Womble Carlyle Non-Compete and Restrictive Covenants Blog

N.C. Court of Appeals Reverses Order Denying Injunction in Trade Secret and Non-compete Case

2015-01-24T07:53:00.000-05:00

On New Year's Eve, the North Carolina Court of Appeals stepped in to reverse an order denying a preliminary injunction to a company seeking to stop a former employee from misappropriating trade secrets and breaching a non-compete agreement. According to the decision, the employee originally worked for TSG Finishing, a fabric finishing company that applies chemical coatings to fabrics for various customer applications. The employee, Keith Bollinger, left TSG to take a job with a competitor at a location just five miles away. At his deposition, Bollinger admitted that he was working with some of the same customers of TSG with his new employer, and that he was responsible for performing some of the same tasks as he had performed at TSG.

TSG sued and asked the North Carolina Business Court to enter a preliminary injunction to prevent Bollinger from misappropriating TSG's trade secrets and working with a direct competitor in violation of his non-compete agreement. The Business Court denied the injunction, concluding that TSG had not presented a sufficient showing of trade secret misappropriation, and that the non-compete agreement (which was subject to Pennsylvania law) had not been properly assigned to TSG following a bankruptcy. TSG appealed.

In a unanimous published decision, the North Carolina Court of Appeals reversed the order, and took the additional step of ordering the trial court to enter the preliminary injunction. In a detailed analysis, the Court of Appeals concluded that TSG had shown a likelihood of succeeding on its trade secret claim, and that injunctive relief was appropriate. In addition, applying Pennsylvania law to its review of the non-compete issues, the Court concluded that the non-compete agreement had been properly assigned to TSG in a prior bankruptcy proceeding, and that the 2-year restriction applying to the textile finishing field in North America was reasonable and enforceable under Pennsylvania law.

The case is TSG Finishing, LLC v. Bollinger, and the Court of Appeals decision can be found here.

Thomas Weisel Partners Wins Breach of Fiduciary Duty Claim Against Former Director Who Joined BNP Paribas and Orchestrated En Masse Resignations

2010-04-06T15:34:00.003-04:00

This out of California - on April 1st, a federal judge (The Honorable Marilyn Hall Patel) found Praveen Chakravarty liable for breach of fiduciary duty to Thomas Weisel Partners in connection with his departure as a Director for Thomas Weisel Partners and his "facilitation of" the resignations of at least 18 employees, who promptly became re-employed with BNP Paribas or its affiliated company, BNP Paribas Securities (Asia) Limited. In carefully chosen words, Mr. Chakravarty admitted he served as "an intermediary of information between BNPP and his co-workers in the hope that some of them might secure alternative employment." That, according to Judge Patel, was a no-no.

Some related evidence certainly didn't help Mr. Chakravarty. Apparently before the court was an e-mail to Mr. Chakravarty from Jonathan Harris, BNP Paribas Asia's Head of Company Research. Before Mr. Chakravarty had even resigned, Mr. Harris sent an e-mail to Mr. Chakravarty's e-mail at Thomas Weisel Partners as follows:

"As we discussed, the way we'd like to take this forward is to first identify the core group of your team, I think you said about 20-25 individuals. We'd like to then work on preparing employment documents for all of them. Once you have them and all is satisfactory, we'd look to you to resign from Thomas Weisel enmass [sic]. If their [TWP's] reaction is that they'd move to shut down the remainder of the office, we can step in and offer to take over the remainder as a gesture to save them the office shutdown costs.

First step would be to get from you the list of all employees, their current comp and job descriptions. Next I'd like you to highlight the 20 or 25 key individuals, and a bit more info on their job descriptions and background. For this group, please provide an indication of what comp levels you would think about for their move to BNP Paribas. Once I get this from you, you and I can arrange for a call to talk through the info."

Editor's note: this doesn't look good. This sounds like Harris knows exactly what the "enmass" departures will do to Thomas Weisel. But, of course, Mr. Chakravarty didn't send this data to Mr. Harris, did he? Well, yes. He did. That same day he sent it, noting "you are not obligated to take the entire team. The minimum we can go with is 8 analysts and the rest are available as needed. If we close the deal with 8 analysts, me and the HR/Prod Mgmt. person quickly, then we can try to big for the office space and others." Ooops. That's not good either. Seems Mr. Chakravarty knows exactly what the "enmass" departures will do to Thomas Weisel too.

Well, you can click on the link above to read the rest of Judge Patel's decision and order but suffice it to say this one is a long way from over. We would assume Mr. Chakravarty will appeal this decision and order. If he doesn't, Thomas Weisel Partners now has a guy in pretty serious legal trouble and there's more in this case to follow.

Georgia House Passes Proposed Constitutional Amendment On Non-Compete Agreements

2010-03-24T23:20:00.002-04:00

A proposed amendment to the Georgia Constitution to allow for enforcement of reasonable non-compete agreements easily cleared the Georgia House of Representatives on March 22, 2010. The proposal now heads to the Georgia Senate. If passed by the Senate, the amendment could be presented to Georgia voters for ratification this November.

Goldman Sachs Alleges Credit Suisse Picked Its Pocket in Atlanta

2010-02-18T14:17:00.002-05:00

Reuters is reporting that Goldman Sachs has sued seven former wealth managers for allegedly soliciting an en masse departure of employees and clients. Goldman has also reportedly sued Credit Suisse for inducing the departures with oodles of up front departure bonus cash.

The seven immediately began "pirating" Goldman clients and colleagues to join them at Credit Suisse, according to the suit, filed in federal court in Atlanta on Wednesday. The seven violated their non-solicitation agreements and stole confidential information, the suit said.

Credit Suisse and Goldman declined to comment on the matter.

Goldman's lawsuit comes amid heated competition among the largest U.S. wealth management firms to poach advisers and their customers.

Credit Suisse's Americas private banking head told Reuters earlier this month that he wants to grow the U.S. wealth management business from 400 advisers to 700 over the next few years.

According to the Goldman lawsuit, one of the seven defectors, David Greene, told Goldman Atlanta office head David Fox that Credit Suisse agreed to pay him $11 million to join the firm.

The seven began soliciting Goldman's clients and employees on Feb. 6, a day after they resigned from Goldman, according to the suit.

Greene called Goldman Sachs Vice President Justin Berman on Feb. 8 at 6:15 a.m. and offered him $10 million to join Credit Suisse, the suit said.

Goldman also accused the defectors of telling Goldman clients that the defections had "destabilized" the Atlanta office, which is in the same building as Credit Suisse's wealth managers.

Goldman's Atlanta team advised 140 Goldman clients in several Southeast states, according to the filing.

The suit alleges that the departing advisers attempted to skirt non-solicitation agreements by having Dennard and Tyson -- who did not sign such agreements -- call former clients on behalf of the team. Clients were asked to contact Goldman advisers who were moving to Credit Suisse, the suit said.

The departing executives also targeted Goldman's internal list of potential wealth management clients, another violation of their employment agreements, Goldman said. The New York bank draws attention to a similar wave of defections that hit Credit Suisse in 2007 , and says “It is beyond ironic that Credit Suisse having been so damaged by the departure of its key private wealth asset managers in October 2007 has similarly preyed on Goldman Sachs.”

Goldman asked the court to restrain the seven defectors from using Goldman information and order them to return documents.

The case is captioned In re: Goldman, Sachs & Co. v. Greene et al, U.S. District Court, Northern District of Georgia, No. 1:10-cv-00453.

Dunkin' Donuts Pays Its Way Out of Starbucks Manager's Noncompete Promise

2009-10-27T09:48:00.003-04:00

The Puget Sound Business Journal is reporting that Paul Twohig ran Starbucks retail operations in the Southeastern United States before taking the Dunkin’ job.

By switching companies, Starbucks alleged, Twohig violated an agreement in which he had said he would not work for a rival for 18 months. He left Starbucks in March and asked to have the non-compete lifted, but was denied.

“As part of the settlement Mr. Twohig will complete initial training but will otherwise not work at Dunkin’ until Jan. 15, 2010,” Starbucks said in a statement quoted by the Puget Sound Business Journal. “In addition Starbucks will be paid $500,000. Mr. Twohig also reconfirmed his commitments not to share Starbucks trade secrets and other confidential information with Dunkin’ at any time.”

So, per this report, Starbucks gets the benefit of some of the 18-month term in its noncompete promise from Mr. Twohig and they also get $500,000 for the effort.

Buy-outs of remaining term of a noncompete are not out-of-the-ordinary in the business world and they represent efficient legal solutions to often messy litigation.

Federal Appellate Court Holds No Error in $1.16 Million Noncompete Breach Verdict from Rhode Island

2009-10-23T09:29:00.002-04:00

If you click on this link: http://newsroom.law360.com/articlefiles/129967-Astro_med.pdf or the title to this blog post you'll be able to read fresh analysis from the First Circuit in their affirmation of a lower court's entry of a $1.16 million verdict in a breach of noncompete and nonsolicitation trial.

But the part of the First Circuit's opinion that interested us most was an argument posed by the former employee and his new employer: if a covenant not to compete is deemed too broad to be enforced and is judically modified by the trial court to make it enforceable, can the employee be liable for breach of the original covenant BEFORE the covenant is judicially reformed or fixed? Employee was essentially asking: "how can I be liable in damages for breach of a promise the court says can't be enforced unless it is modified?" The employee acknowledged that he could be liable AFTER the trial court fixed the covenant - but he vehemently argued that he couldn't be liable for breach BEFORE the trial court fixed the covenant (which just happened to be when he engaged in all his breaching behavior).

The trial court found that he COULD be liable for his conduct that occurred before the judicial fixing and the First Circuit agreed. Here is their reasoning:

Defendants’ contention does not withstand analysis. Their logic would give the promisor in a non-competition agreement one free breach, requiring a prior judicial order before the provision could be said to have been violated. Such a proposition, the validity of which is without authority, would eviscerate all but the most narrowly tailored non-competition agreements, since a
modification of any term of the provision would justify a breach of all its terms. Further, because most breaching employees gain the full benefit of the breach the first time they compete with their former employer, a second breach after judicial warning would in most cases be cumulative. Also, once a court restricts the scope of the non-competition agreement, the breaching party is being held to a more narrowly circumscribed agreement than the one he signed, and the more restrictive terms of the agreement remain as effective
as the day they were agreed to.

We are not particularly persuaded by this logic and we think the Court had to craft a rule here so that this crafty litigant wouldn't get away with his plan to breach that covenant not to compete. The Court is essentially saying: "if you weren't liable for breach in the BEFORE MODIFICATION period, you'd be getting a free pass and we can't have that" and also "you were always obligated under the geographically reasonable restriction that the trial court modified the agreement to provide, you just weren't obligated under the geographically unreasonable parts."

There might be law review articles out there discussing this argument - you're bound by a geographic scope that is reasonable even though your's is unreasonable and if you run afoul of that reasonable provision, you're in trouble - and we'll keep an eye out for them. This is an interesting issue.

Todd Sullivan Interviewed in Technology Transfer Publication

2009-09-22T10:31:00.002-04:00

RALEIGH, N.C.-Womble Carlyle attorney Todd Sullivan is quoted in an article in the August 2009 issue of Technology Transfer Tactics, a monthly newsletter for technology transfer professionals.

The article focuses on intellectual property disputes between research universities and inventors, and how proactive measures can prevent such disputes from becoming major headaches. The article was prompted in large part by a recent court battle between the Mayo Clinic and former employee Dr. Peter Elkin, who developed a software program for bioinformatics. The two sides now are battle over who controls the rights and revenues from the software.

Sullivan is quoted extensively on how companies and inventors can prevent such disputes. "Disputes essentially arise like a phoenix from the ashes of poorly drafted agreements," Sullivan tells Technology Transfer Tactics.

Todd Sullivan is a trade secrets litigation attorney in Womble Carlyle's Raleigh office. He is a co-author of the Womble Carlyle Trade Secrets Blog.

Click here to read the full article.

North Carolina Court of Appeals Finds Restricted Stock To Be Insufficient Consideration

2009-09-09T23:46:00.004-04:00

The North Carolina Court of Appeals issued a decision that serves as a good reminder for businesses that when offering consideration to support a non-compete agreement, the consideration cannot be illusory.

In the case of MSC Industrial Direct Co. v. Steele, the employee worked for the company for 12 years before he was asked to sign an agreement with a non-compete provision. In consideration for the agreement, the employee was offered 85 restricted shares of the company’s stock. (Remember, in North Carolina, continued employment is insufficient consideration to support a non-compete agreement entered into after the employment relationship has begun.) The first 50% of the stock would not vest for three years, and the remaining 50% would vest over the two years following that. If the employee was terminated at any time before vesting, the shares were forfeited. In addition, before the shares vested, the employee had none of the attendant rights usually associated with stock, such as the ability to transfer the shares, receive dividends, or to vote the shares.

Under these facts, the Court of Appeals held that the award of shares was illusory consideration, and ruled that the non-compete agreement was not enforceable. The court reasoned that the company could divest the employee of the shares by terminating him “only moments after signing" the agreement. On that basis, the court found the restricted shares were insufficient consideration to support a non-compete.

As a final point, the Court of Appeals also noted that since the employee had worked for the company for 12 years, the company could not rely on the fact that it continued to provide him with access to confidential information as consideration to support the agreement. The court concluded that since he already had access to the information prior to the agreement, the company was not providing anything new of value to the employee.

This case serves as a good reminder that where it is critical to bind current employees to a non-compete agreement, the better course is to tie the agreement to an increase in compensation, a promotion, a signing bonus, or some other type of consideration that is of immediate benefit to the employee.

Massachusetts Judge Modifies Injunction - Permits Executive with Noncompete to Work for Hewlett-Packard in Limited Capacity

2009-05-27T10:21:00.002-04:00

It is not common for a judge to modify an injunction - but it happens.

The Boston Globe is reporting that a Suffolk County Superior Court has cleared the way for former EMC executive David Donatelli to start work at rival Hewlett-Packard. But the court barred Donatelli from working at any HP business unit that competes with EMC for one year.

Until his surprise resignation last month, Donatelli was president of EMC's data storage products operation, the company's biggest business unit and one that competes directly with HP's storage business. In late April, HP said Donatelli would become its executive vice president for enterprise servers, storage, and networking. But Donatelli had signed a contract with EMC stating that if he left the company, he would wait 12 months before taking a job at a competing firm.

Donatelli sought to get out of the contract by filing a lawsuit in California, where HP is headquartered and where courts generally refuse to enforce noncompete agreements. EMC filed a countersuit in Massachusetts, where Superior Court Judge Stephen Neel issued an injunction on May 4 barring Donatelli from taking the HP job.

On Thursday, Neel modified his injunction. The new version allows Donatelli to work for HP as long as he steers clear of the company's storage business. In a statement issued yesterday, HP said Donatelli will serve as executive vice president for enterprise servers and networking, and will take on leadership of the storage business after the injunction is lifted a year from now. Until then, HP's storage operation will be run by senior vice president Dave Roberson.

Georgia Considering New Statute To Provide Guidance on Enforcement of Non-Competes

2009-05-12T15:15:00.000-04:00

In response to the strict scrutiny given restrictive covenants by Georgia courts, a coalition is seeking to pass legislation that would allow for the enforcement of reasonable non-compete and non-solicitation covenants. The goal of the proposed statute, as emphasized in its legislative findings, is "to provide statutory guidance so that all parties to such agreements may be certain of the validity and enforceability . . . and know their rights and duties according to such provisions."

The proposed legislation can be found at http://www.legis.ga.gov/legis/2009_10/sum/hb173.htm.

Adult Showclub Claims “Near Permanent” Relationships with VIP Room Customers Are Exposed to Interference by Competing Former Employee

2009-03-31T09:03:00.004-04:00

A pending case in Illinois is providing an interesting context for the analysis of the nature of customer relationships required to establish the protectable business interest necessary to support a non-compete agreement.

The Penthouse Club is an “adult showclub” in Sauget, Illinois. Penthouse filed suit on March 10, 2009 in federal court in the Southern District of Illinois seeking an injunction against its former Director, Michael McLean. Penthouse seeks to prohibit violation of his non-compete agreement and interference with the club’s customer relationships.

According to the complaint, the Penthouse Club operates a “VIP Room” that is open only to members who have to pay initiation and yearly membership fees. As the club’s director, Mr. McLean gained valuable inside knowledge about the VIP Room members, the names of the club’s entertainers and their working preferences, planned promotions, and the club’s specialized and unique training programs to increase business.

The lawsuit arose after Mr. McLean was fired from the club and went to work for a competing adult showclub. The Penthouse Club claimed that this violated his non-compete agreement, which prohibits Mr. McLean from working at an adult club within a 25-mile radius of the Penthouse Club.

The Penthouse Club has moved for a preliminary injunction. In arguing that it is likely to succeed on the merits of the case, Penthouse must show that the non-compete protects a legitimate business interest. That interest, according to Penthouse, is the “near permanent customer relationships with many of its members in its VIP Room.” In its motion, Penthouse contends that it “has spent a significant amount of money to build its clientele in the VIP Room.” Citing its “exclusive nature,” Penthouse claims that “finding and maintaining the clientele willing to become members and maintain his membership is difficult.” Because of his employment, Mr. McLean gained extensive knowledge about those members, and Penthouse believes that he will inevitably disclose that knowledge in his competing employment.

Under Illinois law, among the factors considered on the customer relationship issue are the time required to develop the customer relationships, the amount of money spent to do so, the employee’s personal contact and knowledge of those customers, and the length of the customer relationship.

The injunction motion is set to be heard next month. It will be interesting to watch how the court handles the argument about whether “near permanent relationships” with customers has been established. Given the current economy, there are doubtless many businesses in many industries that could make a similar argument premised upon the contention that finding customers who are “willing to become and remain” customers requires a significant investment of time and resources.

The case is IRC, LP v. McLean, Case No. 3:09-cv-00189, pending in the U.S. District Court, Southern District of Illinois.

IBM Obtains TRO From Federal Court Ordering Former Employee to Stop Working for Apple

2008-11-18T17:46:00.002-05:00

Well, the federal court in New York has decided to stop Mark Papermaster from violating the terms of his noncompete agreement but has ordered IBM to post a $3 million bond to protect Papermaster if it is later determined the injunction was wrongfully issued.

Click on the link above in the Fortune piece on this interesting case and you can review the complaint and Judge Karas's order. The order mandates an immediate termination of Papermaster's employment with Apple.

In an interesting little twist, Papermaster's attorneys are suggesting to the New York court that New York law should not apply to this matter, even though the IBM/Papermaster agreement says that New York law should apply. They are arguing, as one would credit them for attempting to do, that Texas law or California law should apply to this dispute. Papermaster is making the argument believing that California law will invalidate this noncompete covenant - and Texas law would give this agreement a rough ride too.

Papermaster worked for IBM out of Texas and planned to work for Apple in California.

We'll keep an eye on this one for you. Papermaster does not appear to be done fighting this one - he is sitting on the sidelines for now and presumably has lots of time to plan his defenses and counter-offenses.

IBM Sues Top Executive to Stop Migration to Apple

2008-10-31T12:03:00.002-04:00

IBM is suing one of its top executives, a server guru who is trying to take a job with Apple, where he would be working closely with CEO Steve Jobs.

Mark Papermaster, a 26-year veteran of IBM, has knowledge of "significant and highly confidential IBM trade secrets" that would "irreparably harm" the company if he is allowed to work for Apple, IBM alleges in a suit filed in United States District Court in Manhattan on Oct. 22. Papermaster also signed a noncompetition agreement in 2006 pledging not to work for competitors for one year after the conclusion of his employment with IBM.

The complaint says Papermaster was IBM's top expert for its Power microprocessors and the vice president of IBM's blade server development unit, until resigning on Oct. 21. Papermaster is also a member of IBM's "elite" Integration & Values Team, a group of 300 senior managers charged with developing corporate strategy.

"Recently, Mr. Papermaster informed his superiors at IBM that he intended to accept a position at Apple," IBM's complaint states. "On information and belief, Mr. Papermaster will become a senior executive and corporate officer at Apple and will work very closely with Apple's Chief Executive Officer in providing to Apple technical and strategic advice on a variety of issues."

IBM says it tried to lure Papermaster back with a substantial pay raise, and offered to pay him one year's salary in exchange for Papermaster "refrain[ing] from working for an IBM competitor for one year."

Papermaster nonetheless decided to leave and work for Apple beginning in November, the complaint states.

"Mr. Papermaster, as long as he is employed by Apple, will inevitably use and/or disclose IBM trade secrets for his own benefit and for the benefit of Apple," IBM alleges.

IBM is seeking an injunction preventing Papermaster from working for Apple and asks for monetary awards "as the court deems just and proper."

California Attorneys Concede Total Defeat on Noncompete Issues

2008-10-23T10:53:00.002-04:00

Adam Katz had earlier blogged the Edwards v. Arthur Andersen decision - but now California attorneys are agreeing with him on the record that the gig is up in California.

“Employers simply cannot use noncompete agreements with their employees any more,” explained San Jose-based employment attorney Dennis Brown, co-founder of Littler Mendelson PC’s risk management program, noting that certain courts had allowed some latitude in the matter in recent years.

The August decision by the California Supreme Court, Edwards v. Arthur Andersen LLP, was closely watched by labor and employment lawyers because it took up the issue of noncompete agreements, which are allowed in many states as long as they’re limited in terms of geography and duration.

In the case, Raymond Edwards, an accountant at Arthur Andersen, sued the firm on a number of grounds. Among them was an agreement he signed specifying that after leaving the firm, for 18 months Edwards would not contact any of the clients he’d worked with at Andersen.

The firm argued, “You can still be a tax accountant,” Brown said, “you just can’t call on our customers for 18 months.”

This argument had been accepted in recent years as valid by the 9th U.S. Circuit Court of Appeals, a federal appellate court, believing the California courts would uphold a narrow opening into the noncompete area as long as it was reasonable.

In matters of state law, however, the state Supreme Court has the final word. California courts are bound by what its own courts say, not by what federal appellate courts say, according to employment attorney Andrew Wolfe, a partner at Redwood City-based Ropers, Majeski, Kohn & Bentley.

The state Supreme Court unanimously reaffirmed its stance on the noncompete issue, saying California statute, dating back to 1872, was clear — any restraint is invalid unless it fits within specific statutory exceptions.

Those exceptions include contracts eliminating competition in the context of the sale of a business or the dissolution of a partnership.

“The California Supreme Court took the Edwards case simply to deliver this message: ‘Pay no attention to the 9th Circuit, lower courts. California law remains what it always was,’” Wolfe said. “In sum, it reaffirms the status quo.”

Risks of Enforcing Noncompetition Agreements - The Former Employee Countersuit

2008-10-16T09:30:00.002-04:00

Sharon Snyder of the Ober Kaler law firm has published an interesting, and informative, piece about a topic that should be of some interest to employers and employees - the possible employee countersuit for interfering with their ability to make a new employment relationship with a potential employer. Ms. Snyder notes that there are some interesting rulings out there - and our experience with these types of rulings indicates that it is the over-aggressive and win-at-all-costs employers who bear the greatest risk of the counter-attack on these grounds. Ms. Snyder's piece is captured below:

"The situation is this – you want to enforce a restrictive covenant against a former employee who you believe is unlawfully competing and/or soliciting clients. Time is of the essence, and you want your legal counsel to send a cease-and-desist letter to the new employer. In reviewing the restrictive covenant and learning about the underlying facts, the lawyer determines that an argument could be made either way that the covenant does or does not prohibit the former employee's work for his new employer. Or, perhaps the former employee has gone to work for a competitor, and you suspect that the employee is breaching his or her obligations under a restrictive covenant but lack proof that there has been a breach; however, the failure to take action if a breach is ongoing would cause significant harm. In either event, a court could rule against you for one of the many reasons that courts refuse to enforce restrictive covenant agreements. Perhaps the covenant might be deemed to broad in geographic scope, or perhaps it extends for too long a period of time, or perhaps the covenant is written more broadly than is necessary to protect the legitimate interests of the employer, or maybe it is unclear whether the new employer fits within the restrictive covenant's definition of a "competitor."

Employers frequently respond to this situation by having their counsel send a letter to the former employee and his or her new employer, demanding that the new employer terminate its relationship with the former employee, with the expectation that a court ultimately would resolve any dispute over the enforceability of the restrictive covenant. This tactic, however, can potentially create liability for the employer.

Maryland recognizes the tort action for wrongful interference with contractual or business relationships in two general forms: inducing the breach of an existing contract and, more broadly, maliciously or wrongfully interfering with economic or prospective relationships. A cause of action for tortious interference with an existing contract is fairly easy to establish under Maryland law. In order to prove a case for tortious interference with an existing contract, a plaintiff must establish: 1) the existence of a contract between plaintiff and a third party; 2) the defendant's knowledge of that contract; 3) the defendant's intentional interference with that contract; 4) a breach of that contract by the third party; and 5) resulting damages caused to the plaintiff by the breach. See, e.g., Fowler v. Printers II, Inc., 89 Md. App. 448, 466 (1991), cert. denied, 325 Md. 619, 602 A.2d 710 (1992).

In order to prevail on a cause of action for tortious interference with prospective advantage, under Maryland law a plaintiff must establish: (1) intentional and willful acts; (2) calculated to cause damage to the plaintiffs in their lawful business; (3) that were done with the unlawful purpose to cause such damage and loss, without right or justifiable cause on the part of the defendants (which constitutes malice); and (4) with actual damage and loss resulting. Natural Design, Inc. v. The Rouse Co., 302 Md. 47, 71 (Md. 1984) (citation omitted). The Court of Appeals has held that wrongful or malicious interference with prospective advantage requires interference that is independently wrongful. "Wrongful or unlawful acts include common law torts and ‘violence or intimidation, defamation, injurious falsehood or other fraud, violation of criminal law, and the institution or threat of groundless civil suits or criminal prosecutions in bad faith.'" See K & K Management, Inc. v. Lee, 316 Md. App. 137, 166, 557 A.2d 965 (1989), quoting Prosser, Law of Torts, § 130, 952-53 (4th ed. 1971).

Given the elements of these two causes of action, the risk inherent in causing a new employer to terminate a relationship with an employee based on the threat to enforce an invalid restrictive covenant is apparent. It is uncertain, however, whether a Maryland court would consider interference with a former employee's at-will employment with another employer under the rubric of tortious interference with contract or tortious interference with prospective advantage. While the Maryland appellate courts have not addressed a claim for tortious interference by a former employee in a situation where the former employer erroneously attempted to enforce an unenforceable restrictive covenant, there is wellestablished, long standing law in other states holding that a former employer may be liable if a potential new employer withdraws an offer of employment based on the threat of litigation.

In some jurisdictions, the former employer will be liable, but only to the extent that the employer failed to act in good faith and with a reasonable basis to believe that the restrictive covenant was enforceable. See Luketich v. Goedecke, Wood & Co., 835 S.W.2d 504, 199 Mo. App. LEXIS 1077 (Mo. App. 1992). Under this reasoning, the court focuses on whether the former employer who threatened to enforce the noncompete or restrictive covenant had the right to assert a claim that the covenant was enforceable. According to the Luketich Court, there is no liability for tortious interference that results in the termination of employment where the termination is caused by "the exercise of an absolute right, that is, an act which one has a definite legal right to do without any qualification." "As a matter of law, . . . a former employer [is] justified in attempting to enforce its rights under [a] non-compete agreement . . . as long as [the former employer has] a reasonable, good faith belief in the validity of the agreement." Luketich, 835 S.W.2d at 508-09. Although "reasonableness" and "good faith" are issues of fact, this reasoning provides some protection for employers who rely on covenants that are ultimately found to be unenforceable.

In West Virginia, however, a former employer may be held liable for tortious interference with prospective relations if the restrictive covenant is unenforceable, even if the employer had a good faith reason to believe that the restrictive covenant or noncompetition agreement was enforceable. See, e.g., Voorhees v. Guyan Machinery Co., 191 W.Va. 450, 446 S.E.2d 672 (W. Va. 1994). In Guyan, the former employer threatened to "go to the highest court in the land" to enforce a noncompetition agreement that had been signed by its former outsides salesman. In response to the threat of litigation, the competitor that had agreed to hire the former employee advised him that he had to obtain a waiver of the noncompete from his former employer or the offer of employment would be withdrawn. When Guyan would not agree to a waiver, the former employee was fired by the competitor, and the employee sued Guyan for tortious interference.

Ultimately, Guyan was unable to convince a jury that it had satisfied its burden of "demonstrating a legitimate business interest warranting the protection of the restrictive covenant" and the noncompetition agreement was deemed unenforceable. The court reasoned from this decision by the jury that any attempt to enforce the unenforceable noncompetition agreement was wrongful and therefore constituted tortious interference. Moreover, the court found that an award of punitive damages was appropriate since the cease-and-desist letter sent by Guyan was intended to interfere with the former employee’s relationship with the new employer, and since the jury’s decision that the restrictive covenant was unenforceable meant, ipso facto, that the threat of litigation was wrongful and therefore constituted malice to support a punitive damages award. See Voorhees, 191 W.Va. at 456.

The well-established Maryland law on the tort of tortious interference, as well as these two lines of authority, make it imperative that employers and their counsel consider carefully whether a restrictive covenant or noncompetition agreement is likely to be enforceable before threatening a new employer with a lawsuit if it does not refuse to employ a former employee. Employers that insist on moving forward to interfere with a former employee’s employment, when it is unclear whether the applicable agreement bars that new employment, must be cognizant of the risk that their threat of litigation might well result in a successful tort claim back against them by the employee whose ability to earn a livelihood has been adversely affected."

Motorola Sues Four Former Employees in Massive Alleged Trade Secret Theft With Chinese Connections

2008-09-24T21:31:00.001-04:00

Motorola Inc. named four former software engineers employed at its Libertyville and Schaumburg offices in a lawsuit filed Tuesday alleging the theft of $600 million in trade secrets with plans to take them to China, officials said.

Hanjuan Jin, 37, of Schaumburg was indicted by a federal grand jury in April on three counts of theft of trade secrets and is facing charges of computer fraud and abuse, misappropriation of trade secrets and breach of fiduciary duty in the lawsuit.

Federal authorities said U.S. customs agents seized sensitive proprietary information from Jin as she attempted to board a flight to China on Feb. 28, 2007, at O'Hare International Airport. That included more than 1,000 documents, both electronic and paper, belonging to Motorola.

Authorities said they also found $30,000 in her luggage.

The release of the classified engineering information on three computer networking products would have cost Motorola $600 million over the next three years, officials said.

Three other former Motorola employees were named in the lawsuit - Xiaohua Wu, of 21878 North Tall Hills Drive, Kildeer; Xuefeng Bai of 2444 Palazzo Court, Buffalo Grove; and Xiaohong Sheng of 875 Westmoreland Drive, Apt. 7, Vernon Hills - were accused of computer fraud and abuse, misappropriation of trade secrets and breach of fiduciary duty in the lawsuit. Bai and Sheng worked at Motorola's Libertyville office; Wu and Jin worked at the Schaumburg office.
Shaowei Pan of Kildeer, chief technology officer of Motorola competitor Lemko Corp., 1700 E. Golf Road, Schaumburg, and spouse of Wu, is accused of computer fraud and abuse and misappropriation of trade secrets in the lawsuit.

New York Judge Finds Nixon Peabody's Actions in Soliciting Taylor Wessing Attorneys A-OK

2008-09-17T13:10:00.003-04:00

Here's a story our readers from private industry are going to find interesting - law firms disputing the validity of a nonsolicitation agreement they agreed to.

U.K.-Germany based Taylor Wessing filed suit against Nixon Peabody, accusing the Rochester, NY based law firm of colluding with the former managing partner of Taylor's Paris office to "raid" its partner ranks after merger talks between the two firms fell through.

The complaint contended that Nixon's alleged attempts to poach 12 of Taylor's 15 nonequity French partners violated a July 2007 agreement in which the two firms promised not to recruit from each other for two years if merger talks collapsed.

Justice Kenneth Fisher ruled in favour of Nixon Peabody on all claims, affirming that the US firm had acted appropriately in its recruiting discussions and questioning the legal validity of the nonsolicitation agreement between the parties.

A Nixon Peabody spokesperson said today’s decision had, “settled all claims” with TWF.

However Taylor Wessing UK managing partner Michael Frawley said that he was surprised by the judge's findings and is in the process of reviewing the judgment for possible appeal.

He said: "This case demonstrates that these non-solicitation clauses, which are common in commercial agreements in the UK and most of Europe, are void as a matter of public policy in NY. What is disappointing is that Nixon Peabody agreed to this restriction, only for them to assert subsequently that the restriction was always unenforceable."

Computer Forensics Playing Bigger Role in Noncompete and Employee Defection Litigation

2008-09-11T09:41:00.004-04:00

The Philadelphia Business Journal has just published a great piece on the impact that computer forensics is playing in employee defection and noncompete cases. We thought you'd like to read it:

Cozen O’Connor attorney David Walton recently won a $7 million award for a client based on evidence that wasn’t there.

In hiring certain employees, Walton’s client had put in place a noncompete clause. The new hires promised not to compete directly, or for that matter unfairly, should they depart the company.

The employees in this case broke the deal, squirreling away confidential data on their computers before leaving. Walton hired experts to pick apart hard drives, where they found big blank spots — places where vital company information had first been hidden and later wiped away.

It’s called computer forensics and it’s the next big thing in noncompete clauses. Employers who ask new workers to sign noncompete documents now can dig deep into e-mail and other records to discover whether trade secrets have been swiped on the way out the door.

“I have seen an explosion in the availability of forensic experts, especially people who are retired from the federal government, the FBI, Secret Service and so on,” said Walton, a member in Cozen’s labor and employment practice in West Conshohocken.

At Littler Mendelson in Philadelphia, noncompete law expert Marguerite Walsh said she has seen at least 10 cases in which forensics played a major role in resolving noncompete disputes.

“We had a situation with a client in the insurance industry, where one of its key salespeople had left and gone to a competitor,” she said. “Once we got into not just the number of files but what the files stored, it was clear he had been transferring all the sales contacts, all the sales records that he could use at his new company.”

Forensics are without doubt the big news in noncompete clauses after the fact. They offer a way to enforce a claim that a former worker has walked off with client names and other significant sales data.

For many employers, though, the noncompete is more likely to come up at the time of hiring.

Their objective in bringing on board a new employee will be to write a noncompete that sticks, especially after repeated court challenges around the nation calling into question the enforceability of these documents.

Noncompetes are enforceable. As a matter of hiring practice, though, recent trends suggest they must be crafted with care.

Foremost is the trend toward judicial discretion, a nice way of saying that nothing is set in stone here.

“The law is so fuzzy and nebulous that judges will basically rule out of a sense of fairness,” said attorney Michael Wietrzychowski, vice chair of the labor and employment practice at Schnader Harrison Segal & Lewis’ offices in Cherry Hill and Philadelphia. “Courts want to see something that is fair to the departing employee so they can continue to put food on the table, and fair to the employer so they can protect their interests.”

In practice this means that noncompete clauses are getting narrower and more specific, or at least the good ones are. At the time of hiring, employers are (or should be) taking a hard look at what exactly they are trying to protect, and then drawing up agreements that specify just that narrow area.

Take for instance geography. Is it “fair” to prohibit an employee from working for a competitor anywhere in the nation, if your business is purely regional?

Is it “fair” to tie an employee’s hands when it comes to data anyone else can access? “You can’t call everything in the workplace ‘confidential,’” Walton said. “If you call everything confidential, and then you put a list of customers on your Web site, then nothing is really confidential.”

Courts want limits that show a genuine business interest on the part of the employer, an interest that goes beyond merely keeping this employee out of the game, should the two part ways.

“You have to be reasonable. You can’t make an employee sign a noncompete just to quell competition. You have to have a legitimate business interest,” Walton said. “That means either the protection of customer good will — ‘I don’t want you to take my customer relationships to the competition’ — or the protection of confidential information.

“Unreasonable on the other hand would be something that is too long: A noncompete that runs for two years, when you only really need the protection for six months.”

For the human resources professional making the actual hiring offer, “you need to talk to your business people about why they want this” before drafting the noncompete, said Christopher Stief, a regional managing partner at Fisher & Phillips in Radnor.

“Ask them to identify the specific harms, as specifically as they can, that a person in this position could do if he or she leaves. That is your starting point and then you work backwards to say, ‘What is the least restrictive clause we can identify to restrict that possible harm?’”

When it comes to fairness, the courts also had been looking favorably on deals that are tangibly equitable: That is to say, noncompetes in which the employee is directly compensated for his or her end of the bargain.

“It’s not only the stick but also the carrot, the concept of golden handcuffs,” said employment attorney Jonathan Wetchler at Wolf Block in Philadelphia. “I might say to you: ‘I am giving you stock options and the options will vest over five years, if and only if you remain employed with me, or, the options will vest if and only if you don’t compete with me if you leave.’”

Courts have a certain respect for such quid pro quo.

The ultimate golden handcuff is known as garden leave. Long practiced in Europe, this type of noncompete contract has begun to appear sporadically in the United States. Typically it refers to a high-up worker being paid to sit at home, not working, for the duration of the noncompete period.

Many employers balk. Six months’ pay for doing nothing? But consider the alternative. Just the first 30 days of a noncompete legal dispute will typically run $20,000 to $60,000 in legal fees.
Finally, there is the perspective of the new employer, who will have a whole other set of hiring headaches to think about when bringing on board a worker saddled with a noncompete.

“Companies that hire employees from a competitor take a significant risk when they turn a blind eye,” Walsh said. New hires must be told up front that their misappropriated data will not be welcome, that their undue competition with any former employer is out of bounds. Otherwise the new firm could find itself on the receiving end of litigation.

“The minute confidential information that doesn’t belong to your company hits your system, you have a risk,” Walsh said.

Tom Sawyer to Moderate Association of Corporate Counsel Employee Defection Webinar

2008-09-04T10:58:00.002-04:00

Tom Sawyer, Labor & Employment Practice Group Leader in Womble Carlyle's Northern Virginia office will serve as Moderator of the Association of Corporate Counsel webinar: "Employee Defection and the Multi-Jurisdictional Employer: Practical Advice on Enforcing Noncompetes and Other Restrictive Covenants".

The webcast will be presented September 24 by the ACC's New to In-house Committee. Panelists include: Michelle L. Adams, Senior Employment Counsel, Accredited Home Lenders, Inc.; Dennis Stryker, General Counsel, Rick Engineering Company and Carol Rick Gibbons, Associate General Counsel, Employment, Capital One Financial Corporation.

Womble Carlyle Employee Defection and Recruitment Team

Webinar registration information

No Non-Competes Allowed (in California, that is)

2008-08-23T23:21:00.002-04:00

As of August 7, 2008, you have a better chance of getting cast opposite Tom Cruise in the next Mission Impossible movie than in having your non-compete agreement enforced in California. In Edwards v. Arthur Andersen, the Court struck down a non-compete agreement signed by a former Arthur Andersen tax manager and rejected the Ninth Circuit's narrow-restraint exception. The Court reiterated that only non-competes that fit the statutory exceptions (e.g., those entered into ancillary to the sale of a business) are allowed. The Court noted that the statutory bar to restraints on trade (Section 16600) is unambiguous and stated that, "if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect." If you have employees in California, you need to read this opinion.

Aramtel Gets Injunction from Maryland Court Prohibiting Competition in Iraq in Noncompete Case

2008-08-14T13:42:00.003-04:00

The Wall Street Journal is reporting that Aramtel Limited, investor and financier in wireless communications systems internationally, today announced the issuance of an order by the Circuit Court for Howard County, Maryland, prohibiting its business partner in a major Wireless Local Loop (WLL) operation in Iraq from participating in a competing wireless venture in that country, in violation of a non-competition agreement. The order follows an earlier civil judgment for Aramtel in a related matter for over $28 million and requires Dr. Faisal Fadul, currently an owner and CEO of the competing venture, to end his involvement in that company.

Our question is: how does Aramtel think its going to obtain compliance in Iraq with the Maryland court's order?

The injunction issued by Circuit Court Judge Timothy J. McCrone prohibits Dr. Faisal Fadul (also known as Dr. Faisal Khalil Abbas Al-Fadhul), his wholly-owned companies Dynacorp Ltd. and TeckTel Ltd., and their agents from directly or indirectly engaging in any competitive wireless telecommunications business activities in Iraq in violation of a non-compete agreement signed by Fadul on behalf of himself and these related entities. Aramtel is currently embroiled in litigation with Fadul over the ownership and operation of the WLL authorization in Iraq granted to VitalTel (Khat-Al-Hayawi). In July 2007, Aramtel obtained a confessed judgment for $28,371,302 plus interest and costs in a related matter from the court. The court later blocked an effort by Fadul to revoke the order, and Aramtel is currently seeking collection on the judgment.

Non-Competition Restriction
Aramtel entered an agreement with Fadul in 2006 under which it owns 50% of a company started by Fadul, VitalTel (Khat-al-Hayawi), through a newly-formed UAE holding company, Moutiny Limited. The agreement, among other things, prohibits Fadul directly or indirectly from engaging in any competing wireless telecommunications business activities in Iraq unless he does so in conjunction with Aramtel.

Aramtel alleges that after it sunk millions of dollars into the VitalTel (Khat-al-Hayawi) venture, by way of loans and direct investment, Fadul became a major owner and operator of a competing venture known as "Al-Nakheel" - without the knowledge and consent of Aramtel. (Al-Nakheel operates under the trade name "Ommnea" in Iraq.) In fact, Aramtel believes that Fadul fraudulently transferred the VitalTel (Khat-al-Hayawi) operating authority to this competing company (Al-Nakheel). Judge McCrone's order prohibits Fadul, his companies and agents from engaging in any competing activities in Iraq in violation of his non-compete covenant with Aramtel, and specifically forbids any further participation by Fadul in the Al Nakheel venture. Although the court has not yet heard all of the evidence to be presented, Judge McCrone already expressed the view that the case involves fraud.

Exclusive Equipment Vendor
The operating agreement between Aramtel and Fadul also provides that any equipment purchased for VitalTel (Khat-al-Hayawi), or any other venture in Iraq by these parties, must be obtained through equipment vendor TWS. Fadul did not purchase network equipment for Al-Nakheel from the agreed vendor. Rather, Fadul has admitted to the court that he bought equipment from competing vendor Huawei Technologies. The preliminary injunction bans Fadul from purchasing equipment from Huawei or other competing vendors.
The legal actions taken in this matter were brought under the provisions of the operative contracts which identify Maryland law as controlling in disputes. The preliminary injunction was issued by Judge McCrone in a suit brought by Aramtel for breach of contract by Fadul and his companies.

Motorola Accuses Former Executive of Breaching Noncompete In His Apple/iPhone Employment

2008-07-22T10:46:00.005-04:00

Crain's Chicago Business is reporting that Motorola, which is struggling in the mobile handset sector, sued former company executive Michael Fenger on Thursday in Cook County (IL.) Circuit Court. Motorola alleges in its suit that Mr. Fenger not only breached his employment contract by going to work for a competitor within two years of resigning, but that in his new job as Apple's vice-president of global iPhone sales, he “cannot separate out Motorola's trade secrets from his daily duties at Apple.”

"He was privy to the pricing, margins, customer initiatives, allocation of resources, product development, multiyear product, business and talent planning and strategies being used by Motorola,'' according to the complaint.

“Motorola is seeking all available remedies to protect its trade secrets, confidential information and customer relationships," a Motorola spokeswoman said.

Specifically, the suit asks for Mr. Fenger to be barred from working for Apple or any other competitor until March 2010. Motorola also wants Mr. Fenger to return more than $1 million worth of stock options he has received as part of his employment contract during the six years he worked at Motorola.

By accepting those options, Mr. Fenger agreed to a non-compete clause that keeps him from working for a competitor within two years of leaving the company, Motorola said. The company also claims Mr. Fenger recruited away two former Motorola employees, something else prohibited under terms of his employment contract.

This is a high-profile hybrid case that combines noncompete breach arguments with the inevitable disclosure doctrine. The latter doctrine - essentially a contention that one cannot do their job for their new employer without inevitably utilizing or disclosing the trade secrets of their former employer - is one that has been slow to gain jurisprudential traction since its original appearance in the 1980's but we'll keep an eye on this case and report back how the court treats Motorola's claims and Mr. Fenger's defenses.

Leaving on a midnight train (and forum selection clause) from Georgia

2008-06-24T22:15:00.003-04:00

It is well known that Georgia has a strong public policy against restraints on trade, including restrictive covenants in employment agreements. The application of this public policy results in "strict scrutiny" of restrictive covenants (covenants not to compete, customer non-solicitation covenants, non-disclosure of confidential information, and non-solicitation of employees) contained in employment agreements.

For years, Georgia's public policy has led Georgia courts to ignore provisions in employment agreements where the parties have agreed that another state's laws will apply. The rationale has been that Georgia's public policy trumps foreign law that would likely be more favorable toward the restraints.

Several years, the Georgia Court of Appeals held that enforcing a forum selection clause in an employment contract containing a non-competition clause did not typically contravene Georgia public policy. More recently, in Hasty v. St. Jude Medical S.C., Inc, 2007 WL 1428733 (M.D. Ga. 2007), the federal district court for the Middle District of Georgia upheld a forum selection clause in an employment-related non-competition agreement and transferred the case to the federal district court in Minnesota.

In light of these decisions, employers who want to have foreign (non-Georgia) law applied to agreements signed by their employees working in Georgia should be sure to include mandatory forum-selection clauses in their employment agreements (and cross their fingers that the law does not change).

Noncompetes, Injunctions and Credibility

2008-06-10T11:18:00.004-04:00

We thought we'd report about an interesting opinion written by United States District Court Judge Sarah Evans Barker from the Southern District of Indiana involving noncompetes, injunctions and the credibility of parties in lawsuits involving the same.

Seems that Cook Medical Incorporated is in the business of manufacturing and selling many of the devices now commonly used worldwide to perform minimally invasive medical procedures. A competitor of Cook Medical's, Endologix, manufactures a device to treat abdominal aortic aneurysm (AAA) that is a direct competitor to Cook Medical's Zenith line of AAA endografts. It is apparent from the reports that Endologix designed to hire away a number of Cook Medical's sales personnel and that those people had noncompete agreements with Cook Medical. So Cook Medial sued them and Endologix . . . . Nothing unique there.

Cook Medical moved for an injunction against their former employees and they persuaded the federal court in Indiana to grant that injunction (see link attached above). BUT the parties disagreed with the meaning and accuracy of the written injunction due to the fact that the court apparently orally announced its ruling and the resultant written injunction order suggested to the enjoined defendants something other than what was supposed to occur. So - they asked Judge Barker for a clarification. And a clarification is exactly what they got.

This is what Judge Barker had to say:

"Defendants also seek clarification of the terms in Paragraph 7 of our March 25, 2008 Order. That section provides as follows:

Endologix is not enjoined from further sales to or servicing of AAA customer accounts tied to the individual Defendants, so long as the contacts maintained by the sales agent are by someone other than the four individual Defendants. Any such sales or servicing must be performed without reliance on confidential Cook materials or information which Endologix may have access to

Defendants object that the language of this provision is too broad, in that it “extend[s] the scope of the covenants not to compete ... such that the individual Defendants would be enjoined from engaging in business on behalf of Endologix with his or her own former Cook accounts and the other individual Defendants' former Cook accounts, regardless of whether he or she ever had any relationship with these accounts.” Defendants propose that the provision be rewritten to clarify that each individual Defendant may make contacts with the customer accounts formerly held by the other individual Defendants.

Editor's note: The employees are essentially asking and telling Judge Barker "you didn't mean that, did you? If you stop me from selling to customers I didn't even have contact with at Cook Medical then you are putting an expanded noncompete on my back. I have to be free to contact and sell to accounts I did not service at Cook Medical - it's my right to do that." But - Cook Medical smelled something fishy (i.e., "you sell to my former accounts and I'll sell to yours and that won't violate the injunction") in this clarification request, and so did Judge Barker. The opinion continues . . . .

Plaintiffs counter that the provision as written is reasonable and justified in light of Defendants' deliberate and egregious disregard for the terms of the non-compete agreements. We agree. In our oral findings at the preliminary injunction hearing, we noted our doubts about Defendants' abilities to self-police their sales activities, in light of our serious concerns about the credibility of Defendants' testimony and the bad faith they had exhibited in flagrantly violating their non-compete agreements. Moreover, as Plaintiffs point out, the individual Defendants are not strangers to one another; they were colleagues while employed at Cook and, in conjunction with this litigation, they share common counsel and no doubt collaborate on their defense. Based on the bad faith the individual Defendants have exhibited (and Endologix' active encouragement that the individual Defendants disregard their non-compete obligations), we consider it likely that Defendants will work in concert in order to circumvent the terms of their non-compete agreements and our injunctive orders by “handing off” the accounts of one individual Defendant to another individual Defendant. Thus, we DENY Defendants' request to narrow the terms of our order as to this provision.

Editor's note: Here's an example of a judge who watched witness after witness testify that they didn't do anything wrong in violation of a noncompete and that judge simply didn't believe the witnesses. She apparently concluded they coordinated with Endologix a strategy to disregard their contractual promises to benefit themselves and their new employer to the detriment of their former employer. That they lost credibility with the court in the process of defending themselves is clear in this clarification opinion - the judge concluded that these people WILL try to circumvent the injunction through word parsing and legalistic gamesmanship. So the judge was unwilling to limit the injunction per the request of the former employees and probably DID, in fact, grant an order that was broader than mere enforcement of the textual promise in the noncompete covenant.

In short, injunctive relief orders are granted by human beings who wear robes. Those human beings assess the credibility of those coming before them - whether they are attorneys or witnesses. These credibility assessments will have an effect on the court's treatment of the matter. It is always easier to make arguments to the court when you do so with credibility on your side. Things are much tougher when you don't - as is evidenced by Judge Barker's words identified above.

Consideration - Mere Continuation of Employment May Not Be Enough in Georgia

2008-06-09T11:18:00.006-04:00

As most practitioners here know, Georgia public policy is extremely hostile to employee non-compete agreements. There are many traps for the unwary. On the issue of consideration, however, Georgia is actually pretty lenient compared to some other states. It is almost axiomatic that “mere continuation of employment” usually provides sufficient consideration. That is, in Georgia the employer is generally not required to pay the employee any additional money (or promotion or other enhancement), even if the employee is required to sign the covenant long after the employment commences.

But there is an important, and easily overlooked, caveat to this axiom, as demonstrated by the Georgia Court of Appeals in Glisson v. Global Security Services, LLC, 287 Ga. App. 640 (2007). In Glisson, the employee was required to sign a new non-competition agreement approximately 18 months into his 2-year employment agreement. This requirement was apparently prompted by the departure of several other employees. The new covenant expressly conditioned continued employment upon the signing of the new agreement, which prohibited the employee from competing in certain specified counties for 2 years following termination. The employee signed the new covenant, but several months later he resigned. The company sued to enforce the covenant, and the trial court granted the company’s requests for injunctive relief.

The Court of Appeals reversed, finding a failure of consideration. After noting the general rule that continuation of employment is usually sufficient, the Court pointed out that, in this case, the contract provided that, during the first two years, the employee could be terminated only for “cause,” and “cause” did not include refusal to sign the covenant. Because of this, the Court reasoned that the company was under a preexisting duty to continue the employment, at least until expiration of the 2-year term. “Thus, although the [new] agreement purportedly conditioned [the employee’s] continued employment on adherence to its terms, [the company] was already obligated to employ him through [the end of the 2-year term]. And a promise to perform a preexisting contractual obligation does not constitute consideration for a new agreement.” Id. at 641 (emphasis in original). The trial court abused its discretion in finding the covenant to be enforceable and in granting the injunction.

Main point: Before assuming that mere continuation of employment provides sufficient consideration for a non-compete covenant, be sure that the employment is truly “at will.” Otherwise, the preexisting duty rule may bite you.

Bonus point: The Court noted that the agreement recited $10 as additional consideration, but the evidence showed that the $10 dollars was never actually paid. Query whether the result would have been different had the company simply forked over the ten spot.