What If The Non-Compete Is Too Tough?

LEGAL FORUM from November of 1996 may have an answer in A Too-Tough Noncompete Clause Could Defeat Its Own Purpose:

"Many groups are willing to compromise on their noncompete provisions. When I represent physician employees, I often negotiate such compromises. But I also resist them strongly when representing an established medical group."

Here is my reasoning. The enforceability of a noncompete provision is directly related to its reasonableness. Part of what makes the covenant reasonable is that it is necessary to prevent the departed physician from taking something (the group's market leverage) that would harm the medical group. But if the medical group starts allowing exceptions to the noncompete clause, it effectively has stated that the employee's departure is not harmful to the group, or that the harm is O.K. in certain circumstances. This is dangerous, because it suggests that the noncompete clause may not be an essential protection for the group, increasing the chances that a court may find it inappropriate and thus unenforceable. There certainly are reasons why this vulnerability may not apply in certain circumstances, or why this vulnerability may otherwise be acceptable. But weigh the issues carefully before you agree to compromise.

A medical group that is open to compromise has a number of options to consider. A covenant may only apply if the employee physician is terminated for cause, or departs the group without cause. (Be sure to define "cause" carefully!) Or the covenant may only preclude independent medical practice, so that the departed physician may become a hospital employee. Or the noncompete provision may disappear or change its focus after a certain period of continued employment. There are many permutations. In general, though, an employer should only agree to compromises that can be justified in the contract as both fair and consistent with the premise that underlies the covenant.

Gardening Leave Remedies

I wrote about the uses of gardening leave here. What if an employee decides to breach the gardening leave contract? I thought only injunction relief until I read Protect your firm when staff leave from Microscope in the UK.

Getting an injunction as set out in this paragraph ought to be familiar to anyone filing a suit on a non -compete agreement:

The employer can apply for a court order, an "injunction", to enforce either the employee’s implied duties of honesty, loyalty and faithful service; and/or any express term such as a garden leave clause which will prohibit the employee from having other business interests during the course of employment - which includes employment with another employer.

When does the litigation being? When there is a garden leave agreement in place and the employee quits without giving the notice required under the agreement.

By resigning without notice the employee is breaching the contract. To enforce a garden leave clause, the employer should refuse to accept the attempted termination of the contract, hold the employee to the obligation to give notice and (assuming the contract so empowers you) suspend them for the entire notice period. Where, however, despite these steps, the employee commences work elsewhere, injunction proceedings (see above) may be required.

It is for the client to decide if suit needs filed, but with the remedy being an injunction the time spent on reaching a decision can be injurious to both the business and the suit.

Although framed as a breach of fiduciary duty, Bartholomew v. Alstom Power, Inc., (SD Ohio, Eastern Div. 2005)does involve a garden clause. Violating the garden clause was used by the former employer as one basis for the lawsuit. On the other hand, the jury decided against the employer.

The New South Wales (Australia) courts limited any remedy during garden leave. Mallesons Stephen Jaques noted this in its Can an employer enforce restraints during gardening leave?

The Supreme Court of New South Wales has held that an employer could enforce restraints against an employee on extended gardening leave only to the extent that the restraints were reasonable.

The employee, a broker, was on a fixed term contract which included a restraint on taking up employment with a competitor or soliciting clients or employees. The restraint purported to apply during the term and for three months afterwards. The employee resigned more than a year before the end of the term to take up a position with a competitor. The employer continued to treat the contract as on foot. It placed the employee on gardening leave (that is, continued to pay him but did not require him to attend for work), and sought an injunction preventing him from working for the competitor for the balance of the contract term.

The Court held that while the contract had not been terminated by the employee’s resignation (because it was for a fixed term, and the employer had not agreed to termination), the employment relationship had come to an end. While non-compete and non-solicit restraints are generally enforceable during employment, after employment they are only enforceable to the extent they are reasonable and not contrary to public policy. Based on the nature of the employment and the employer’s business, the Court held that in this case a reasonable period was six months. This meant the employee was prevented from competing or soliciting clients or employees for only six months after he resigned (despite the fact that the fixed term contract continued for a longer period, and the employee would have been paid for the time he was out of the workforce).

Tullett Prebon (Australia) Pty Ltd v Purcell [2008] NSWSC 852

Non-Competition - Policy Ideas

I have written before about Massachusetts liberality towards non-compete agreements here and here. NECN reported a potential change its Mass. non-compete culture to change?

Warner said he believes limiting or banning non-competes would lead to more companies like Google, Cisco Systems, and Avid getting launched in this area instead of Silicon Valley or other parts of the country.

"Here's what happens with non-competes: People think about starting a new company, but they can't leave their current company and go to a competing company,'' Warner said in an interview at a Massachusetts Technology Leadership Council conference this week. "The non-compete issue is hurting us more than you might ever know.''

It's unclear if this bill moves this year. The state's biggest business lobby, Associated Industries of Massachusetts, which represents over 7,000 employers, isn't opposing or backing the bill, saying it sees deep division on the issue. AIM said it thinks fixing other issues -- like taxes, unemployment insurance and electricity costs -- would do far more to improve the Bay State business climate than would the change in non-competes.

***

Beck said he agrees some more could be done to unlock the flow of tech talent in Massachusetts, short of a total Silicon-Valley-style ban on non-competes. He's working pro bono with Brownsberger and Ehrlich and advocates on various sides of the issue to find middle ground and get legislation enacted -- building on the two legislators' own agreement to mesh their previously separate non-compete reform bills. "We're trying to find a compromise between the legitimate business interests of the employer and the right of the employee to continue to work" in their field after leaving an employer, Beck said.

I remain unconvinced that Indiana's conservative approach to non-competition agreements makes Indiana any more attractive to businesses than other states. I think Massachusetts has not been able to translate its academic talents for technology (remember that MIT stands for Massachusetts Institute of Technology) as California has because of its non-compete policy.

Indiana Non-Compete Case

Still trying to round out the material from my hiatus.

Judges differ in non-compete agreement case

In a legal dispute regarding a non-compete agreement, the Indiana Court of Appeals judges disagreed as to whether the agreement could be enforced if the former employee's clients voluntarily left and contacted him to continue to be their accountant.

At issue in Craig P. Coffman and Coffman Proactive CPA Services, LLC v. Olson & Co., P.C., No. 53A04-0804-CV-190, is whether Olson & Co. had a protectable interest that could be enforced by a non-compete provision in an employment agreement and whether the trial court erred by voiding the liquidated damages provision in the agreement and calculating the damages award.

Craig Coffman worked as CPA for Olson & Co. and signed a confidential non-disclosure and client proprietary agreement that said upon termination of his employment with the company he couldn't contact or work with Olson clients for 24 months. If he did so, he would liable to Olson for two times the client's most recent 12-months billings with Olson if he informed the company of the violation of the agreement; if Coffman failed to inform Olson, he would be liable for three times the amount.

Non-Competes and Trade Secrets - IBM Loses a Case

I am not so sure that I buy not signing on the correct line means that the non-compete agreement in Judge: Former IBM executive can work at Dell is enough. I am more worried about the implication that IBM had an employee sign a non-compete after the start of employment.

According to a court document, IBM in 2005 required executives to sign noncompete agreements to continue receiving equity benefits. Johnson didn't agree with certain conditions in the noncompete agreement, so he signed the document on the wrong line. Johnson said that IBM discovered that the signature wasn't properly executed and sent him a new noncompete agreement, which he never signed.

In a court filing, IBM alleged that Johnson had indeed signed a noncompetition agreement. However, the court said that IBM's case wasn't strong enough and that its actions raised significant doubts as to whether Johnson had entered into the noncompete agreement.

Frankly, this argument from the employee from Reuters' IBM loses injunction against Dell executive better explains what went wrong at IBM:

He maintains that the non-compete agreement is invalid because he intentionally signed his name in "the wrong spot" on the document in a bid to win time to work out his differences with his superiors.

"I believed that IBM did not consider the non-compete agreement agreed upon or entered because IBM returned to me the one I had signed in the wrong spot unexecuted and asked me to sign a new form," Johnson said in an affidavit.

I find the trade secrets issues even more interesting:

The judge also said that Johnson didn't have access to IBM trade secrets. "The Court ... believes that IBM has overstated its case. Mr. Johnson does not have the sort of information that is considered quintessential trade secret information--detailed technical know-how, formulae, designs, or procedures," Robinson wrote. In addition, Johnson could suffer great hardship if the court enforced the agreement, the judge wrote.

Which is pretty straightforward trade secrets law, but IBM argues the employee possesses a different kind of information:

IBM argued that Johnson could hurt the company because he has knowledge of the "most sensitive confidential strategic information," according to the filing.

I am trying to figure out what strategic information could be confidential. Client lists....but we are talking about IBM here. Those likely to be IBM clients are what I would call obvious and not a secret.

If I can find the time, I might jump on Pacer and see what else there is to find out.

Non-Compete Agreements - Closing the Barn Door After the Horse Leaves

Which is how I describe this dialog from Internet Marketing & Affiliate Tips's Use Noncompete Agreements To Help Protect Your Business:

Q: One of my former employees has started a competing business and is calling my clients and trying to steal their business from me. Do I have any legal recourse against him?
– Brad J.

A: I hate to break this to you, Brad, but unless this former employee signed a noncompete agreement while on your payroll, there is probably very little you can do to stop him from wooing your customers. You should discuss the situation with your attorney, but unless this person is also breaking the law in some other way (using stolen trade secrets, for example) your attorney will probably concur with me.

For those of us old enough to remember the idea of nuclear deterrence, you may better understand the use of a non-compete agreement as a deterrent to former employees acting as described above. Which means you need one before the employee leaves.

I will be happy to discuss with any Indiana business their need for a non-compete agreement.