforceability.

The authors also concluded that long term contracts are more likely to include non-competes than short term contracts, which also makes sense. Finally, there was some correlation between use of non-competes and profitability as more profitable companies were more likely to use them.  The working paper is entitled, “When do CEOs Have Covenants Not to Compete in Their Employment Contracts” and the authors are Norman Bishara from the Stephen M. Ross School of Business at the University of Michigan, Kenneth J. Martin from New Mexico State University and Randall S. Thomas from Vanderbilt Law School and the Owen School of Business, Vanderbilt University.  The paper is currently under submission for law review publication. It was discussed on November 20, 2012 on the Harvard Law School Forum on Corporate Governance and Financial Regulation and is available on the Social Science Research Network Site.

The Georgia Court of Appeals refused to enforce a forum selection clause in a restrictive covenant agreement entered into by a Georgia resident because it would have led to a different result than applicable Georgia law. Carson v. Obor Holding Company, LLC (Nov. 20, 2012). Obor Holding provides software and staffing services to clients in the defense industry. The company conducts business in Florida and Georgia.  Alan Carson, the former Vice President of Sales, was a Georgia resident, having lived in Georgia since 1984. He executed Obor Holding’s Operating Agreement in February 2007. Pursuant to the Operating Agreement, the business of Obor Holding is conducted by a four-person Management Committee, with each member of that committee being a Director of the company.  Carson served as a member of the Management Committee and a Director of Obor Holding until his resignation on September 2, 2011.

The Operating Agreement contained several restrictive covenants that apply to Directors of the company, including a covenant of non-disclosure, a non-solicitation covenant, and a non-compete covenant.  The Operating Agreement also had a forum selection clause, which states that any legal actions brought for the purpose of “enforc[ing] any rights or obligations” thereunder “shall be [brought] in Orange County, Florida.”  The choice of law provision states that the Operating Agreement shall be governed by Florida law.

Carson filed a lawsuit in Georgia state court seeking to enjoin Obor Holding from enforcing any of the restrictive covenants against him because they were unenforceable under Georgia’s old non-compete common law and public policy (which apply to agreements signed before the new Restrictive Covenants Act went into effect on May 11, 2011.) Obor Holding filed a motion to dismiss based on the forum selection clause.  Carson opposed the motion, arguing that the trial court should find the forum selection clause unenforceable because allowing a Florida court to decide the enforceability of the non-compete covenants would violate Georgia’s public policy under the old non-compete law.  The trial court granted the motion to dismiss and Carson appealed.

The Georgia Court of Appeals reversed.  The Court held that choice of forum clauses are prima facie valid and presumptively reasonable. Such clauses, however, are not enforceable if (i) the covenants violate Georgia public policy and (ii) a Florida court would be likely to find the covenants enforceable.  The Court held that the covenants violated Georgia’s old non-compete common law. For example, the customer non-solicitation covenant was unenforceable because it was not limited to customers with whom Carson had contact and, alternatively, it did not contain a territorial limitation.  The Court also held that a Florida court was likely to enforce the covenants. Accordingly, Carson was entitled to litigate the case in Georgia.

As noted above, Georgia’s non-compete law applies to covenants signed on or after May 11, 2011.  The new law generally makes restrictive covenants more enforceable, similar to Florida law. Consequently, the result in this case may have been different if Georgia’s new non-compete law and the public policy it represents had applied to Carson’s agreement.

 

A federal court in the Northern District of Mississippi has allowed a plaintiff in an employment law dispute to conduct an on-site inspection for purposes of videotaping the machine which he formerly operated in Morton v. Cooper Tire & Rubber Co., (N.D. Miss. Dec. 10, 2012). Morton, an amputee with a prosthetic leg, asserted that he  was denied a reasonable accommodation a claim under the Americans with Disabilities Act and then constructively discharged.  Morton asserted he could do the job if allowed a couple of ten-minute breaks to adjust his prosthetic leg during his 12 hour shift.  Cooper Tire countered that Morton had requested several 30 minute breaks, which it claimed was not a reasonable accommodation, and that Morton was unable to perform the essential functions of the job.

In discovery, Morton requested an inspection of the Tupelo, Mississippi plant to photograph and videotape the machine he had worked on while it was being operated by another employee, to show the physical demands of operating the machine.  Cooper Tire objected and sought a protective order, asserting that trade secrets would be revealed and that the requested discovery had little to no relevance to the case.  Morton responded with a motion to compel.  Although it directed the parties to enter into an appropriate protective order, the court generally rejected Cooper Tire’s contentions, holding that testimony would not be a reasonable substitute for the inspection and that the videotaping and photography which Morton sought was necessary to show he was able to perform his essential job functions.  The court noted that the machine would not be modified during the inspection and that Morton was not seeking information about other machines and processes beyond the one that he worked on.  The court also noted that Morton had signed a confidentiality agreement when he started working for Cooper Tire, whereby he agreed not to disclose information about the company during and after employment.  This, coupled with the protective order limiting disclosure only as necessary for the lawsuit, was determined to adequately address Cooper Tire’s trade secret concerns.  In allowing the limited inspection, the court expressly noted that “[t]his is not a suit by a competitor who might have ulterior motives for seeking discovery,” suggesting that the result might differ depending upon the type of case.

The decision highlights the types of concerns about trade secrets  that can come into play during run-of-the mill employment litigation.  Employers and their attorneys should take care to protect trade secrets and confidential information by, among other things, using existing non-disclosure agreements to which former employees agreed to be bound and seeking protective orders to ensure that such information will be utilized only for purposes of the litigation at hand.

Our contributor John A. Snyder writes on the Jackson Lewis website about an interesting decision out of the Eighth Circuit involving an executive of Hallmark Cards, Inc. who was ordered to pay back $735,000 in severance benefits and an additional $125,000 she earned at a competitor because she disclosed information about Hallmark’s processes and market research in violation of her separation agreement. The case also involved findings that the executive deliberately destroyed computer files and an adverse inference instruction to the jury. The entire article can be viewed here.

We have often been asked: if an employer fires an employee, can a non-compete or non-solicitation agreement be enforced?  Some federal district courts interpreting New York law had said “no.”  A recent decision from the Second Circuit Court of Appeals, Hyde v. KLS Professional Advisors Group, LLC, 2012 U.S. App. LEXIS 21111 (2nd Cir. October 12, 2012), clarifies and narrows the scope of those prior decisions.

The previous line of thinking stemmed from a handful of decisions from the U.S. District Court for the Southern District of New York suggesting that if an employee is fired without cause, his or her restrictive covenant is not enforceable, citing Post v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 48 N.Y.2d 84, 421 N.Y.S.2d 847 (1979).  The Post case, however, involved the forfeiture of benefits arising from the breach of a restrictive covenant, and applied New York’s “employee choice doctrine.”

Under the employee choice doctrine, a restrictive covenant can be enforced without regard to its reasonableness, if the employee was given a choice between accepting a benefit (such as deferred compensation or other monetary payment) and relinquishing his or her right to compete on the one hand, and rejecting the benefit and retaining the right to compete on the other hand. See Morris v. Schroder Capital Management International, 7 N.Y.3d 616, 825 N.Y.S.2d 697 (2006). Central to the employee choice doctrine is the freedom of the employee’s choice. Accordingly, New York courts have made it clear that if an employee were fired, the employer could not take advantage of the employee choice doctrine and instead must establish that the agreement satisfies the general rule of reasonableness applicable to restrictive covenants in New York.

In Hyde, the Second Circuit stated (in dicta):

Having concluded that Hyde failed to establish irreparable injury, we need go no further. In the interest of judicial economy, however, we note our reservation about the district court’s preliminary interpretation of New York law. Relying on Post v. Merril Lynch, Pierce, Fenner & Smith, 48 N.Y2d 84, 397 N.E.2d 358, 421 N.Y.S.2d 847 (1979), the district court concluded that restrictive covenants are per se unenforceable in New York against an employee who has been terminated without cause.  But in Post, the New York Court of Appeals held only that when an employee was terminated without cause, the employer could not condition the employee’s receipt of a previously earned pension funds on compliance with a restrictive covenant. Id. at 89, 421 N.Y.S.2d at 849. We caution the district court against extending Post beyond its holding, when a traditional overbreadth analysis might be more appropriate.

Indeed, courts in New York routinely have enforced restrictive covenant agreements against employees who were terminated from employment involuntarily. Instead of creating a per se prohibition against restrictive covenants in New York, the fact that the defendant-employee may have been terminated without cause is a factor that will weigh in the usual reasonableness analysis, and the balancing of the equities in cases where a preliminary injunction is sought.

North Dakota has one of the fastest-growing workforces in the country as the result of recent advances in extracting natural gas and oil.  As more employers seek to hire in or transfer employees to the Peace Garden State, many are surprised to discover that North Dakota law prohibits non-compete agreements. North Dakota Century Code Section 9-08-06. It is perhaps better well known that California also prohibits non-competes. California Business and Professions Code Section 16600.

Remarkably, both states inherited their non-compete laws from the same New York attorney, David Dudley Field II. Field was born in 1805 and practiced law in New York where he became convinced that the common law would benefit from unification and simplification. He traveled to Europe to study French and English legal codes and returned home to prepare a code of civil procedure which was adopted by New York in 1850.

Field then set his sights on the systemic codification of all state law which he completed in 1865. His model civil code, which eventually became known as the Field Code, was largely rejected by New York.  Several new states coming into existence at that time, however, including North Dakota and California, adopted the Field Code, including its restriction on non-compete agreements.  Although some have assumed the North Dakota Field Code was based on the California Revised Field Code of 1872, in fact the Dakota Territory enacted the Field Code in 1865.

Because of the common legal origins, North Dakota courts have cited with approval to California precedent in interpreting their own non-compete law. E.g. Werlinger v. Mutual Serv. Cas. Ins. Co., 496 N.W.2d 26 (N.D. 1993) and Franklin v. Forever Venture, Inc., 696 N.W.2d 545 (N.D. 2005).  Employers wishing to protect themselves from unfair competition in North Dakota should tread carefully. They may choose to consider a strategy similar to the approach they take to protect business information in California. And certainly, employers should consult with an attorney for specific advice.