“You’ve got…a non-compete!”

| William A. Schreiner, Jr.

"Old Computer"

Almost faster than a pop-up ad, AOL Inc. sued one of its former executives one day after he left the company for another pioneering Internet business – Yahoo, Inc. AOL, which also named Yahoo as a defendant, alleges that Edward Brody’s employment agreements with it prevent Yahoo from hiring him as the head of its Americas sales division. 

AOL’s pleading, filed Friday in New York State court, is not yet a full complaint laying out all of its allegations, but only a summons with notice – which under the rules governing New York’s courts can be used to begin a suit instead of a complaint, but only if it includes “a notice stating the nature of the action and the relief sought.”  The brief “notice” AOL included tells us a lot: Brody, AOL alleges, is bound by two employment agreements – one dated June 2012 and one dated November 2009.  The company – which you may recall started as an online game service for Commodore 64’s and similar early home computers – argues those agreements are enforceable against Brody (who until Thursday was the head of AOL Networks), and “prohibit Defendant Yahoo Inc. from employing and/or using his services during the notice and post-employment restricted periods” in them.  

Of course, there’s more to this story than the one paragraph AOL includes with its summons, and that piece of the story raises some interesting issues about AOL’s non-competes.  One is whether AOL can even enforce its non-competes given some recent prohibitions on them in some states, which is a question any company operating in different states now needs to consider.  AllThingsDigital reports that Brody lives in Washington, D.C., and that AOL is based in Maryland, while Yahoo is headquartered in California’s Silicon Valley.  California, as we noted here, no longer enforces most non-compete agreements, while New York is willing to enforce non-compete agreements “which the parties had freely agreed upon.” 

Given this big disparity in the law, AOL may have felt a need to act like an Old West gunslinger trying to get the draw on an opponent: filing quickly in New York court to enforce the non-competes on Brody before Yahoo could file in a California court, seeking the opposite declaration that the agreements can’t be enforced against it and its new executive.  My esteemed Baltimore colleague Andrew Torrez wrote a piece about a similar dispute between insurance brokers Aon and Alliant, where the tensions between New York and California law on non-competes led to a New York court, in a departure from the usual practice, refusing to dismiss a New York suit in favor of a suit filed first in California

Curiously enough, AllThingsDigital also reports that AOL may have warned Yahoo to expect a court battle if it hired Brody – so AOL may have already planned out a New-York-first strategy as it saw Brody head for the door.  Sounds like what another icon in the history of computing, the famous but fictional WOPRwould do.

Another curious wrinkle in this case is that Yahoo (perhaps inspired by Dire Straits?) may be so interested in hiring Brody that it will pay him not to work for it (but, presumably, not to work for anyone else, either) for as long as the non-compete agreements require.  While not fully unprecedented, this is an interesting way to hire an employee with a non-compete, assuming the reporting proves to be correct. 

This is certainly one we’ll watch, and not just for the trip down memory lane inspired by a case between two Internet pioneers.