Archive for the ‘Non-Compete Provisions/Agreements’ Category

LINKEDIN AND NON-COMPETE AND NON-SOLICITATION AGREEMENTS

November 6, 2013

By G. A. Finch

Another lawsuit has resulted from LinkedIn communications bumping up against employment restrictive covenants.  The National Law Journal reported on a recent case out of a Massachusetts Superior Court (KNF&T, Inc. v.  Charlotte Muller, et al., C.A. No. 13-3676) where an employer sued its former employee for violating a confidentiality and non-competition agreement.  In its complaint, the employer zeroed in on LinkedIn and alleged:

“Most recently, Muller has updated her profile on LinkedIn to announce her employment as Regional Vice President of Panther Global Group, resulting in notification to all of Muller’s 500+ LinkedIn contacts she established during, and which were related to, her employment at KNF&T.  To the extent this notification has been sent to current KNF&T clients, this notification constitutes a solicitation of business in direct violation of her non-competition agreement.  A printout of Muller’s recently up-dated LinkedIn profile is attached as Exhibit F.”

Mass Case Photo20131106_154847

The Massachusetts Superior Court denied a preliminary injunction and held that defendant Muller was not soliciting business for the same kind of workers covered by the field of workers of her previous employer, KNF&T.  The Court suggested that a general description of one’s new job in a profile update without active solicitation or accepting business in the exact recruiting categories prohibited by the former employer was not a violation.

This is similar to a U.S. District Court case (TEKsystems, Inc. v.  Brelyn Hammernick, et al.  ) that I blogged about in 2010.  In that case, a former employer alleged Defendant violated the non-solicitation and non-compete provisions by soliciting Plaintiff’s contract employees and clients within the restricted geographic area covered by the employment agreement in using such electronic networking systems as LinkedIn.

Whether a LinkedIn update or message communication to one’s contacts will constitute a breach of non-solicitation and non-compete provisions will be driven by the facts of the particular case.  Bad facts can land a former employee or her or his new employer in hot water.

The medium of communication, whether it is by telephone, email, mail, fax, or social media, does not change the substance of improper communication that may violate non-solicitation, confidentiality, and non-compete provisions.

As I have admonished in my earlier post:  If you already have pre-existing relationships with employees, customers, clients, potential customers and potential clients, then be sure to list those in a carve-out provision before you sign non-solicitation, non-compete and confidentiality agreements; there may be overlap between your existing contacts and your prospective employer’s contacts and you don’t want to be precluded from utilizing them post-employment.Blog LinikedIn Muller Photo20131106_161614

In turn, employers should remind departing employees that their social media may not be used as an end-run around any restrictions contained in confidentiality, non-solicitation, and non-compete agreements.

Finally, social media is still a mostly uncharted world of communication that must be approached prudently.  One must be conscious of the social, legal, and business impacts of whatever messages and images one is putting on the internet.

THE NUTS & BOLTS OF EXECUTIVE EMPLOYMENT AGREEMENTS BY G. A. FINCH (Video)

January 12, 2013

THE NUTS & BOLTS OF EXECUTIVE EMPLOYMENT AGREEMENTS  (click here for video)

A video created by Dignitas Wealth Management – Family Office – Wealth Management.

PREVAILING PARTY’S LITIGATION EXPENSES

April 22, 2012

A not uncommon provision in employment agreements, separation agreements, or stand alone agreements containing restrictive covenants (e.g. non-competition and non-solicitation) is a “prevailing party” provision.  This kind of provision grants the prevailing party in any litigation over an agreement the right to be reimbursed its, his or her legal fees and costs.

A typical prevailing-party provision will read like the following: “If litigation arises under this Agreement between the Company and the Executive, the prevailing party in such litigation shall be entitled to recover its or his reasonable attorneys’ fees, court costs and out-of-pocket litigation expenses from the non-prevailing party.”

The prevailing-party provision serves as a disincentive for an individual employee to assert his legal rights or to take a risk of violating an agreement.  From the outset, the employer ordinarily would have more financial resources to litigate, and this added provision of saddling the non-prevailing party with all the litigation costs has a chilling effect on the employee’s seeking vindication of his rights.  From the employer’s standpoint, this is precisely the sobering reminder that an employer wants to send to its ex-employees who may choose to test the validity of the employer’s restrictive covenants, especially non-compete clauses.

In any event, the prevailing-party provision is one that must not be overlooked by either the employee or the employer.

ILLINOIS SUPREME COURT OPINES ON LAW OF COVENANT NOT TO COMPETE

January 7, 2012

Illinois Supreme Court

Justice Charles E. Freeman

On December 1, 2011, the Illinois Supreme Court handed down a decision on covenants not to compete (Reliable Fire Equipment Company v. Arnold Arredondo et al.). Justice Charles E. Freeman wrote the judicial opinion.  This decision generated a lot of discussion not only among legal commentators but also by business reporters in Crain’s Chicago Business and the Chicago Tribune.

Covenants not to compete are permissible in Illinois and many employers use them in employment contracts, separation/severance agreements or in agreements for the sale of a business.  The business community certainly has an obvious interest in the topic and we employment attorneys scrutinize a new case to see how it affects the law of non-competes and its application to our clients’ situations whether they be the promisee or promisor, employer or employee, or selling entity or purchasing entity.

What is all the fuss about?  The court simply sought to re-settle Illinois law after the issuance of couple decisions by appellate courts that muddled it.

Here is what you need to know. The court has reaffirmed the longstanding three-prong inquiry into the   reasonableness of  a restraint on competition: 1) whether enforcement  be will be injurious to the public; 2) whether enforcement will cause undue hardship to the promisor; and 3) whether the restraint imposed is greater than is necessary to protect the promisee,  namely,  the “legitimate business interest” of the promisee. The court stated “we continue to recognize the legitimate business interest of the promisee as a long-established component in the three-prong rule of reason.”

The other major pronouncement of the court is that “whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case.”  Courts can still consider such non-exclusive, non-exhaustive factors such as near-permanent customer relationships, employee’s obtaining employer’s confidential information, and time and geography of restrictions.  However, the court makes clear each factor is of equal weight and will be determined by the facts of a particular case.

Accordingly, the decision may give a party more opportunities to argue whether a particular non-compete clause is enforceable.  A party’s having more grounds to argue does not necessarily translate into increased odds of prevailing.  I concur with the school of thought that the decision does not give any particular advantage to a party.

Nevertheless, as I and others have noted, the Court’s holding “whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case” will likely result in more parties being willing to roll their dice and litigate, assuming they have the financial wherewithal to do so.

SUGGESTED NEW YEAR’S RESOLUTIONS ON NON-COMPETES, CONFIDENTIALITY AGREEMENTS, AND SOCIAL MEDIA

January 3, 2012

It is the beginning of the year.  The time for New Year’s Resolutions.  My little son reminded me on New Year’s Eve for us to make our New Year’s “Revolutions.”  His revolution was to do 40 minutes of guitar practice per day (up from 20 minutes).  He had carefully written it down and happily wadded it into a ball to throw into the fireplace.  As the flame consumed his promise to himself, I complimented him on his lofty ambition. Resolutions are indeed personal intentions of revolutions directed at ourselves.  My son’s malapropism has some relevant meaning.

It got me to thinking about appropriate resolutions for executives.  There are many I could conjure up, but three seemed like an easy number to digest and remember.

Resolution # 1: Look Before You Leap

At this time of new possibilities and opportunities, an executive who is considering moving to another company should carefully scrutinize his non-compete, non-solicitation, and confidentiality agreements he has with his current employer to ascertain whether he would be in violation.  The executive should not try to do this without the assistance of legal counsel.  Employers have gotten more aggressive in seeking enforcement of these agreements as evidenced by the many court cases around the country.

Resolution #2: It’s Not Secret If Everyone Knows Or Employees Don’t Know It’s A Secret

Confidentiality Agreements are meant to protect the proprietary information and trade secrets of a business.  If the executive leadership has not instituted safeguards, controls, and notices of confidentiality for its important business information, then do not expect a court readily to treat it as confidential information.

An employee confidentiality agreement is a good start.  Physical and technological protections of business information along with legal protection of intellectual property through copyrights and patents are a good finish.   Think locked filing cabinets, password protected computer files, documents marked “confidential,” and so forth.  The New Year is a good time to establish protocols for safeguarding trade secrets, etc.

Resolution #3: Know How To Use Social Media But Don’t Lose The Personal Touch

If you are an executive or professional, no matter what your age, you are committing business development and networking malpractice by not understanding and utilizing social media whether it is LinkedIn, Facebook, Twitter, blogs, etc.  Whether you realize it or not, you, your business, or your profession are affected by social media and will continue to be at an accelerated rate.

You don’t have to be a “techy” to join LinkedIn or pen a blog – I am living proof of that.  You must do something or you will be increasingly on the margins of access to information sharing.  After some skepticism, I recently signed up for Twitter and I will let you know how it goes.  Older executives must adapt and be continuous learners.

Despite the rise of social media, it is still not a substitute for meeting with people in the flesh, having conversations on the telephone, and sending thank you notes and condolence cards.  Being there and showing up still counts for a lot.  Younger executives should cultivate old fashion pressing the flesh.

Senior executives and the twenty-something young Turks can learn from each other.  To borrow a phrase from my son, that would be a nice “revolution.”

SEARS SEEKS TO ENFORCE NON-COMPETE PROVISION AGAINST EXECUTIVE

May 20, 2011

In a 17 May 2011 article, Crain’s Chicago Business reported that Sears Holdings Corporation sued its erstwhile Senior Vice President Nicholas P.M. Coe to enjoin him from working for its perceived direct competitor, Limited Brands, Inc.  Mr. Coe ran Sears’ Lands’ End business unit.  At Limited Brands, Inc. Mr. Coe serves as CEO of Bath & Body Works Brand Management Inc.

According to Crain’s, Mr. Coe had previously filed his own suit seeking to invalidate the non-compete provision on the usual legal grounds of being unreasonable and overly broad.   What is interesting about Mr. Coe’s non-compete provision is that Limited Brands, Inc. apparently was listed as a company for which he could not work for at least a year. 

Three things to note from this exchange of lawsuits over a non-compete provision: A) An executive should consult an attorney to analyze his non-compete agreement for potential breach prior to his accepting a new position; B) Executives and their new employers are now more willing to challenge non-compete provisions through litigation; and C) Spurned old employers often will seek to enforce non-compete agreements through litigation.

Whether a non-compete agreement will be upheld depends heavily on which state’s law applies to the contract and the factual circumstances of the particular employment situation.

Meanwhile, Sears lost $170 million in the first quarter of 2011.  This amount translates into a loss of $1.58 per share.

UNINTENDED LEGAL CONSEQUENCES OF SOCIAL MEDIA FOR EMPLOYMENT CONTRACTS

August 11, 2010

By G. A. Finch

A fellow alumnus, Gene Killian, recently started a discussion in the LinkedIn University of Michigan Law School Group with the query: LinkedIn Use Violates Restrictive Covenants?

Mr. Killian alerted the group to a recent complaint filed in the U.S. District Court for the District of Minnesota captioned TEKsystems Inc. v.  Brelyn Hammernick, et al. 

Allegations

Plaintiff TEKsystems Inc. is in the business of recruitment and placement of temporary and permanent employees.  Defendant was a former employee of the Plaintiff and had signed an employment agreement which contained provisions not to compete, not to solicit, and not to divulge confidential information.  Defendant went to work for a purported competitor of Plaintiff.

Plaintiff alleges Defendant violated the non-solicitation and non-compete provisions by soliciting Plaintiff’s contract employees and clients within the restricted geographic area covered by the employment agreement.  Specifically, the complaint alleges Defendant “communicated with at least 20 of TEKsystem’s Contract Employees using such electronic networking systems as LinkedIn.”  The complaint went on to allege that Defendant connected with several named employees of Plaintiff.  Plaintiff further alleges that Defendant specifically asked an employee whether he was still looking for opportunities and alleges that Defendant stated that she would love to have the employee come by her new offices and hear about the stuff she was working on.

These allegations are just allegations and, of course, Plaintiff will have to prove its case.

Social Media Bumping Up Against Employment Contract Provisions

What I find interesting is the intersection of social media and employment contracts.  We talk a lot about both of these subjects in this blog.  Now we see how one can affect the other.

People have gotten way too comfortable with social media like Facebook and LinkedIn. We forget 1) that what is sent into the internet never really goes away and 2) that it can be conceivably be read by thousands, if not millions of individuals.  Most disturbingly, much of it can be used in a court of law as evidence against you.

We don’t know what Defendant’s response and defense will be so we can’t speculate how a fact finder (judge or jury) might decide this case.

Medium Doesn’t Change Underlying Elements of a Cause of Action and  Use of Carve Outs

I do have a couple of observations:

A) The medium or means of communication may vary (e.g., telephone or email), but improper communication is improper communication.  You can’t solicit a customer or former employer if you have signed a valid non-solicitation provision.

B) If you already have pre-existing relationships with employees, customers, clients, potential customers and potential clients, then be sure to list those in a carve out provision before you sign non-solicitation, non-compete and confidentiality agreements.  There may be overlap between your existing contacts and your prospective employer’s contacts and you don’t want to be precluded from utilizing them post-employment.

The TEKsystems Inc. case is instructive in that we should not be lulled by the false sense of intimacy and instant camaraderie of social media like LinkedIn and Facebook.  Our communications, whether on the internet or face to face, can have unanticipated legal consequences.

NON-COMPETE AGREEMENTS: YOU MAY NOT GET WHAT YOU BARGAINED FOR

February 3, 2010

G. A. FINCH

According to the English philosopher Francis Bacon, “A man must make his opportunity as oft as find it.”

Preventing a person from making his opportunity runs counter to the American ethos that a person should have the freedom to work wherever and whenever the person desires. This notion has been tempered by contractual and equitable principles that a person can bargain away or limit his freedom to work under certain circumstances as manifested in non-compete agreements (or covenants not to compete). Courts loathe to deprive someone of the ability to make a living. The following commentary is a generic discussion of this kind of an agreement.

Non-compete agreements commonly are used in two situations: employment and business purchase agreements. To be a valid contract, a non-compete agreement also must be supported by “legal consideration,” which means the price bargained and paid for a promise (it may be a return promise, an act, or a forbearance).

Most courts closely scrutinize non-compete agreements as they are restraints on trade and considered to be contrary to public policy. A non-compete agreement is unenforceable where its sole purpose is to restrict competition without other justifying factors. Because there is more of an arm’s length bargaining position of the parties, non-compete agreements arising from the purchase of business assets are viewed more favorably by courts. A court will ordinarily sustain a non-compete agreement that is necessary to protect the promisee’s legitimate proprietary or business interests.

The court’s determination of the validity of a non-compete agreement is done by examining whether the terms are reasonable. The circumstances of each case will drive this determination. Reasonableness is measured by the scope of the territory, duration, the type of restricted activity, the hardship on the promising party, and the effect on the general public. The longer the duration and the larger the geographic territory, the more likely a court could find such terms as overbroad and contrary to public policy and, therefore, unenforceable.

The lack of any geographic limitation can be problematic, and without some legitimate qualifier on the prohibited activity placed on promisor, such as the promisor not soliciting particular existing customers of promisee, the covenant could be invalidated. Typically, non-compete agreements have a duration from six months to three years. In a sale-of-a-business situation, one court allowed five-years, because the agreement did not prohibit the selling party from engaging in all business activity, just the kind of activities that competed with the business subject to the sale agreement.

To enforce a non-compete agreement, a promisee often will seek an injunction against the promisor. Sometimes a promisor will file an action for declaratory judgment seeking to invalidate a non-compete agreement. Depending on the circumstances, monetary damages could be awarded as well as attorneys fees to the prevailing party.

This article was originally published in Lorman.com Newsletter Legal Update.

Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.