Over the past few days, we’ve been covering the non-compete dispute between American Realty Capital Properties, Inc. (ARCP) and the Carlyle Group LP and Jeffrey Holland.  (Here are Part 1 and Part 2 of our series in case you need to catch up).  It’s time to end the suspense and tell you how the judge, the Honorable David Campbell of the U.S. District Court for the District of Arizona, resolved the dispute. 

Judge Campbell issued his ruling on the same day as the oral argument, denying ARCP’s request for a temporary restraining order against Carlyle and Holland.  He decided that ARCP had not made the necessary showing of a “likelihood of success on the merits” of its claim that Holland would violate his employment agreements by marketing Carlyle’s investment products.  It said that Holland’s “non-solicitation provisions appear[ed] to be unreasonably broad,” because “read literally, they would prevent Defendant Holland from soliciting any form of business from any client of Plaintiff, anywhere in the world.”  Further, the applicable Maryland and Arizona law did not allow the court to “blue pencil” these provisions – i.e., to rewrite them to be legally enforceable.  Similarly, the confidentiality provisions in Holland’s agreements were also too broad to enforce, because they would have forever prohibited Holland from using any information related to ARCP’s customers.

The ARCP-Carlyle-Holland saga involves a couple of additional twists.  Soon after the ruling, ARCP dismissed its Arizona case without prejudice.  It then filed an identical case in New York for breach of contract.  Carlyle and Holland moved for attorneys’ fees in Arizona, relying on an Arizona statute that allows a successful party to recover “reasonable attorneys’ fees in any contested action arising out of contract.”  The court awarded Carlyle and Holland $46,140 for five days of attorney work (of the $134,182 they sought). 

Thus, Carlyle and Holland won the battle, with some additional compensation for their troubles thanks to Arizona law.  However, the war over Holland’s work for Carlyle is now raging in a different forum.

• Breach of Contract
• Noncompete Agreements ‎

Last week, we introduced you to a non-compete dispute between American Realty Capital Properties, Inc. (ARCP), on one side, and the Carlyle Group LP and Jeffrey Holland, on the other side.  Now, it’s time to find out more about the parties’ arguments.

In its application for a preliminary injunction, filed on April 1 of this year, ARCP made two main arguments.  First, it argued that it could legitimately enforce the provisions in Holland’s agreements that precluded him from using its confidential information and from soliciting its investors.  Second, it argued that by marketing Carlyle’s investments, Holland was breaching these provisions.

In the hearing on the motion, held a week later on April 8, the court summarized the dispute as follows:

It seems to me that the key question is this: [ARCP] is concerned that Mr. Holland’s work for Carlyle … will be in direct competition with the plaintiff’s business of marketing REITs … to financial advisors because that was the business Mr. Holland oversaw while he was with Cole, the predecessor to ARCP, and that that business is highly dependent upon relationships with independent financial advisors or financial advisors with firms.

Holland, ARCP said, would be exploiting these relationships in violation of his agreements if he was allowed to market Carlyle’s products to Cole’s investors.  It counsel argued that ARCP would be “irreparably harmed by that because he will be preying upon . . . my client's confidential information and on its good will.”

Holland, meanwhile, argued that Carlyle did not market REITs, that he would be marketing Carlyle’s products mostly to a different class of purchasers, and that if his agreements covered these activities, they would be too broad to be enforceable.  As his counsel summarized: “It cannot be the case that because you learn how to build a retail relationship in one financial product, that you can’t do it in another if you’re not competing.”

Tomorrow, we’ll talk about the court’s resolution of the dispute, as well as an interesting side-effect of its ruling.

• Breach of Contract
• Noncompete Agreements ‎

“Nasty, brutish, and short” isn’t just Hobbes’s famous explanation of human life in the state of nature.  It also hits close to the mark in describing how litigation over non-compete provisions often proceeds, as a recent case illustrates.

The plaintiff in the case was American Realty Capital Properties, Inc. (ARCP), a publicly traded REIT (a real estate investment trust).  Allied on the other side were the Carlyle Group LP and Jeffrey Holland.  Holland used to work for Cole Real Estate Investments, a company that ARCP bought in February of 2014.  According to ARCP’s court filings, it paid Holland handsomely when it acquired Cole, giving him $7.1 million in connection with the change.  Holland then told ARCP that he wanted to take some time off.  ARCP was comfortable with that, given that Holland had previously signed both an employment agreement and a consulting agreement in which he agreed not to solicit Cole’s or ARCP’s investors for 12 months.

Within a couple of months, Holland joined Carlyle, one of the world’s largest investment firms, to raise funds for its products.  To put it mildly, ARCP was not pleased with this development.  At the beginning of April, it sued both Holland and Carlyle and filed an application for a preliminary injunction and temporary restraining order (TRO). 

• Breach of Contract
• Noncompete Agreements ‎

A recent decision from an appeals court in Pennsylvania is a warning to companies that the non-compete agreement they think they have with their top executive could be unintentionally wiped out with a few words in a later agreement.  In law-speak, the words are called an “integration clause” or a “merger clause.”  Through them, the parties agree that their agreement is their “entire” agreement and that it wipes out any earlier agreements. 

In the Pennsylvania case, Randy Baker was the President and CEO of Diskriter when Diskriter was acquired by Joansville Holdings, Inc.  The terms of the acquisition were memorialized in a stock purchase agreement (“SPA”), which had non-compete and non-solicitation clauses that apparently bound Baker.

• Breach of Contract
• Noncompete Agreements ‎

Last week, American Apparel announced that its board had decided to terminate Dov Charney, the company’s founder, CEO, and Chairman, “for cause.”  (We’ve discussed the meaning of terminations “for cause” in prior posts here and here.)  The board also immediately suspended Charney from his positions with the company.  Although the board didn’t initially disclose the reasons for its action, Charney is not new to controversy; in recent years, he has faced allegations of sexual harassment and assault.

The reasons for Charney’s termination have now become public, and they aren’t pretty.  In its termination letter, available here, the board accuses Charney of putting the company at significant litigation risk.  It complains that he sexually harassed employees and allowed another employee to post false information online about a former employee, which led to a substantial lawsuit.  The board also says that Charney misused corporate assets for “personal, non-business reasons,” including making severance payments to protect himself from personal liability.  According to the board, Charney’s behavior has harmed the company’s “business reputation,” scaring away potential financing sources.

• Age Discrimination
• Breach of Contract
• Civil Litigation
• Executive Compensation
• Indemnification and Advancement
• Releases
• Severance Agreements
• Termination With or Without Cause
• Wrongful Termination

We have written before here on Suits by Suits about the risk to a company hiring an executive from a competitor of being sued by the competitor for tortiously interfering with the executive’s non-compete agreement.  A recent decision from a federal court in Pennsylvania sheds light on another facet of that risk:  being forced to defend the lawsuit in a faraway court favored by the competitor because the executive agreed to be sued there. 

• Breach of Contract
• Civil Litigation
• Noncompete Agreements ‎

You can read about it in the Times:  the publisher of Texas Monthly sued The New York Times Companylast week over Jake Silverstein leaving his post as editor-in-chief of Texas Monthly to be editor of The New York Times Magazine.  Silverstein had a three-year contract with the Texas publisher that was supposed to run through February 2015.  The publisher claims that The New York Times Company tortiously interfered with that contract, causing Silverstein to break it.  This is a common scenario for sought-after executives when they switch companies:  the companies fight in court over them but not against them.  The executive in the middle may feel like she dodged a bullet by not being named as a defendant in the lawsuit.  In fact, it is not so simple.

• Breach of Contract

In our recurring “State-by-State Smackdown” series on the evolving law with respect to covenants not to compete, we’ve described the traditional balancing-test approach that is the law in the majority of jurisdictions as the Legitimate Business Interest or “LBI” test.  In understanding this shifting landscape, we’ve typically highlighted statutes and/or judicial opinions in jurisdictions that have begun to shift away (or even depart entirely) from the classical LBI analysis.

Today, we’re doing something a little different, taking our cue from a recent New York state appellate decision:  Brown & Brown, Inc. v. Johnson, 980 N.Y.S. 2d 631 (App. Div., 4th Dep’t, February 7, 2014).  Read on.

• Breach of Contract
• Civil Litigation
• Noncompete Agreements ‎

Earlier this week, we outlined the rights of indemnification and advancement, and discussed how those rights can hinge on the statutory law governing a corporation and the private agreements that companies enter into with their officials.  In this post, we review a recent decision to see how these principles apply in real life.

The decision comes from Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery.  Because many companies are incorporated in Delaware, the Delaware courts handle some of the most preeminent disputes involving corporate law, and they have significant experience addressing issues of indemnification and advancement. 

The Vice Chancellor’s opinion illustrates a judicial view that companies sometimes agree to broad rights at the outset of an employment relationship, but then seek to back away from those agreements once a dispute arises.  He wrote:

It is far from uncommon that an entity finds it useful to offer broad advancement rights when encouraging an employee to enter a contract, and then finds it financially unpalatable, even morally repugnant, to perform that contract once it alleges wrongdoing against the employee.

Vice Chancellor Glasscock’s ruling also shows how courts will review the governing statutes and agreements in order to decide whether a company’s denial of advancement is legally justified.

This particular dispute, Fillip v. Centerstone Linen Services, LLC, 2014 WL 793123 (Del. Ch. Feb. 20, 2014), involved Karl Fillip, the former CEO of Centerstone.  Fillip resigned, claiming that he had “Good Reason” for the resignation under his employment agreement and therefore was entitled to receive certain bonuses and severance pay.  When Centerstone wouldn’t pay up, Fillip sued it in Georgia state court, alleging breach of contract and also seeking a declaratory judgment that restrictions in his employment agreement were invalid.  Centerstone then filed counterclaims, which triggered a response from Fillip for advancement of funds to defend against those claims.

Centerstone, as you might imagine, was not happy about this turn of events.  It refused his request, but also said it would withdraw certain counterclaims because it didn’t want to pursue claims “that could potentially trigger an obligation by Centerstone to pay Mr. Fillip’s attorney’s fees and costs in defending them.”  Dissatisfied, Fillip sued in Delaware for advancement of his fees.

• Breach of Contract
• Civil Litigation
• Executive Compensation
• Indemnification and Advancement
• Severance Agreements

Our state and federal courts generally have two levels of courts: trial and appellate courts.  The archetypal trial court is the knock-down, drag-out venue of TV drama, where judges issue quick rulings and juries weigh the testimony and documents to make their mysterious decisions.  Appellate courts are much more monastic (and thus, much less entertaining for TV’s purposes).  There, learned panels of esteemed judges review cold court records and legal tomes, reviewing the parties’ arguments and applying the law in order to reach their thoughtful and detailed decisions.

Appellate courts may not even entertain every argument that a party seeks to make.  For the most part, to argue in the appellate court that the trial court made a mistake, a litigant has to “preserve” the error below – meaning that the litigant must give the trial court the opportunity to rule on the issue in the first instance.  The failure to preserve error has tripped up many an appeal.

The case of Jeff Gennarelli, the former regional vice president of American Bank and Trust Company (ABT), gives us yet another example of this stumbling block. 

• Breach of Contract
• Civil Litigation
• Confidentiality
• Noncompete Agreements ‎