Smooth Transitions Law Blog
Addressing the legal issues arising from the departure of employees & business breakups

Non-Compete

The $1 Jury Award for Specialized Bicycles
February 3, 2012

I’ve been riding bikes and racing triathlons for several years and been able to ride in some amazing places. Below is a picture of my brother, my Dad, and me during a trip to France in 2010.

                 

Specialized is a premier American bicycle manufacturing company that has had significant success in the European peleton and in the triathlon world.  They are also very aggressive about defending their technology.

Specialized sued two former employees in California who were starting a competing bike company.  The lawsuit claimed the employees were using proprietary information and violating their non-compete agreements. 

The case went to trial and the jury awarded Specialized $1.00. The jury seems to have agreed that there was a breach of contract, but no real damage.  Regardless, Specialized was able to slow down the progress of the fledgling company through litigation.  As one of the former employees noted:

The bike industry is all about the small amount of innovation that brings new people in. We should all celebrate that. Between them and us, we spent 2.5 million dollars on this. It’s just so silly. Think of what we could have done with all of that (to improve bicycles).

No one really won in the lawsuit except the lawyers.  Specialized has a $1 verdict and both companies have incurred significant legal fees.  Now they can get on with the real competition – who can build the better bike. 

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Non-Compete Agreements

Get Ready for More Healthcare Non-Competes
January 9, 2012

                                  

Medical device manufacture, Synthes Medical Company, has filed a number of lawsuits against former employees alleged to have violated non-compete and non-solicitation agreements.  The lawsuits illustrate the rise of litigation within the medical world over non-competes. 

Synthes, with whom I have firsthand experience, is very aggressive in prosecuting former employees who have violated non-compete agreements and non-solicitation agreements, against its former salespersons. A lot of this litigation has to deal with spinal implants, which are not surprisingly, very lucrative.

The medical industry is growing, and will continue to grow as our baby boomer generation ages. The projections are staggering:

 

By 2035, in the absence of change, spending for Medicare alone (which is more likely to be impacted by aging Boomers) will have more than doubled to 8 percent [of GDP], and by 2080 it will have grown to 15 percent.

 

The forecast for medical industry litigation includes more non-compete disputes between doctors and their medical groups as well as on the sales side of medical devices such as the Synthes lawsuits. As with any non-compete agreement, employers need to make sure that if they are using these agreements they will stick.  Meaning employers need to have a strategy in place to enforce them and not simply put them in an employment contract as an afterthought.  This is specifically an issue when you have sales persons in different state jurisdictions with different laws.

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Non-Compete Agreements

Protecting Your Business In 2012
January 1, 2012

                         

Happy New Year!

Last year the Texas Supreme Court altered the non-compete landscape in Marsh v. Cook.  As lower courts construe the opinion we will see what its impact is on employers and employees.  The takeaway from the opinion should be that employers will attempt to offer other forms of consideration, like stock options, signing bonuses, etc., in exchange for post-employment agreements like non-competes and non-solicits.  The days of limited non-competes/non-solicits based only upon the exchange of propriety information, trade secrets, or training appears to be over.  This means industries that typically do not use non-competes could.  That said, employers should be skeptical of the ramifications of the Marsh opinion until there is guidance from other courts.

Employers should be doing all they can to protect their business in 2012 from the departing employee.  The cold reality is in an economy short on jobs, potential employees will be more willing to sign non-compete agreements.  In addition to the run-of-the-mill non-compete, employers should also consider non-solicitation agreements, anti-raid provisions, and even a garden leave policy (all discussed here previously).

Besides post-employment covenants there are general day to day business practices that are a necessity.  True trade secrets need to be protected through restricted access that incorporates some type of password as well as protections that prevent the employee from emailing such information or putting it on a jump drive and walking out the door.  It routinely happens and employers need to be vigilant in protecting proprietary information.

Finally, have termination/transition policies in place.  Once an employee is fired or determines they are going to leave, cut off their email and end their access to the computer network or other sensitive information.  It also makes sense to audit any of their recent activity to determine if they have taken proprietary information through jump drives, email, or other storage devices.  It pays to be paranoid.

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Non-Compete Agreements

The End of Year HR Punchlist
December 13, 2011

                                          

Earlier in the week we discussed policies and procedures that should be in place to deal with end of year employee departures. Companies should also consider a number of other HR related issues as the year draws to a close. Here are my thoughts:

  1. Evaluation of all employment policies, including the employee handbook;
  2. A review of all federal and state law changes that may impact employment practices – talk to your lawyer;
  3.  A review of all employment contracts;  
  4. A review of all employment files – are they up to snuff?; and
  5. An evaluation as to whether the company should adopt post-employment covenants including non-competes, non-solicitations, and garden leave policies.

Now is the time to make any necessary changes before the New Year begins. Let me know if you have any additions to the list.

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HR Issues

The Inevitable End of Year Employment Move
December 1, 2011

Generally, many employees will wait to move to another employer until after they have received any year end bonuses or commissions they are due.  We are all familiar with stories where a top producer bolts after they get their end of year check. 

For these reasons, it is important the employers be prepared to review company policies for employment transitions. This would include post-employment covenants such as non-competes.

Critical to the employment transition practice is ensuring that the employer has protected any proprietary or trade secret information that departing employees can access. Departing employees should immediately lose access to any type of proprietary or trade secret information. This should include locking the employee out of their email account or limiting access.  That employee is now a competitor.

Employers who are vigilant about having these types of policies in place will ultimately protect their business and their product from an inevitable employee departure.

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HR Issues

The World of Non-Competes 3 Ed.
November 11, 2011

Some interesting stories in the world of non-compete agreement enforcement from around the United States:

 Non-Competes and Arbitration Provisions – An interesting case out of the Tenth Court of Appeals where the Court ruled reformation of a non-compete agreement could not be used to avoid an arbitration clause.

Updating Non-Competes – A nice discussion by the lawyers of Jackson Lewis about the importance of keeping non-competes up to date after a change in ownership.

Non-Competes for Salons – A case from Connecticut arising from the enforcement of a non-compete in the salon industry.

$52 Million Verdict – Breakdown of a big verdict in a non-compete case from Idaho.

Non-Competes in Arizona Medical Practices – A detailed analysis of the use of non-competes in healthcare.  

 

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Non-Compete Agreements

The Non-Compete Signed at Termination
October 14, 2011

                         

As we referenced earlier in the week, two Merrill Lynch executives received several million dollars in exchange for executing a release and one year non-compete with Merrill following their departure. Merrill was effectively able to take them off the market in exchange for a multimillion dollar payment. 

A post-employment non-compete is generally signed at the outset of the employment relationship, not at the time that the employee is walking out the door. Would a non-compete, signed at the end of the employment relationship be enforceable in Texas? The answer is that it is unlikely. 

In the state of Texas, generally the non-compete or non-solicitation agreement signed at the point of employee departure generally is not enforceable because there is no consideration. Certainly, there is an open question in light of the Marsh case where the consideration of some money or stock option paid at the time of departure. 

Another alternative is to tie payments to continued non-competition or non-solicitation. Put another way, Employee X will continue to receive their monthly, or bi-weekly payments as long as they don’t compete. The agreement may not be enforceable, but the former employee won’t compete because they want to get paid.   

The better practice remains to have the employee execute the non-compete or non-solicit at the time employment begins. There remains too much uncertainty as to whether a non-compete signed at the end of the employment relationship is enforceable under Texas law. 

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Non-Compete Agreements

Choice of Law
October 7, 2011

                    

Over the last few weeks we’ve discussed some key components in employment contracts including venue and jury trial waivers. Another key provision is choice of law. As was discussed in the Sam Adams case, choice of law  was critical because it permitted the employer to pursue an action against a former employee for breach of a non-compete agreement which would not be enforceable in the state of California. In that case, there is both a venue and choice of law provision for Massachusetts. 

As with venue and jury trial waiver provisions, the choice of law should be tailored to circumstances of the agreement at hand. Many employers like to default to the choice of law where their headquarters is located or many times the state of Delaware (shareholder disputes are very difficult to prosecute in that jurisdiction), but that will not always make sense in an employee/employer relationship. 

Additionally, courts do not always enforce choice of law provisions and employers should consult with their attorneys to put themselves in the best position contractually to enforce the provision. There is always a preference of the Court to enforce the contract based on laws of that jurisdiction because the judge is typically more familiar with those laws as opposed to some other jurisdiction. 

In the context of post-employment covenant litigation, there are certain jurisdictions state laws employers will want to avoid because they are not friendly to enforcement and vice versa. Employers need to be cognizant of the effect of a choice of law provision and also put some thought into its use because it will be an issue on down the road.

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HR Issues

Sam Adams Goes to Court
October 4, 2011

                                       Courtesy of Tuaussi 

 

Sam Adams Beer Company recently filed a lawsuit in Massachusetts against a salesman who it alleges went to work for a competitor in California.  The case illustrates the importance of a venue provision in an employment contract, which we recently discussed here. 

California is downright hostile when it comes to non-solicit and non-compete agreements for employees.  The defendant employee went to work for a California beer maker and lives in California, but his employment agreement with Sam Adams provides for venue in the state of Massachusetts, as well as a choice of law provision for Massachusetts law.  The Complaint alleges:

 

The Employment Agreement is governed by Massachusetts law. Paragraph 12, the governing law clause, provides that the “validity, interpretation and performance of this Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts.

 

The Agreement further provides that “Any dispute between Employee and the Company shall be litigated exclusively in the state or federal courts of The Commonwealth of Massachusetts, to whose jurisdiction Employee hereby agrees to submit.

 

Of course, this puts the employer in the position of trying to enforce a non-compete against an out-of-state employee.  That said, Sam Adams also sued the new California employer as well which pragmatically will make enforcement easier. 

 

The complaint is interesting because it focuses upon the inevitable disclosure doctrine.  It alleges that former employees had been exposed to proprietary information , including business strategies, that he will inevitably disclose during his employment with his new employer.

 

This is another example of a post-employment covenant with a salesperson, this time in the adult beverage industry.  We will continue to monitor this case.

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Non-Compete Agreements

Venue Venue Venue
September 25, 2011

                    

 

Employers should always be careful and cognizant of venue provisions in their employment agreements. Many employers will simply include a venue provision making venue mandatory where the home office or headquarters is located, but this doesn’t always make sense in the context of an employment dispute. 

 

Recently, I reviewed a contract which required mandatory venue in the federal court where the company headquarters was located. Employees who would actually sign the agreement were located in a state a thousand miles away. While it’s nice to have venue in your own backyard, that doesn’t always work for enforcement of the agreement. 

 

In the context of most post-employment covenants, like non-competes or non-solicitation agreements, it is much easier to enforce these agreements in a venue where the actual defendant/former employee resides. In many of these cases, the employer will want to obtain equitable relief in the form of a temporary restraining order or injunction preventing the former employee from working or soliciting. 

 

It is much easier to institute and enforce these types of claims in the state or federal court where the actual employee lives, as opposed to one that is many thousands of miles away. In preparing employment agreements, employers should be cognizant of what makes sense in terms of enforcement, if enforcement is a key consideration. 

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