In the latest chapter of an ongoing dispute between Aon Risk Services and Alliant Insurance Services (stemming from Alliant’s hiring of dozens of Aon employees and accepting millions in annual revenue from former Aon clients), on January 10, 2013, the New York State Supreme Court, Appellate Division, First Department issued a decision upholding key rulings of the trial court that enforced Aon’s restrictive covenant agreements. Aon Risk Services, Northeast, Inc., et al v. Cusack, et al, Index no. 551673/11 (1st Dep. January 10, 2013.)

Specifically, the Appellate Division rejected the forum non conveniens argument advanced by a California-based individual defendant, Peter Arkley. The court found that Arkley had previously engaged in business activities in New York, and had involved himself in the lawsuit even before he was named as a co-defendant. Further, the court credited the trial court’s conclusion that Arkley’s previously-filed declaratory judgment action ion California was merely:

a preemptive measure undertaken to gain a tactical advantage so as to negate the force and effect of the restrictive covenants, which the parties and freely agreed upon,

and not entitled to deference.  The Appellate Division also upheld the parties’ contractual choice of Illinois law. The court noted that, “New York courts are willing to enforce parties’ choice of law provisions” and generally to construe agreements to give effect to the parties’ intent. And finally, the court upheld the preliminary injunction barring business relationships with certain former Aon clients and solicitation of Aon employees.

Beyond the flurry of motions and decisions in this case that make it great entertainment (see Justice Fried’s decision from December 20, 2011, 34 Misc. 3d 1205A, 946 N.Y.S. 2d 65, 2011 N.Y. Misc. LEXIS 6392), this decision highlights the efficacy and importance of choice of law clauses in restrictive covenant agreements. It also highlights the willingness of New York courts to hear non-compete cases involving former employees living and working outside of New York.  Accordingly, employers should consider using choice of forum and choice of law clauses in their agreements, to maximize consistency and enforcement of their agreements.

Last December, PhoneDog, a mobile phone website, sued Noah Kravitz, after he resigned from the company, alleging that he improperly took control of his Twitter account and approximately 17,000 Twitter followers when he left. While at PhoneDog, Kravitz’s Twitter account was @PhoneDog_Noah. After he left, Kravitz changed the account to @noahkravitz but kept his followers. PhoneDog did not have a written policy regarding ownership of the Twitter account. PhoneDog sued Kravitz after he left, seeking damages of $2.50 per follower per month.  After Kravitz’s motion to dismiss was denied, the case recently settled under terms that allow Kravitz to maintain his Twitter account and followers, however other settlement terms were not disclosed so the question of how much a Twitter follower is worth remains unanswered.

This dispute might have been avoided if PhoneDog had written policies and agreements in place consistent with privacy and social media protection laws regarding who owns social media networking accounts when they are used on behalf of the company and in furtherance of its business as well as guidelines on communicating professionally with clients, prospects, vendors, suppliers and the like over social networking sites.  In this case, PhoneDog did not have a written policy and this may have led to the protracted legal battle. Working things out ahead of time can provide a better understanding for all parties down the road.

A U.S. District Judge in Connecticut recently issued an injunction against a former employee of Amphenol Corp and his new employer, TE Connectivity, Ltd, despite the lack of any evidence of competition in breach of his non-compete agreement.  The decision in Amphenol v Paul, Civ. No. 3:12cv543 (D. Conn. Nov. 9, 2012),  involved a former business unit director of Amphenol who had been responsible for product development, marketing and sales of Amphenol’s electronic and fiber optic connectors.  He signed a non-compete agreement which prohibited work on any competitive product that was in development during the 12 months preceding his termination of employment or about which he had received confidential information.

The employee joined TE Connectivity as a vice president of a business unit that did not compete with Amphenol. Amphenol discovered, however, that he had forwarded 2,000 work-related emails to his personal account before resigning and that he had taken other business files with him.  Although the Court found that the employee technically was not competing with Amphenol in his new role, the Court determined that there were “indicia” of a risk of unfair competition. The Court therefore ordered TE Connectivity to distribute a written memo reminding its managers that the employee was to have no involvement with competing products, to search its electronic systems to confirm that the employee did not upload any of Amphenol’s files, and to place a filter on the employee’s email account to ensure that he was firewalled from any competitive activities.  The Court also placed specific limits on the former employee’s scope of work (including restrictions on participating in the pending acquisition of a competing company, a ban on contacting former Amphenol employees, and an order not to work in the area of connectors or interconnectors) and ordered him not to use or disclose confidential information.

The court’s decision serves as an example of creative injunctive relief that may be useful in similar contexts.

 

 The U.S. Department of Justice has filed an antitrust lawsuit against eBay, Inc. in the United States District Court for the Northern District of California.  The suit, filed on November 16, 2012, claims that eBay violated antitrust laws by entering into an agreement not to hire or recruit the employees of a competitor, Intuit, Inc. The DOJ asserts that the agreement eliminated competition in the marketplace, stifling access to better job opportunities and salaries of affected employees.

The DOJ alleges that the agreement applied to employees at the highest levels at each company, covering specialized computer engineers and scientists, and barred the companies from soliciting each other’s employees. In addition, at least as to eBay, the agreement barred the company from hiring any employees at all. The DOJ alleges this arrangement started no later than 2006 and lasted at least until 2009. The complaint alleges that eBay’s recruiters were told not to pursue applications that came from Intuit employees and even to throw out resumes received from them. The suit alleges that Meg Whitman, eBay’s CEO, and Scott Clark, founder of Intuit and chair of its executive committee, were closely involved in crafting and enforcing the agreement. In an odd twist, Cook was also on the eBay board when he was complaining about eBay’s recruitment of Intuit personnel.

The relief sought by the DOJ includes preventing eBay from enforcing the Inuit agreement as well as prohibiting eBay from entering into any similar agreement with any other companies. Further, the DOJ’s Antitrust Division partnered with the California Office of the Attorney General, which conducted its own investigation and filed a similar lawsuit on the same day. Intuit is already subject to a settlement with the DOJ in another case prohibiting it from entering into “no hire” agreements, which might explain why Intuit was not named in this complaint.

Employers invest heavily in time and money to recruit, train and develop talent. They have legitimate interests in protecting their confidential information and avoiding unlawful interference with their personnel relationships. In rare circumstances, however, peace agreements with competitors to not poach each other’s talent can trigger scrutiny under antitrust laws. Jackson Lewis attorneys are available to assist employers as they navigate this minefield.

 

Tolling clauses in non-compete agreements extend the period of noncompetition by a period of time usually equal to the time an employee is in violation.  Appellate courts in some states, including Illinois and Massachusetts, have affirmed injunctions based on contractual extension clauses. For example, in Prairie Eye Center v. Butler, No. 4-01-0005 (Ill. Ct. App. April 16, 2002), the Appellate Court for the Fourth District of Illinois upheld a permanent injunction against an ophthalmologist, barring him from practicing medicine for a two-year term from the date of trial.  The non-compete in that case included the following:

In the event any violation hereunder is determined, the period of noncompetition shall be extended by a period of time equal to that period beginning when such violation commenced and ending when the activities constituting such violation shall have terminated.

Massachusetts courts have enforced similar provisions.  But the use of extension clauses and tolling provisions is far from universal, even ten years after Prairie Eye Center – begging the question: Why?

Courts in other states have invalidated non-competes based on extension clauses. For example in Wisconsin, which does not allow blue-penciling, the Court of Appeals held that an extension clause rendered a non-compete unenforceable, in part because the employee would not be able to determine from the face of the agreement how long the extension would last. H & R Block Eastern Enterprises, Inc. v. Swenson, No. 2006AP1210 (Wisc. Ct. App. Dec. 20, 2007).  Similarly, the Georgia Court of Appeals (under prior Georgia law) held that a non-compete was unenforceable because the tolling provision potentially extended the length of the restrictive covenant “perpetually.” ALW Marketing Corp. v. Hill, No. A92A0663 (Ga. Ct. App. July 9, 1992).

If employers feel strongly enough to require a non-compete in the first place, presumably they would want the contractual flexibility and additional protection afforded by tolling provisions. A tolling provision would be especially useful if, for example, a former employee were to secretly compete for a significant time before being discovered by her previous employer. But secret competition is fairly rare. In the majority of situations, companies have a good idea what their former employees are doing. They want to stop potential harm, not wait in the weeds and then cry, “Gotcha!”

Attorneys drafting and reviewing non-compete agreements for their corporate clients should carefully balance the benefits of a tolling provision against the risks of adding any unnecessary complexity that might cause a judge to invalidate the entire agreement (especially in states which do not allow blue-penciling or judicial modification.) In those states that would not find tolling provisions to be offensive, their use can provide arguments to the court or grounds for settlement terms that might not otherwise be available.

 

Kevlar (R), a high-strength para-aramid fiber created by E. I. du Pont de Nemours and Company and famously used in body armor for soldiers and police officers, is the subject of a recent criminal indictment by the U.S. Justice Department against Kolon Industries, Inc. and several of its executives. According to the October 18, 2012 press release, Kolon and several of its executives allegedly engaged in a multi-year campaign to steal trade secrets related to DuPont’s Kevlar product. The criminal indictment follows a  jury award of $920 million and 20 year injunction issued late last year in a civil case between DuPont and Kolon venued in the Eastern District of Virginia and currently on appeal to the 4th Circuit.

In the civil case, E. I. du Pont de Nemours and Company, U.S. District Judge Robert E. Payne found that, after twenty years of unsuccessful attempts to produce a competitive para-aramid product on its own, Kolon intentionally retained former DuPont employees to disclose trade secrets regarding the manufacture of Kevlar, including machine configurations and processes that Kolon used “in every stage of its own production.” On September 21, 2012, the 4th Circuit Court of Appeals agreed to stay the permanent injunction while the decision is under review.

These high profile civil and criminal cases suggest that Kevlar may join the recipe for Coca-Cola  as one of the most famous trade secrets in American jurisprudence. Anyone who practices in the area of trade secrets knows that the recipe for Coca-Cola is the quintessential example of a trade secret. Other famous examples include WD-40, Listerine, and KFC’s 11 herbs and spices. To that pantheon we can now add: Kevlar.

Reconsidering and reversing its own decision, the Ohio Supreme Court now has decided an acquiring company in a merger could enforce employee non-compete agreements as if it had stepped into the shoes of the acquired company despite the absence of clear contract language to that effect.  The Court, on May 24, 2012, in Acordia of Ohio L.L.C. v. Fischel (“Acordia I”), had answered that the agreements could not be enforced by the merged entity post-merger.  Then, after agreeing on July 25th to take another look at the case, the Court on October 11th reversed its position, explaining it misread an earlier court decision regarding corporate mergers.  Slip Opinion No. 2012-Ohio-4648 (“Acordia II”).

 It held that in a typical corporate merger where one company is wholly absorbed by an acquirer (as opposed to a more limited asset purchase), the acquirer steps into the shoes of the absorbed company with respect to all contractual obligations, including the absorbed entity’s non-compete agreements. The absorbed company ultimately becomes part of the acquirer, and its rights live on in the merged entity, by operation of law.

In Acordia II, the Court held, by a vote of 6-1, that Acordia, the acquiring company, could enforce the non-compete agreements “as if it had stepped into each original contracting company’s shoes.”  Significantly, the Court said, “The language in Acordia I stating that the [acquirer] could not enforce the employees’ non-compete agreements as if it had stepped into the original contracting company’s shoes or that the agreements must contain ‘successors and assigns’ language in order for the [acquirer] to enforce the agreements was erroneous.” Acordia II brings Ohio in line with the majority of courts that have addressed whether non-compete agreements are enforceable by the acquirer, likewise finding the acquirer may enforce the agreements of the acquired company.

Notwithstanding Acordia’s clear victory on the legal successorship issue, the Court remanded the case to the trial court to determine the “reasonableness” of the non-competes. Ohio, like most states, will enforce a non-compete agreement to the extent necessary to protect the employer’s legitimate business interests.  Therefore, while Acordia II eliminated one source of concern when engaging in merger and acquisition due diligence, the non-compete agreements must still be properly drafted to be valid and enforceable.

Employers also should be careful not to conclude that the ruling in Acordia II applies in an asset purchase transaction, where the rules are different and “successors and assigns” language in the non-compete agreement likely will be a critical consideration.

In short, business acquisitions present unique challenges in designing non-compete agreements and other strategies that will protect the value of the purchase.

An executive in Pennsylvania who filed suit against her former employer over control of her LinkedIn account under the Computer Fraud and Abuse Act (“CFAA” or “Act”) had her CFAA claim dismissed as her lawsuit survived under alternative theories.  The decision granting partial summary judgment in Eagle v. Morgan, Civil Action No. 11-4303, (E.D. Pa. Oct. 4, 2012) is noteworthy for a couple of reasons: First, it is a rare instance of a former employee attempting to wield the CFAA against an employer, instead of the other way around as is  typical in non-compete and trade secrets cases. (The Act is currently at the center of a circuit split as to whether unauthorized use of a computer by an otherwise authorized employee is actionable.) In this case, however, the former executive invoked the Act where her successor as president of the company used her password to appropriate the profile for herself.  Second, the case may portend more employment-related litigation over the ownership and control of social media accounts.

The plaintiff in this case, Dr. Linda Eagle, co-founded a company, Edcomm, and created a LinkedIn account indicating her title and position as President of the company. Her assistant maintained the password to the account. Dr. Eagle then sold Edcomm and ended her employment.  The new interim CEO of Edcomm place her own name and photograph on the LinkedIn profile and changed the password.  All of Dr. Eagle’s awards, honors, recommendations and connections remained on the profile, however, and Dr. Eagle could no longer access the account or retrieve messages.

The Court dismissed the CFAA claim on the grounds that unsupported assertions of harm to ongoing business ventures, speculative lost business, legal fees associated with drafting the complaint, and the alleged harm to Dr. Eagle’s reputation and claimed devaluation of her LinkedIn account were not sufficient to sustain a damages claim.  A Lanham Act claim was also dismissed. The court declined to dismiss a number of state law claims, however, so the lawsuit will move on and we are likely to see similar disputes in the future.

Calculating lost profits for breach of a non-compete agreement can be a challenging task, and different courts have adopted different approaches. In Preferred Systems Solutions v. GP Consulting, Nos. 111906, 11907 (Sept. 14, 2012), the Virginia high court affirmed a verdict of $172,395 in compensatory damages in favor of Preferred Systems Solutions (“PSS”), a government contractor, against PSS’s former subcontractor, GP Consulting, for breach of a non-compete clause in a contract between the two businesses. In so doing, the Court affirmed the use of a relatively expansive analysis of lost profits.

GP Consulting had terminated its contract with PSS and began performing similar work for another general contractor under the same blanket purchase agreement with the government. PSS opted not to pursue a temporary injunction against GP Consulting for the breach; instead it sought damages and permanent injunctive relief. As is often the case, lost profits could not be determined with precision because PSS was unable to show it was guaranteed any amount of future work under the blanket purchase agreement. Finding a clear breach of the non-compete, however, the Court endorsed a flexible measure of lost profits. The Court held that the standard of proof in Virginia does not require a “guarantee” that the plaintiff would have earned a profit but for the breach. The Court allowed PSS to use time billed by GP Consulting during the breach, citing cases from Idaho and Utah allowing an injured party to rely on profits earned by the offending competitor, combined with the established profit margin of PSS on such work, to determine lost profits.

Depending in part on the nature of the industry involved, some states require a more stringent test for calculating lost profits, measuring only the amount the plaintiff can show with specificity that it lost due to the breach. Other courts have allowed plaintiffs to recover a disgorgement of profits earned by the offending party. Here, the Supreme Court of Virginia adopted a blended approach, combining the amount of work obtained by the defendant and the profit margins of the plaintiff. This decision is a useful primer on the different ways to calculate damages in a non-compete case and suggests that it pays to be creative.