Year in Review: Non-competes 2013

Types : Alerts

2013 was a busy year for the world of non-competes.  The United States Supreme Court, Illinois Supreme Court, Virginia Supreme Court, First Circuit Court of Appeals, and the Seventh Circuit Court of Appeals all rendered decisions that substantially affect the world of non-compete law.

In early December 2013, the United States Supreme Court issued an opinion in Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas, 134 S.Ct. 568 (2013).  This case involved a forum selection clause in an agreement between Atlantic Marine Construction Co. and J-Crew Management Inc., which specified that all disputes would be litigated in Virginia.  When a dispute arose, J-Crew filed suit against Atlantic Marine in Texas.  While this case did not involve any type of restrictive covenant or non-compete, it has implications for the enforcement of non-competes because many non-competes contain forum selection clauses.

The Supreme Court clarified the proper procedure in a federal civil case seeking to enforce a forum-selection clause.  The court held that a forum-selection clause may be enforced through a motion to transfer under 28 U.S.C. § 1404 (a), but not through a motion to dismiss under 28 U.S.C. § 1406(a) or Fed. R. Civ. P. 12 (b)(3).  The court further held that when a valid forum-selection clause exists, courts must adjust their § 1404(a) analysis in three ways: 1) the forum preference of the party seeking to disregard the valid forum-selection clause should receive no weight; 2) the court should not consider arguments about the parties’ private interests (i.e., convenience of the parties and witnesses); and 3) when a party bound by a forum-selection clause disregards that clause and files suit in another forum, that forum’s choice of law rules will not follow the case to the forum.

This decision creates a significant change in the law in many jurisdictions.  It makes it more challenging for current and/or former employees to avoid forum-selection clauses in their employment contracts.  In light of this decision, employers should consider including forum selection clauses and choice of law provisions in their employment agreements.

Another recent decision was issued in September 2013, by the Virginia Supreme Court.  In Assurance Data, Inc. v. Malyevac, 747 S.E.2d 804 (Va. 2013), the court was faced with the question of whether the lower court erred by using a demurrer (an early motion challenging the legal adequacy of the Complaint) to decide, on the merits, the enforceability of a restrictive covenant.  In this case, Assurance Data and Malyevac (employee) entered into an employment agreement that contained non-competition, non-solicitation, and non-disclosure provisions.  A few months after entering into the agreement, Malyevac resigned, and Assurance Data filed a complaint against Malyevac alleging violation of the employment agreement.  In response, Malyevac filed a demurrer asserting that the complaint failed to state a claim upon which relief can be granted because the contract provisions were overbroad and thus unenforceable.  The lower court agreed with Malyevac and dismissed the complaint

However, the Virginia Supreme Court held that “a demurrer does not permit the trial court to evaluate and decide the merits of the claims set forth in the complaint,” and thus reversed and remanded the case for further proceedings.  The court also noted in its evaluation of prior decisions that restraints on competition are neither enforceable nor unenforceable in a “factual vacuum.”  A seemingly overbroad restraint may be proven reasonable under certain circumstances.

What, if anything can practitioners learn from this decision?  That courts in Virginia will not be so quick to judge the enforceability of a restrictive covenant.

The next notable case came out of the United States Court of Appeals for the First Circuit.  In Corporate Technologies, Inc., v. Harnett, 731 F.3d 6 (1st Cir. 2013), the First Circuit weighed in on the distinction between actively soliciting and merely accepting business as those terms are used in employment contracts.  In this case, Harnett entered into an employment agreement with Corporate Technologies that contained a provision prohibiting Harnett from soliciting, diverting, or enticing away existing customers or business for a period of twelve months after cessation of his employment.  After Harnett resigned and went to a competitor, his new employer sent an e-mail blast to a targeted list of prospects, which included approximately forty percent of Corporate Technologies’ customers.

Harnett argued that he did not solicit any of Corporate Technologies’ customers because they initiated contact with him.  To the contrary, Corporate Technologies argued that the customers would not have contacted Harnett but for the e-mail blast.  The First Circuit refused to “assign talismanic importance to initial contact” and held that the “identity of the party making initial contact is just one factor among many that the trial court should consider in drawing the line between solicitation and acceptance in a given case.”  In the end, the First Circuit upheld the granting of injunctive relief.

Here, the First Circuit took a much broader view of the meaning of the term “solicitation.”  Thus, employers will likely rely on this decision when seeking to enforce restrictive covenants.  On the other hand, the employer that is hiring from the competition should be mindful when sending e-mail blasts to the new employee’s former customers because those seemingly harmless e-mail blasts can potentially violate the new employee’s restrictive covenant with his/her former employer.

The next noteworthy decision comes out of the United States Court of Appeals for the Seventh Circuit, Tradesman International Inc. v. Black, 724 F.3d 1004 (7th Cir. 2013).  This case involves the interpretation of the attorneys’ fees provision of the Illinois Uniform Trade Secrets Act.  Prior to Tradesman, there was no Illinois case law interpreting the attorneys’ fees language of the statute.  The relevant language of the statute permits the prevailing party to collect attorneys’ fees if “a claim of misappropriation is made in bad faith.”  The district court ruled that the defendant had not “adequately supported the proposition that the statute authorizes attorneys’ fees when a suit is maintained in bad faith,” instead it ruled that a suit could only be “made in bad faith” if it was “initiated” in bad faith.

However, the Seventh Circuit reversed the district court’s decision and held that “made in bad faith” should be interpreted as being “brought” in bad faith or “maintained” in bad faith or both.  What can be learned from this decision is that, once a case is filed, employers need to evaluate the facts and evidence uncovered in the discovery process and determine if there is enough evidence to support their allegations.

Last, but not least, the Illinois Supreme Court denied an appeal in a case that held that at least two years of continued employment was required to constitute adequate consideration.  Fifield v. Premier Dealer Serv., Inc., 993 N.E.2d 938 (Ill. App. Ct. 2013), appeal denied 996 N.E.2d 12 (Ill. 2013).  This case involved an employment agreement that contained non-solicitation and non-competition provisions.  Fifield executed the agreement and then resigned three months later and went to a competitor.

Fifield argued that the employment agreement was invalid for lack of consideration because he had only been employed by Premier Dealer Services for three months, which was not a substantial period of time.  To the contrary, Premier Dealer Services argued that at the time of signing the agreement, Fifield was not employed, therefore, the consideration was the job itself.  In the end, the appeals court agreed with Fifield and the Illinois Supreme Court denied the appeal.

This decision is noteworthy because in most jurisdictions, initial employment is considered sufficient consideration.  The appeals court basically determined that initial employment was not sufficient to constitute adequate consideration, therefore, Illinois employers are left to craft bonuses, promotions, and other benefits to constitute adequate consideration.