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.
Even if you’re only an occasional reader of Suits by Suits, you know that we’re committed to engaging in a practical discussion of the varying ways in which an employee’s covenant not to compete might be legal in one jurisdiction but unenforceable in another. It’s our view that both employers and employees need to know about these potential landmines where the employer operates in multiple U.S. states.
But knowing what the substantive law in each state is regarding noncompetes is only half of the battle. Affected parties need to know not only whether a court will determine that a particular noncompete clause is unenforceable as written, but also what that court will do after it makes such a determination. And that’s what this post is all about.
Broadly speaking, a court can do one of three things with a defective covenant not to compete:
Momentum continues to build in Massachusetts for that state to adopt the California model and ban the enforcement of employee covenants not to compete in the state. Last fall, we told you that Gregory Bialecki, Secretary of Housing and Economic Development under Gov. Deval Patrick (D), went on record as saying that the administration supports the “outright elimination of enforceability” of noncompetes in Massachusetts in a story broken by Scott Kirsner of the Boston Globe.
Of course, there is often a world of a difference between a politician “supporting” something and being willing to actually spend political capital to try and bring about actual legislation. At first, Gov. Patrick’s support was limited to 2013’s H.B. 1715, which (as we explained here, over a year ago) would not have prohibited noncompetes, but would have instead created a statutory regime that prohibited such clauses that exceeded six months in length. That bill failed to pass the legislature in 2013.
In researching and writing Monday’s blog post, I came across another unique wrinkle in the Florida statute that governs covenants not to compete, § 542.335 of the Florida Statutes. I think it's worth examining that provision in more detail as part of our ongoing efforts to educate employers and employees as to the varying state-by-state nuances in different jurisdictions that can affect the ultimate questions as to whether and how that state will enforce an employee’s covenant not to compete.
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.
Non-lawyers often wonder why folks in our profession spend so much time and money poring over the documents and e-mails each side usually has to produce in litigation. Sometimes, these document reviews are the legal equivalent of looking for the proverbial needle in a haystack.
And sometimes, you find the proverbial needle – or needles. And when you do, and the success or failure of the case turns on that e-mail, or set of e-mails, then the time and money spent on the search for those things turns out to have been a wise and necessary investment.
Take the case of TBA Global, LLC v. Proscenium Events, LLC. TBA is an event planning company that “produces live event programs and marketing presentations for companies and branded products.” In the course of its work, it hired three senior employees – Santoro, Shearon, and Cavanaugh. While the exact terms of their agreements differ from each other, all three signed non-compete agreements with TBA that provided that if they ever left the company, they would not “directly or indirectly, communicate with clients or prospective clients” of the company for a period of time (one year for two of the executives, and two years for the other).
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.
Ashwin Dandekar and Emily Hua live in California. They worked for Campbell Alliance, a biopharma consulting group, in California. Yet when Campbell Alliance sued Dandekar and Hua for violating their noncompete and confidentiality agreements, it sued them in federal court in North Carolina. And the judge in New Bern has now denied the employees’ bid to send the case back to California, meaning they will have to litigate 3,000 miles away from home. Campbell Alliance Group, Inc. v. Dandekar, No. 5:13-CV-00415-FL (Jan. 3, 2014). What gives?
A forum selection clause, that’s what. Typically, in federal court, a court has the discretion to transfer a case to any other district where it “might [otherwise] have been brought,” in order to serve “the convenience of the parties [and] the interest of justice.” 28 U.S.C. § 1404(a). In making the transfer decision, courts consider the plaintiff’s choice of forum, the residence of the parties, the convenience of parties and witnesses, and other factors that involve whether it’s easier and makes more sense to litigate a case in one location over another. But when there’s a forum selection clause – i.e., a provision in a contract that says a lawsuit over it shall be brought in a particular state – that clause can be a significant factor in the transfer analysis. Indeed, in a decision one month ago, the Supreme Court confirmed that forum-selection clauses should typically decide the issue of which federal court should hear a case. Atlantic Marine Construction Co. v. U.S. Dist. Ct. for the Dist. of Texas, No. 12-929 (Dec. 3, 2013).
An interesting ruling is hot off the press from the U.S. District Court for the Southern District of Alabama. Earlier this week, a federal judge in Dawson v. Ameritox, Ltd. denied Ameritox’s motion for a preliminary injunction seeking to enforce its noncompete agreement with Eric Dawson, a former employee of Ameritox. Ameritox had been seeking an injunction to prevent Dr. Dawson from taking a position as the National Director of Clinical Affairs with Millennium Laboratories, Inc., one of Ameritox’s direct competitors.
The court held that Ameritox’s noncompete agreement was void as against the public policy of Alabama under state law; we unpack exactly how the court reached that conclusion – and what lessons all of us can draw from this ruling.
As Massachusetts continues to consider whether to eliminate the enforceability of employee covenants not to compete in that state, we’ve brought you not only the legal standards at issue, but some of the public policy issues that underlie the debate as well. The two people who are probably at the forefront of this research are Professors On Amir of the Rady School of Management at the University of California San Diego and Orly Lobel of the University of San Diego School of Law. Last year, Amir and Lobel wrote an insightful piece for the Stanford Technology Law Review entitled “Driving Performance: A Growth Theory of Noncompete Law,” which argued that reducing constraints on employee mobility increased economic growth and innovation. [1] (And if you follow our Twitter feed, we directed you to Prof. Lobel's new book, Talent Wants to Be Free, back in November.)
Amir and Lobel are back at it, with a piece published a few days ago for the Harvard Business Review entitled “How Noncompetes Stifle Performance.” They pull no punches, concluding that “limits on future employment not only dim workers’ external prospects but also decrease their perceived ownership of their jobs, sapping their desire to exert themselves and develop their skills.”
As the regulatory and business environments in which our clients operate grow increasingly complex, we identify and offer perspectives on significant legal developments affecting businesses, organizations, and individuals. Each post aims to address timely issues and trends by evaluating impactful decisions, sharing observations of key enforcement changes, or distilling best practices drawn from experience. InsightZS also features personal interest pieces about the impact of our legal work in our communities and about associate life at Zuckerman Spaeder.
Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.
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