business litigation update · 2013-07-29 · the business litigation update is published on our...

EDITORS’ NOTEPAD

The Business Litigation Update is published by the ALFA International Business Litigation Practice Group. This issue focuses on methods of protecting assets which may be unique to your business: trade secrets, intellectual property and proprietary information. These case notes and articles demonstrate the different ways specific legislative and judicial bodies deal with the tension between an individual’s right to earn a living utilizing skills obtained in the workplace with the right of businesses to protect their business interests in legitimately acquired confidential information and other assets.

As you know, the Business Litigation Update is a nascent publication which needs and depends upon the submission of articles, comments, case notes and summaries on important topics by members of the Business Litigation Practice Group. We also welcome articles and comments by clients of ALFA firms. Our next issue will address the topic of bringing added value to client engagements with a focus on alternative billing methods and the use of technology to improve efficiency in the delivery of high quality work product to clients engaged in business litigation. We invite you to submit any relevant materials addressing this topic which is more and more critical to our clients in the current economic times.

The Business Litigation Update is published on our website, and our primary method of distribution is by email. Electronic publication allows us to include hyperlinks for the use of our readers.1 We encourage you to use the hyperlinks feature and our section headings to quickly get to the information that is most interesting to you. The section headings are as follows: Case Notes and Articles.

1 All hyperlinks are in orange. Hyperlinks can be activated by placing the cursor on them and left clicking with the mouse. Links in the Contents go to specific points in the newsletter. Links to websites take you to the website, and links to email addresses open an email addressed to that person.

Volume 2009 Issue 1 Spring

UpdateBUSINESS LITIGATIONA regular publication of the ALFA International Business Litigation Practice Group

continued on next page

MICHAEL ELLINGBURGDANIEL COKER HORTON & BELL, P.A.4400 Old Canton RoadSuite 400Jackson, MS 39211Tel: (601) [email protected]

MARK LOGSDONMULLIN, HOARD & BROWN, LLP 500 S. Taylor Suite 800, LB 213Amarillo, TX 79101Tel: (806) [email protected]

KAREN TIDWALLWHYTE HIRSCHBOECK DUDEK S.C.555 East Wells Street Suite 1900Milwaukee, WI 53202-3819Tel: (414) [email protected]

DAVID MCDOWELLRENAUD COOK DRURY MESAROS P.A.Phelps Dodge TowerOne North Central, Suite 900Phoenix, AZ 85004Tel: (602) [email protected]

Co-Editors

ALFA International | BUSINESS LITIGATION UPDATE | Volume 2009 Issue 1 Spring [ Return to Contents ]

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CONTENTSThe following links are to sections of this newsletter. Activate a link by clicking on desired link:

1. EDITORS’ NOTEPAD

2. FUTURE EVENTS

3. FUTURE ISSUES OF BUSINESS LITIGATION UPDATE

4. CASE NOTES

• Recent Indiana Rulings on Non-Compete Agreements Central Indiana Podiatry P.C. v. Krueger, 882 N.E.2d 723 (Ind. 2008)

• NewMexicoCourtClarifiesProcedureforResistingDiscoveryofTradeSecrets Pincheria v. Allstate Insurance Co., 142 N.M. 283, 164 P.3d 982 (2007)

5. ARTICLES• The Best Protection: Trade Secret or Patent?• Covenants Not to Compete in a Competitive World Market• Non-Competition Agreements Ancillary to the Sale of a Business• Non-Compete Agreements in Texas: Basic Principles

6. BUSINESS LITIGATION PRACTICE GROUP DIRECTORY OF MEMBER FIRMS


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FUTURE EVENTS The ALFA Business Litigation Practice Group will hold a face-to-face meeting of ALFA attorneys participating in the practice group following the ALFA Annual Business Meeting in Chicago, Illinois, in October, 2009. We encourage anyone who would like to become more involved in the practice group to consider attending this meeting. The Saturday afternoon meeting is followed by a dinner with other members of the group and their significant others.

Questions, comments and suggestions can be directed to any of the editors at their email addresses given above. Logistical questions can be directed to Katherine Garcia at the number listed below or by email at [email protected]. We will also post information on our website at www.alfainternational.com.

Contact InformationALFA Contact: Katherine Garcia (312) 642-2215ALFA Contact: Amy Halliwell (312) 642-5244

FUTURE ISSUES OF BUSINESS LITIGATION UPDATE The next issue of the Business litigation Update is currently in the works and will address alternative billing/fee agreements and the use of technology to improve both the efficiency and quality of legal services delivered.


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CASE NOTES

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RECENT INDIANA RULINGS ON NON-COMPETE AGREEMENTS

Several 2008 Indiana Court of Appeals and Indiana Supreme Court opinions illustrate how courts in Indiana are interpreting non-compete agreements.

In Central Indiana Podiatry P.C. v. Krueger, 882 N.E.2d 723 (Ind. 2008),1 a podiatry clinic brought an action against a physician and former employee of the clinic alleging that the physician violated the noncompetition restrictions of his employment contract. The clinic sought injunctive relief to enforce the non-compete agreement after learning that the former employee was working for a competitor in the same geographic area and was attempting to solicit the clinic’s patients on behalf of his new employer. The agreement precluded the former employee from practicing podiatry for a period of two years in 14 named counties and “any other county where the employer maintained an office.” In total, the covenant covered 43 Indiana counties. The trial court ruled the agreement unenforceable as written, stating that the geographic area was overbroad. The Court of Appeals reversed, but the Indiana Supreme Court affirmed the trial court.

The Indiana Supreme Court held the agreement was unenforceable since it attempted to restrict the former employee from practicing in geographic areas other than those where the former employee had actually worked for the clinic. Rather than an outright denial of the clinic’s request for injunctive relief, the Court blue-penciled the agreement’s restriction on the geographic area where the physician could practice, to cover only the three counties the former employee was working in when his employment ended. The Court also held that the portion of the agreement precluding the former employee from contacting former patients was enforceable.

In Gleeson v. Preferred Sourcing, LLC, 883 N.E.2d 164 (Ind.Ct.App. 2008),2 the Indiana Court of Appeals held that a noncompetition agreement barring an employee from working in areas of a business that the employee was never associated with on behalf of his prior employer was unreasonably broad and unenforceable. The agreement at issue prevented the employee from working for a competitor in any capacity. The court objected to the failure of the agreement to specify the types of activity being restricted, and held that such a restriction was overly broad as it reached beyond the employer’s legitimate business interests.

In Aldrich v. Advanced Imaging Solutions, Inc., a June 12, 2008 unpublished opinion,3 the Indiana Court of Appeals reversed the trial court and held unenforceable an agreement which attempted to stop a former employee who sold office equipment from working for a competitor for two years following termination of his employment. The court determined that the employer’s business interests involved the sale of non-specific office equipment. Therefore, information obtained by employees during employment with the office equipment seller provided no unique competitive advantage since that information could be easily duplicated through legitimate means.

While Indiana courts continue to disfavor and strictly construe noncompetition agreements, those agreements will be enforced if drafted narrowly to reasonably protect the legitimate business interests of the employer. Based on recent opinions, attorneys drafting these agreements should consider that Indiana courts

1 Central Indiana Podiatry P.C. v. Krueger, 882 N.E.2d 723 (Ind. 2008).

2 Gleeson v. Preferred Sourcing, LLC, 883 N.E.2d 164 (Ind.Ct.App. 2008).

3 Aldrich v. Advanced Imaging Solutions, Inc., a June 12, 2008 unpublished opinion.


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will closely scrutinize the scope of an agreement as to its restrictions on time, specific types of activity and geographic area in relation to the specific business interests of the employer.

Julie R. Murzyn*BECKMAN, KELLY & SMITH5920 Hohman AvenueHammond, IN 46320-2423Tel: (219) [email protected]

* Julie R. Murzyn is a partner at Beckman, Kelly & Smith in Hammond, Indiana. Her practice focuses on commercial and business litigation, and transportation litigation.


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NEW MEXICO COURT CLARIFIES PROCEDURE FOR RESISTING DISCOVERY OF TRADE SECRETS

In a case of first impression, the New Mexico Court of Appeals has construed the procedural requirements of the state’s trade secrets privilege in a way that likely makes trade secrets easier to protect from discovery in state court than in federal court.

In Pincheria v. Allstate Insurance Co.,1 the court concluded that a state court litigant does not need to move for a protective order to successfully resist discovery of a trade secret. This differs from federal practice in which the only way to protect a trade secret from discovery is to seek a protective order. And the court’s decision relieves the state court litigant of having to show “good cause” why the trade secret should be protected.

The difference between state and federal practice arises because New Mexico has codified a trade secrets privilege in its evidence rules and the federal courts have not. Accordingly, federal courts have not had to consider the interrelationship between the federal civil procedure rule governing protective orders (Rule 26(C)) and a codified evidentiary privilege.

Pincheria involved a nearly ten-year dispute between an insurance company and some of its former clients over the production of documents describing the insurer’s claims handling procedures. The insurer claimed the documents gave it a competitive edge over competitors that it would lose if its discovery responses were made public.

The parties disagreed over whether the insurer had to show “good cause” why the court should grant the privilege. “Good cause” is required by New Mexico’s Rule 1-026(C), the civil procedure rule governing protective orders, and its federal analogue, Rule 26(C). In Krahling v. Executive Life Insurance Co., the court held that “good cause” is established by proof that the movant would suffer “a clearly defined and serious injury” without the order.2

In holding that evidence Rule 11-508 and not civil procedure Rule 1-026(C)(7) governs the trade secret privilege, the court crafted a balancing test involving shifting burdens to determine when the privilege will apply.3 The approach, which the Court derived from the language of the rule, proceeds in four steps:

1. The party resisting discovery must establish that the information is a trade secret and that discovery could cause the party harm.

Rule 11-508 does not define “trade secret,” and the court did not offer its own definition. Rather, it said litigants should look to the definitions within the Uniform Trade Secrets Act (“UTSA”)4 and the Restatement (First) of Torts § 757. The UTSA defines “trade secret” as: … information, including a formula, pattern, compilation, program, device, method, technique or process, that:

(1) derives independent economic value, actual or potential, from not being generally known to and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use; and

1 142 N.M. 283, 164 P.3d 982 (2007).

2 125 N.M. 228, 233, 959 P.2d 562, 567 (1998) (citations omitted).

3 The Court noted that a litigant asserting the trade secrets privilege was not precluded from also moving for a protective order under Rule 1-026(C)(7), however.

4 NMSA 1978, § 57-3A-1, et seq. (1989).


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(2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

NMSA 1978, § 57-3A-2(D) (1989). The Restatement (First) of Torts offers the following definition:

A trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers. …

Restatement (First) of Torts § 757, cmt. b (1939). The Restatement also provides six factors to consider in determining whether information constitutes a trade secret:

(1) the extent to which the information is known outside of [the] business; (2) the extent to which it is known by employees and others involved in [the] business; (3) the extent of measures taken by [the owner] to guard the secrecy of the information; (4) the value of the information to [the business] and to [its] competitors; (5) the amount of effort or money expended . . . in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

Id. The Pincheria Court noted that even though the definitions differ, “both capture the essential elements of a trade secret: confidentiality and value.”5 The court also articulated a seventh factor, noting (without citing to any authority) that “document age is a factor used to determine whether a document is a trade secret.”6 Thus, a litigant seeking to assert the trade secrets privilege cannot look to a single, clearly articulated formula but must analogize to an amalgam of variables.

The court also held that the party opposing discovery must demonstrate an element of harm. Yet it advised that “[i]f the resisting party establishes that the information sought derives economic value that can be obtained by others if the information is disclosed, then the loss of that value results in harm.”7 Most trade secrets likely will fall within this rubric. Also, the court cautioned that its approach “does not require that proof of harm be shown as an independent element before the burden shifts.”8 Accordingly, the court requires only a minimal indication that disclosure could cause harm.

2. If the party resisting discovery establishes that a trade secret exists, the party seeking discovery must establish that disclosure of the trade secret is required for the fair adjudication of its claims.

Rule 11-508 provides that the privilege does not attach if nondisclosure would “tend to conceal fraud or otherwise work injustice.” The court construed the phrase “work injustice” to require that the party seeking discovery demonstrate more than the relevance of the trade secret to the underlying claim or defense. The court demanded that the party seeking discovery “make a particularized showing that the information sought is relevant and necessary to the proof of a material element of at least one cause of action presented in the case and that it is reasonable to conclude that the information sought is essential to a fair resolution of the lawsuit.”9 Thus, discovery is not proper where knowledge of the trade secret would merely help a litigant’s case. Disclosure must be a necessity.

5 142 N.M. at 297, 164 P.3d at 996.

6 142 N.M. at 296, 164 P.3d at 995.

7 142 N.M. at 295, 164 P.3d at 994.

8 142 N.M. at 294, 164 P.3d at 993.

9 142 N.M. at 297, 164 P.3d at 996.


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3. If the parties have met their respective burdens, the trial court must balance the necessity of the evidence against the potential harm of disclosing it.

Whether, to what extent, and how the privilege should apply depends on the facts of each particular case.

4. If the trial court decides to compel disclosure of the information, it must determine what, if any, protective measures to impose.

Under Rule 11-508, when a court orders disclosure, the court “shall take such protective measure as the interests of the holder of the privilege and of the parties and the furtherance of justice may require.” The Pincheria Court determined that the rule should “allow the trial court to evaluate the circumstances of the case and fashion a disclosure order that balances the parties’ interests.”10 The court again found the UTSA informative. In actions filed under that act, a court is required to employ “reasonable means” to protect a trade secret. “Reasonable means” include “granting protective orders in connection with discovery proceedings, holding in camera hearings, sealing the records of the action and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.”11 Thus, protective orders likely are but one approach a trial court could take to protect a trade secret.

In summary, a litigant in New Mexico courts need not show “good cause” to protect trade secrets from discovery, but must be able to demonstrate that a trade secret exists and that it has economic value before a court may consider allowing the privilege to preclude disclosure.

Rod SchlagelBUTT THORNTON & BAEHR PC4101 Indian School Rd. N.E. Suite 300SAlbuquerque, NM 87110Tel: (505) 884-0777 [email protected]

10 142 N.M. at 294, 164 P.3d at 993.

11 NMSA 1978, § 57-3A-6.


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ARTICLES

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THE BEST PROTECTION: TRADE SECRET OR PATENT?

When determining how to protect intellectual property (IP), it can be difficult to decide between trade secrets and patents. To best understand the options, it is useful to recognize the differences between trade secrets and patents, the varying legal and business factors that come into play, and the remedies available should a third party misuse protected IP.

WHAT ARE TRADE SECRETS AND PATENTS?

Trade Secrets

Trade secret law developed from state common and statutory laws, and aims to avoid misappropriation of valuable business information. Under the Uniform Trade Secrets Act (UTSA), trade secrets are:

− information, including a formula, pattern, compilation, program, device, method, technique or process,

− not generally known or ascertainable by the public,

− that derive economic value from being held secret, and

− are protected from disclosure with reasonable efforts.1

This definition protects a broad range of information. To identify a trade secret, businesses should consider how well the information is known to employees and outside businesses, the steps taken to protect its secrecy and value, the costs associated with developing it, and how easily third parties can recreate or copy it. A trade secret is created when a company identifies valuable information and makes reasonable efforts to protect it. Protection begins immediately and lasts indefinitely unless the information is publicly disclosed. Securing trade secrets is relatively easy because owners need not complete applications or formal examinations. Further, the only costs associated with protecting secrets are the costs of maintaining secrecy, therefore trade secret protection is also relatively cheap. Importantly, owning a trade secret does not come with exclusive rights. While the owner can take action against third parties who misappropriate the secret, the owner has no recourse if a third party independently invents the information, discovers the information through reverse engineering, or obtains the information due to accidental disclosure. Once any of these events occurs, the owner loses his or her property rights in the secret.

Patents

Federal law, rather than state law, governs patents. Patents aim to disclose innovative, useful information to the public. Patent protection is available for information that is:

− novel,2

− useful,3 and

− non-obvious.4

Obtaining a patent is costly and time-intensive. A patent application must be filed that describes the invention

1 For example under the Wisconsin Uniform Trade Secrets Act, § 134.90(c), trade secrets are also defined as “any information that can be used in the operation of a business or other enterprise and that [are] sufficiently valuable and secret to afford an actual or potential economic advantage over others.” See also, Restatement (Third) of Unfair Competition § 39 (1995).

2 35 U. S. C. § 102.

3 35 U. S. C. § 101.

4 35 U. S. C. § 103.


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and how it is made and used in sufficient details so as to distinguish it from other protected information. Additionally, the application must define the “best mode” for implementing the invention and its subject matter. The Patent Office reviews “prior art”5 when the application is received to determine whether the invention is novel and non-obvious. Patent applications may be published 18 months into this review process.

The entire process can take over two years and costs vary depending on the complexity of the science or technology involved, but can easily be in excess of $15,000.00. Once obtained, a patent lasts 20 years.6 A patent owner has exclusive rights to the patented information, allowing her to “exclude others from making, using, offering for sale, or selling” the information.7

LEGAL AND BUSINESS CONSIDERATIONS

A. Trade Secrets

Legal ConsiderationsSince trade secret protection does not convey exclusive rights, it can be easily destroyed. For example, a trade secret can be lost through independent discovery, reverse engineering, accidental disclosure, or patent issuance. Additionally, a trade secret owner may lose her property right by initiating a misappropriation action because the secret may be publicly disclosed in the event the action is unsuccessful.

The information’s value may also depend on the scope and duration of the property right. Trade secret protection, which is unpredictable due to its indefinite duration, may not be as easy to value during litigation as a patent where market information may be more readily available.

Business ConsiderationsInformation with a brief shelf life or that can easily be kept secret is well suited to trade secret protection. However, businesses should pay attention to the cost of maintaining the secret compared to its value; if the cost is higher than the value, a patent may be more economical.

Further, businesses should consider how many employees need access to the protected information and how it will be used. If multiple employees need access, or if the information will be used largely outside the business, secrecy will be more difficult and costly. Employee mobility and turnover rate within the business will also affect the ability to maintain trade secrets.

B. Patents

Legal ConsiderationsDespite obtaining exclusive rights through securing a patent, patent owners can also lose those rights. A third party can challenge a patent’s validity through a reexamination proceeding, or, if sued, as a defendant in a patent infringement action. A third party can obtain the patent through an interference proceeding by claiming that he or she is the true inventor.8

Business ConsiderationsInformation with long-term value or that is easily reverse engineered or independently developed is better suited to, and worth the time and expense of, a patent. On the other hand, patents also disclose

5 35 U. S. C. § 102 (a),(b),(d),(e),(g).

6 35 U. S. C. § 154(a)(2) (2000).

7 35 U. S. C. § 154(a)(1).

8 35 U.S.C. § 135.


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information to the public, allowing third parties to invent around the patent or use the information if patents are published but not issued.

ENSURING PROTECTION

A. Trade Secrets

Physical barriers help preserve trade secrets. Conspicuously labeling items “confidential,” locking and securing information, minimally reproducing and distributing information, destroying data where possible, and using passwords are effective ways to protect trade secrets.

Additionally, a confidential environment may help maintain secrecy. Employees should know which information is confidential and treated as a trade secret, and understand the information’s importance to the company. Further, employees should have access to secrets on a need-to-know basis. Though expensive, conducting a trade secret audit program can further monitor and improve compliance with an established trade secret program.

Confidentiality and non-competition agreements can prevent disclosure by third parties or former employees. Monitoring guests and visitors, as well as competitors, can also help protect trade secrets and reveal when a trade secret has been misappropriated.

B. Patents

Defensive publishing can protect valuable information before—or in lieu of—a patent. Defensive publishing involves disclosing the invention to establish its legal existence, classify it as prior art, and prevent third parties from obtaining a patent and property rights to the same invention. Defensive publishing avoids the cost and time associated with obtaining the patent, but does not grant the same property rights.

Another technique is to maintain “know-how” gained while developing the patent as a trade secret. Such information, like engineering techniques, does not need to be disclosed on the patent. Maintaining know-how as a trade secret can prevent competitors from inventing around the information but is subject to the same limitations as any other trade secret.

REMEDIES AND DAMAGES FOR IP MISUSE

Preliminary Injunction A trade secret or patent owner can file for a preliminary injunction upon discovering that a third party has misused protected information. Though preliminary injunctions are costly and often lead to full litigation, they can prevent others from using the information and protect property rights.9 To succeed in obtaining a preliminary injunction, the owner must prove either “a likelihood of success on the merits and the possibility of irreparable injury,” or “the existence of serious questions going to the merits and that the balance of hardships tips sharply in its favor.”10

MisappropriationA trade secret owner can initiate a misappropriation action when a third party acquires a trade secret improperly11 or without consent.12 In Wisconsin, this includes acquisition by accident or through another, 9 Alexander L. Brainerd & Olga Rodstein, Trade Secrets, American Corporate Counsel Association 2001 Annual Meeting Presentation 25, 27 (2001).

10 Id. at 27-28.

11 A trade secret is acquired improperly if acquired through “espionage, theft, bribery, misrepresentation [or] breach or inducement of a breach of duty to maintain secrecy.” Wis. Stat. § 134.90(1)(a).

12 Wis. Stat. § 134.90(2).


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unauthorized party.13 To prove misappropriation, the trade secret owner must demonstrate that he or she has a property right in the trade secret, the third party acquired the secret improperly, and the owner was injured as a result.14 If successful, the owner may obtain the actual loss caused by the misappropriation plus unjust enrichment; additionally, punitive damages may be awarded if the court finds the misappropriation was malicious.15

InfringementA patent owner can initiate a similar suit via an infringement action. To prove infringement, a patent owner must demonstrate that “someone, without authority, makes, uses, offers to sell, sells, or imports the patented invention within the United States, its territories, or its possessions during the term of the patent.”16

If successful, the patent owner is entitled to damages as long as he or she marked the product or gave actual notice of 35 U.S.C. § 287(a). Marking requires the patent owner to affix the word “patent” or “pat,” and the patent number, on the invention or its packaging. Actual notice is given when the patent owner asserts that a particular invention infringes his or her patent. Once compliance or actual notice has been proven, the patent owner can obtain lost profits, reasonable royalties, or other compensation for actual damages from the time of compliance or notice.

CONCLUSIONDue to the current economic and technology climates, it is more important than ever to protect business innovations. Selecting which protection is best suited for individual businesses and their IP assets can be confusing and difficult. Fully understanding the scope, limitations, and risks of trade secrets and patents can assist businesses and inventors in making the right choice.

Eugenia (Gina) G. Carter*WHYTE HIRSCHBOECK DUDEK S.C.Thirty-three East Main Street, Suite 300Madison, WI 53703Tel: (608) [email protected]

* Gina Carter is an attorney in the Madison office of Whyte Hirschboeck Dudek S.C., heading both the firm’s intellectual property litigation team as well as the intellectual property practice in the Madison office.

13 Wis. Stat. § 134.90(2)(b)(2).

14 J. Thomas McCarthy, Roger E. Schechter, & David J. Franklyn, McCarthy’s Desk Encyclopedia of Intellectual Property, 377-78 (3d ed. 2004).

15 Wis. Stat. § 134.90(4).

16 35 U. S. C. § 271.


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COVENANTS NOT TO COMPETE IN A COMPETITIVE WORLD MARKET

Judge Wachtler explained the reason non-competition agreements are so problematic:1

[J]udicial disfavor of these covenants is provoked by ‘powerful considerations of public policy which militate against sanctioning the loss of a man’s livelihood.’ . . . Indeed, our economy is premised on the competition engendered by the uninhibited flow of services, talent and ideas. Therefore, no restrictions should fetter an employee’s right to apply to his own best advantage the skills and knowledge acquired by the overall experience of his previous employment. This includes those techniques which are but ‘skillful variations of general processes known to the particular trade.’ . . .

In a nod to the difficulties employers face in navigating these issues while attempting to remain competitive, the court did recognize

the legitimate interest an employer has in safeguarding that which has made his business successful and to protect himself against deliberate surreptitious commercial piracy. Thus restrictive covenants will be enforceable to the extent necessary to prevent the disclosure or use of trade secrets or confidential customer information . . . . In addition injunctive relief may be available where an employee’s services are unique or extraordinary and the covenant is reasonable.

Id.

The balancing act between the two concepts—unreasonable restraints on employment versus the legitimate need to protect proprietary information so as to remain competitive—is the subject of this article.

In general, an agreement not to compete will not be enforceable if:

(a) The restraint is greater than is needed to protect the employer’s legitimate interests;

(b) The employer’s need for protection is outweighed by the hardship to the employee in enforcing the agreement;

(c) Enforcement of the agreement would injure the public interest.2

Stated another way, in the absence of more restrictive statutory provisions, an agreement not to compete will only be enforceable if it is:

(a) Reasonable as to duration, geographical scope, and the activities restrained;

(b) Explicitly outlines a valid “protectible interest;” and

(c) Does not violate public policy considerations.

As with all contracts, the negotiation process must be equitable (not made under duress, or unconscionable in its terms), and there must be adequate consideration.

1 Reed, Roberts Associates, Inc. v. Strauman, 40 NY 2d 303, 353 NE 2d 590, 593-94 (1976) (internal citations omitted).

2 Restatement of the Law 2nd, Contracts 2nd §188 (1981).


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Unfortunately, when trying to parse through the statutes and decisional law, the general rule is that there is no general rule—every situation is fact-specific.

For instance, although the courts in most states will excise (“blue pencil”) a section of a restrictive covenant that is too broad, and enforce the remainder, if a court finds a particular agreement was overreaching, trying to protect more than is truly necessary, or making it impossible for a former employee to pursue his chosen career, the court may simply declare the entire agreement unenforceable as against public policy.3

In general, courts tend to shy away from global pronouncements. A two-year restriction on soliciting clients may be considered reasonable, while an agreement of identical temporal scope will not be enforced where there is an absolute prohibition on working for any company that provides similar services.4

And just try to decipher what a “similar services” means! An Iowa Court of Appeals rejected a former executive’s claim that his equine medication was not in competition with his former employer’s bovine medication for the same condition, while a Missouri court found no similarity between silicon wafers that performed essentially the same function.5

Also, the job description matters. Because of the dearth of medical practitioners in some areas, and because a patient’s right to choose his or her own medical practitioner is considered inviolate, a non-competition agreement with a physician— even if very limited in scope—will be subject to greater scrutiny than, for instance, a non-competition agreement with an insurance salesperson.6

Similarly, the relationship of the parties makes a difference: an agreement between an employee and an employer will be subject to greater scrutiny than an agreement between the seller and the buyer of a business.7

Moreover, the definition of “adequate” consideration varies widely from state to state, with some states requiring advance notice and/or increased compensation, and other states accepting continued employment as sufficient.8

And of course, there is no clear principle regarding what is “protectible.”9

To alleviate this uncertainty, some states have imposed such strict statutory restrictions that crafting an enforceable covenant not to compete is nearly or completely impossible. For instance, Oregon Revised

3 See, e.g., Westwind Technologies, Inc. v. Jones, 925 So 2d 166 (Ala 2005) (refusing to narrow “the world” as a geographical scope).

4 See, e.g., Konecraners, Inc. v. Sinclair, 340 F Supp 2d 1126, 1131 (D Or 2004) (noting that “a restriction that says a stock broker can’t solicit his former clients for one year might be upheld, but a restriction that says he can’t work in the industry altogether might be unreasonable”)

5 AMPC, Inc. v. Meyer, 669 NW 2d 262 (Iowa App 2003); Pirooz v. MEMC Elec. Materials, Inc., 2006 WL 568571 (E D Mo 2006).

6 See, e.g., Foltz v. Struxness, 215 P2d 133 (Kan 1950) (reviewing cases from across the nation and balancing an employer’s need to protect business against the public interest in having enough medical practitioners in a given area).

7 See, e.g., Attaway v. Republic Svcs. of Gas, 253 Ga App 322, 325, 558 SE2d 846 (2002) (same); Cal. Bus. and Prof. Code §16600 et seq. (carving out an exception to the general prohibition on non-competition agreements for purchase and sale agreements).

8 See, e.g., Research and Trading Corp. v. Powell, 468 A2d 1301, 1303 (Del Ch 1983) (even a threat of termination for failure to sign the covenant not to compete does not invalidate the agreement for lack of consideration); Central Adjustment Bureau, Inc. v. Ingram Associates, 622 SW 2d 681 (Ky App 1981) (same).

9 See, e.g., Connecticut Pathworks Corp. v. Palmer. 2003 WL 22006402 (Conn Super 2003) (Installing bathtub liners and walls is not a protectible skill, trade secret, or other protectible interest); Buffalo Imprints, Inc. v. Scinta, 144 AD 2d 1025 (NY 1988) (customer lists for novelty advertising items is not protectible); Durapin, Inc. v. American Products, Inc., 559 A2d 1051 (RI 1989) (where company held 80% of the bowling alley market, the “identity of those customers was common knowledge” and was not protectible); Clark Paper & Mfg. Co. v. Stenacher, 140 NE 708, 711 (NY 1923) (covenant not to compete is not enforceable as to salesperson: “That the defendant has profited by the experience which he obtained in the plaintiff’s service may be true. To use this acquired skill elsewhere is no legal wrong. Experience, competency and efficiency in selling goods are qualifications which can hardly be so rare as to require the aid of equity to prevent an irreparable loss to an employer who finds himself compelled to substitute one salesman for another.”).


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Statute 653.295 provides that all such covenants are unenforceable unless the employee was given written notice at least two weeks prior to beginning work, the employee is in an executive, professional, or administrative position, the employee earns at least as much as the income for a median family of four, and the restriction lasts no more than two years. Similarly, California Business and Professional Code Section 16600 states that “[E]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

The issues become even more complex when you step outside the borders of the United States. In the United Kingdom, for instance, the presumption is that non-competition agreements are usually only necessary (and therefore valid) when imposed on senior executives; a non-competition agreement may be unenforceable if the employer failed to follow the termination provisions in the employment contract; and a restriction of more than six months will be “closely scrutinized.”10 In France, “[t]he non-competition agreement cannot preclude the employee from performing an activity which is consistent with his education, professional training, and professional experience.” Id. In Canada, restrictive covenants are unenforceable restraints of trade and will only be enforceable “if they are reasonable and in the interest of the parties and the public.”11 In practice that means it is unlikely a court will uphold an agreement lasting more than one year or an agreement that interferes with “any employee’s ability to engage in their chosen profession.” Id. Finally, in Mexico, as in most of the United States, the measure of damages for violation of a covenant not to compete is the actual loss to the contracting party.12

As a practical matter, even in those areas that have taken draconian measures, many international, federal, and state laws provide some protection for trade secrets without any specific contractual provisions. (Of course, identifying confidential information in an employment agreement demonstrates reasonable efforts to maintain the secrecy of such information, thereby supporting an argument that the information is a trade secret subject to statutory protection). Also, many states have codified an exception for non-solicitation agreements.

Finally, as we are all painfully aware, an unsuccessful attempt to protect clients from unfair competition can be costly. As outlined above, there is no Silver Bullet or magic language, however the following tips may assist in drafting an enforceable covenant.

1. One Size Does Not Fit All

Know the law of the state or country where the employee resides and works, and make sure the agreement meets the requirements of those laws.

2. Less is More

Many courts will not interpret or revise an overly broad non-competition agreement. Rather than creating a broad employment agreement that protects “everything but the kitchen sink,” covering the world, and lasting into perpetuity, consider carefully what the company’s vulnerabilities and needs are, and draft the agreement narrowly to protect them.

3. Get it Signed Before the Employee Begins to Work

In some countries and states, a non-competition agreement is invalid unless signed at the initiation of employment.

10 Ann Bevitt and La Tanya N. James, U.S. And E.U. Non-Competition Agreements Compared And Contrasted (December 2007), © Morrison & Foerster LLP, http://www.mondaq.com/article.asp?articleid=54910.

11 Confidentiality and Non-Competition Agreements, provided by former ALFA member Walter J. Pavlic, Q.C., Parlee McLaws LLP, Edmonton, Alberta (2008).

12 Caselaw provided by ALFA member Javier Lizardi, Von Wobeser Y Sierra, Santa Fe, Mexico.


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4. Consideration

Employment or continued employment may not be sufficient.

5. No Lawyerspeak

Use plain English. Remember that ambiguous language will be construed in favor of the non-drafting party, and a lay person may successfully avoid enforcement by arguing she did not understand what she was signing.

6. Piecemeal Protection is Preferable

Rather than lumping all your desired prohibitions in one clause, include one clause that protects confidential information from disclosure, another clause prohibiting solicitation of customers or clients, a third affirming statutory trade secret protections, and a separate clause prohibiting working for, owning, or managing a competing business (the traditional non-competition clause). Then, if a court finds one clause unenforceable, the other clauses may be left intact.

For the same reason, make sure the contract includes a severability clause.

7. Geographical Scope

Do not attempt to limit competition beyond the area where the employee actually works and has customer contact. If the employee has contact with customers worldwide, consider limiting the restriction to an agreement not to actively solicit customers with whom the employee has worked directly.

8. Time is Not on Your Side

While there is no established rule, as a general proposition a restriction lasting longer than two years will probably not be enforceable.

9. Protectible Interests

Consider what is public knowledge versus information known only to your employees, and limit the restrictions to protect your confidential information.

10. Prepare for the Worst

Include a provision for injunctive relief so you can move quickly to stop the hemorrhaging of business in the event a former employee breaches the covenant. A provision for liquidated damages and attorneys fees should be considered, although some jurisdictions will not enforce these provisions.

Shari L. LaneEmployment Advice and Counsel COSGRAVE VERGEER KESTER LLP805 SW Broadway, 8th FloorPortland, OR 97205Tel: (503) [email protected]

www.cvk-law.com


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NON-COMPETITION AGREEMENTS ANCILLARY TO THE SALE OF A BUSINESS

Arizona has adopted a more liberal view of non-competition covenants ancillary to the sale of a business than it employs in other context. Arizona courts asked to enforce non-competition covenants in agreements for the sale of a business consider the purpose of the covenant and the intent of the parties.1 Arizona courts enforce the “letter and spirit” of the covenant often using Arizona’s implied covenant of good faith and fair dealing to achieve results beyond the plain language of the covenant itself.

Arizona has long imposed an implied covenant of good faith and fair dealing in every contract which prevents a party to a contract from acting to “impair the right of the other to receive the benefits which flow from their agreement or contractual relationship”.2 When the plain language of the non-competition covenant will not proscribe the actions of the former owner, Arizona courts have used this implied covenant to fulfill the spirit of the covenant. In Diagnostic Lab., Inc., v. PBL Consultants, plaintiffs (two physicians) sold a histology and cytology testing laboratory to defendants. The sale contract contained a non-competition covenant which proscribed sellers from directly or indirectly engaging in clinical laboratory business or other professional activities which would be prejudicial to the buyer.3 Evidence showed that the sellers did not engage in any prohibited conduct themselves but provided assistance to another who was engaged in a business competing with buyer’s business. While no evidence showed that the sellers actually violated the express language of the non-competition covenant, their use of a subterfuge was found to be in violation of the implied covenant of good faith and fair dealing, thus injuring the buyer’s contractual right to be free of competition from the seller.

Arizona courts have extended the application of the covenant of good faith and fair dealing to enforce restrictions which do not actually appear in the contract and to impose restrictions on discretion retained under the contract.4 Arizona courts have gone so far as to effectively re-write the terms of the parties’ contract, while simultaneously stating that this implied covenant cannot contradict the express terms of the contract. In a case that did not deal with a non-competition clause, the Arizona Court of Appeals stated that instances “inevitably arise where one party exercises discretion retained or unforeclosed under a contract in such a way as to deny the other a reasonably expected benefit of the bargain.”5 The court stated that in Arizona, a party can breach the implied covenant of good faith and fair dealing both by act inconsistent with the express language and by acting in a way that while not expressly excluded by the contract’s terms bears adversely on the party’s expected benefits of the bargain.6 In Bike Fashion Corp., v. Kramer, Kramer, who controlled a corporation that was the managing partner of a general partnership owning real estate, caused his corporation to sell the principal asset of the general partnership without the consent of the other partners. The court held that while the express terms of the contract gave Kramer the discretion to sell, his exercise of that discretion violated the justified understanding of the parties.7 The court explained that the implied covenant may be breached even if the express terms speak to a related subject.

In The Mastro Group v. American Restaurant Enterprises, the court extended this concept beyond Bike Fashion and allowed the implied covenant of good faith and fair dealing to contradict the plain language of the parties’

1 The Mastro Group v. American Restaurant Enterprises, 2008 WL 4017948 (Ariz. App. Div. 1, 2008), citing Centorr-Vacuum Indus., Inc., v. Lavoie, 609 A.2d 1213, 1215 (N.H. 1992) and Bicycle Transit Auth., Inc., v. Bell, 333 S.E.2d 299, 305 (N.C. 1985).

2 Bike Fashion Corp., v. Kramer, 202 Ariz. 420, 46 P.3d 431 (App. Div. 1, 2002).

3 Diagnostic Lab., Inc., v. PBL Consultants, 136 Ariz. 415, 419, 666 P.2d 515, 519, (App. Div. 1983).

4 Bike Fashion Corp., v. Kramer, 202 Ariz. 420, 46 P.3d 431 (App. Div.1, 2002).

5 Bike Fashion Corp., v. Kramer, 202 Ariz. 420, 46 P.3d 431 (App. Div. 1, 2002) citing Wells Fargo Bank v. Arizona Laborers, Teamsters & Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474, 38 P.3d 12, (2002).

6 Id., 202 Ariz. at 424, 46 P.3d at 435.

7 Id., 202 Ariz. at 424, 46 P.3d at 435.


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contract.8 In Mastro, plaintiff sold “Maloney’s Tavern” to the defendants.9 The sale contract contained a non-competition clause with a geographic scope of three miles. When the defendants stopped making royalty payments under the contract (with or without justification), the sellers opened a steakhouse under the name “Drinkwater’s City Hall Steakhouse” within three miles of the restaurant it sold. Defendants claimed that its steakhouse was not in violation of the non-competition clause because the non-competition clause only prohibited the defendants from the “operation of a ‘Maloney’s Tavern’ or a ‘Maloney’s On Campus’ bar business”.10 The court disagreed. Even though the express terms of the non-competition covenant addressed a “Maloney’s Tavern” or “Maloney’s On Campus” the court held that the reasonable expectation of the parties may have been a complete prohibition against operating any restaurant or bar business within the three-mile scope contained in the contract.11

While non-competition clauses associated with the sale of a business are enforceable in Arizona, the plain language of the clause may not limit the scope of the non-competition clause. Arizona courts have used the implied covenant of good faith and fair dealing to extend the non-competition clause beyond its plain language in an attempt to effectuate the parties’ reasonable expectations, even when the parties fail to state those expectations in their written agreement.

David McDowell*RENAUD COOK DRURY MESAROS P.A.Phelps Dodge TowerOne North Central, Suite 900Phoenix, AZ 85004Tel: (602) 307-9900Direct: (602) [email protected]

* David McDowell is a partner at Renaud Cook Drury Mesaros PA in Phoenix. In addition to general contract and business litigation, David defends product manufacturers in litigation involving their products.

8 2008 WL 4017948 (Ariz. App. Div. 1, 2008).

9 The Mastro Group, 2008 WL 4017948 (Ariz. App. Div. 1, 2008).

10 Id.

11 Id.


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NON-COMPETE AGREEMENTS IN TEXAS: BASIC PRINCIPLES

INTRODUCTION

Texas has a well-deserved reputation as a jurisdiction which disfavors the enforcement of non-compete agreements. Restraints on competition generally are unlawful.1 However, the Covenants Not to Compete Act, enacted in 1989, carves out an exception for non-compete agreements and provides the framework for litigating their enforceability.2 With careful planning and the right set of facts, enforcement of these agreements is possible.

1. Basic Requirements.

The statute boils down to two basic requirements:

• Thecovenantmustbe“ancillarytoorpartofanotherwiseenforceableagreementatthetimethe agreement is made.”3

• Thecovenantmustcontain“limitationsastotime,geographicalarea,andscopeofactivitytobe restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the [party seeking to restrain activity].”4

2. When is a Covenant “Ancillary to an Otherwise Enforceable Agreement?”

Whether a covenant meets the “ancillary” requirement depends on the form of the particular agreement involved. For example, restrictive covenants in the context of the sale of a business almost always are considered to be ancillary.5 Similarly, a restrictive covenant in the context of a settlement agreement can be ancillary to an otherwise enforceable agreement.6

However, employment relationships are different. Employers who want their employees’ options limited intone that this is a simple matter of contract and abiding by one’s word. Employees (or their new employers) who seek to avoid these contractual limitations point out, with varying degrees of success, that they have families to feed and are trying to avoid oppression. Furthermore, most employment relationships in Texas are subject to the at-will doctrine, meaning that an employee can be terminated for good cause, bad cause, or no cause, except when the termination is prohibited by statute or because the employee refuses to commit a criminal act.7 Can at-will employment be considered ancillary to an otherwise enforceable agreement?

a. Standard Before October, 2006.

In Light v. Centel Cellular Co. of Texas, 883 S.W.2d 642 (Tex. 1994), the Texas Supreme Court required that the ancillary agreement be enforceable at the time the agreement was made. This meant neither employment at-will, nor any promise that was conditioned upon a continued period of at-will employment, was deemed to be enforceable when made. Why? The person making the promise could avoid having to perform by simply terminating employment, which it could do at-will. This made the consideration for the non-compete illusory and thus the non-compete unenforceable.8

1 Tex. Bus. & Comm. Code § 15.05.

2 Tex. Bus. & Comm. Code § 15.50-15.52.

3 Tex. Bus. & Comm. Code § 15.50(a).

4 Id. Physician agreements have different requirements. See Section ___, infra.

5 See, e.g., Hill v. Mobile Auto Trim, Inc., 725 S.W.2dm 168 (Tex. 1987).

6 Justin Belt Co. v. Yost, 502 S.W.2d 681 (Tex. 1973).

7 Matagorda County Hosp. Dist. v. Burwell, 189 S.W.3d 738 (Tex. 2006) (per curiam).

8 Light, supra, 883 S.W.2d at 644-645.


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Light was also cited by Texas courts for a similar, but slightly different proposition: a unilateral agreement (for example, an employee’s offer not to use confidential information becomes a contract when the employer actually provides the confidential information) could not support a non-compete because the unilateral contact was not enforceable “at the time” the non-compete was made.9 As a result, employment agreements with at-will employees would not meet the ancillary test, even if there was a proviso that the employee would receive specialized training or access to proprietary information in return for the employee’s agreement to maintain the confidentiality of the agreement, because the agreement was not enforceable at the time it was made Instead, it was enforceable when the employer provided the training or access to proprietary information.10

b. Sheshunoff Changes the Analysis.

As a result of Light and its progeny, it was just about impossible to enforce a non-compete in Texas where at-will employment was involved. That changed on October 20, 2006, when the Texas Supreme Court issued its long-awaited decision in Alex Sheshunoff Management Services, L.P. v. Johnson, 209 S.W.3d 644 (Tex. 2006).11 Sheshunoff modified Light by holding that an at-will employee’s non-compete covenant becomes enforceable when the employer performs the promises it made in exchange for the covenant. “In so holding, we disagree with language in Light stating that the Covenants Not to Compete Act requires the agreement containing the covenant to be enforceable the instant the agreement is made.”12

The practical effect of Sheshunoff is that many non-compete agreements that earlier were held unenforceable because of a lack of enforceable consideration will now meet the ancillary test. For example, if the employer did not provide specialized training or access to confidential information simultaneous to the employee’s execution of the non-compete, the non-compete failed under Light. Under Sheshunoff, consideration is considered adequate once the training/access is given.

c. What Does “Ancillary to or Part of” Really Mean?

Even if the agreement is otherwise enforceable, the non-compete must still be ancillary to or part of the otherwise enforceable agreement. “Ancillary to or part of” has a distinct legal meaning in Texas non-compete jurisprudence; it means that the otherwise enforceable agreement must give rise to “an interest worthy of protection” by the non-compete.13 In other words, there must be some nexus between the consideration given and the non-compete. This was described as a two-part test in Light:

(1) the consideration given by the employer in the otherwise enforceable agreement must give rise to the employer’s interest in restraining the employee; and

(2) the covenant must be designed to enforce the employee’s consideration or return promise in the otherwise enforceable agreement.14

The kinds of agreements that meet this test are enforceable promises by the employer to provide trade secrets or confidential and proprietary information made in exchange for the employee’s return promise not to disclose or use the trade secrets post-employment.15 This is because the employer’s enforceable promise to give the employee trade secrets gives rise to the employer’s need to restrain the employee from competing.

9 Light, supra, 883 S.W.2d at 645, n.6.

10 A different result would be reached if the employment agreement was not at-will, because at that point the consideration was not an illusory promise. See, e.g., Stone v. Griffin Communications and Security Sys., Inc., 53 S.W.3d 687 (Tex.App.—Tyler 2001) (covenant not to compete was ancillary to an otherwise enforceable agreement where underlying employment agreement was not strictly “at will” but was contingent on the employer’s good faith “satisfaction” with the employee’s services)

11 The case was argued to the court on November 10, 2004, almost two years before a decision was rendered.

12 209 S.W.3d at 646.

13 Light, supra, 833 S.W.2d at 647.

14 Id.

15 Id., n. 14.


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Likewise, the covenant not to compete is designed to enforce the employee’s promise not to disclose or use the trade secrets.

d. Post-Sheshunoff Examples of What is Not Ancillary.

Not all consideration will justify enforcement of a non-compete. Baker Petrolite Corp. v. Spicer, 2006 U.S. Dist. LEXIS 41535 (S.D.Tex. 2006) provides a good example. The consideration provided by the employer was business information: buying contacts, customer methods of operation, and customer product needs that would have been useful industry knowledge for the employee. So far, so good. However, the court refused to enforce the non-compete because the information was not confidential or proprietary and therefore did not give rise to an interest in restraining the employee from competing. How can that be? Well, the information was available from other sources, including industry directories and the actual customers themselves. Thus, it could not be properly classified as confidential or proprietary.

A promise to give notice of termination to an otherwise at-will employee does not give rise to an interest in restraining competition, and thus cannot be considered an ancillary agreement.16 Similarly, a covenant not to compete has been held not “ancillary to” the stock option agreement in which the non-compete was contained, because there was no connection between granting the employee the right to buy stock and restraining the employee from post-employment competition.17

How about a $2,500 “non-competition bonus”? In Corporate Relocation, Inc. v. Martin, 2006 U.S. Dist. LEXIS 69098 *38 (N.D. Tex. Sept. 12, 2006), the court held such a bonus “does not give rise to an interest worthy of protection.”

3. Are the Limitations as to Time, Geographic Area, and Scope of Activity Reasonable?

After the “ancillary” issue has been resolved, you are not home free. The agreement still must be reasonable as to time, geographic area, and scope of activity to be restrained.18 Whether a covenant is reasonable is a question of law.19 However, there are no uniform rules concerning what restrictions are reasonable and what restrictions are not. Instead, “reasonableness” determinations are fact sensitive. Thus, limitations which are found to be reasonable in one case may be deemed unreasonable in another.

Nevertheless, the following parameters should be helpful when drafting (or contesting) a non-compete:

• Time. Does the covenant’s time restriction bear some relationship to the employer’s business needs? Is the restriction longer than the length of the employee’s employment? Is the non-compete potentially for an indefinite period of time?

• Geography. Courts usually do not fault geographic limitations which are no greater than the area in which the employee worked. Restrictions based on former customers with whom the employee dealt can be a substitute for a geographic limitation or a basis for reformation of the agreement.

• Scope of Activity. The restrictions in this area must bear some relationship to the activities of the employee during his employment.20 Thus, prohibiting solicitation of former customers with whom the employee dealt would usually be valid,21 while prohibitions on an industry-wide scale are suspect.22 However, if the industry is highly specialized, such a limitation would be

16 Alex Sheshunoff Management Services, L.P. v. Johnson, 124 S.W.3d 678, 688 (Tex.App.—Austin 2003, aff’d in part, rev’d in part, 209 S.W.3d 644 (Tex. 2006); Strickland v. Medtronic, Inc., 97 S.W.3d 835, 839 (Tex. App.—Dallas 2003, writ dism’d).

17 Olander v. Compass Bank, 172 F.Supp.2d 846, 854 (S.D.Tex. 2001).

18 Tex. Bus. & Comm. Code § 15.50(a).

19 Light, supra, 883 S.W.2d at 644.

20 Peat Marwick Main & Co. v. Haass, 818 S.W.2d 381, 387 (Tex. 1991).

21 See, e.g., Peat Marwick, supra; American Express Financial Advisors v. Scott, 955 F.Supp. 688 (N.D.Tex. 1997).

22 See, e.g., McNeilus Companies, Inc. v. Sams, 971 S.W.2d 507 (Tex. App.—Dallas 1997, no writ); Diversified Human Resources Group, Inc. v. Levinson-Polakoff, 752 S.W.2d 8 (Tex. App.—Dallas 1998, no writ).


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reasonable if “the employer is in only one area of business and the purpose of such a covenant is to prevent employees who learn a particular business and know customer clients from engaging in a competing business for a reasonable time and area.”23

4. Doctors are Different.

Section 15.50(b) of the Business & Commerce Code sets out criteria for enforcing non-competes against physicians. Here are the criteria:

• Thecovenantmustnotdenyphysicianaccesstolistofpatientsseenortreatedwithinoneyearpreceding termination of contract, must provide access to medical records of patients upon authorization of the patient (subject to payment of copying costs), and provide that any access to a list of patients or to medical records after termination of contract shall not be required in any form different from how records were maintained.

• Thecovenantmustprovideforabuyoutofthecovenantbythephysicianatareasonableprice.If the parties cannot agree on a price, it will be decided by an arbitrator (mutually agreed upon or court appointed).

• Thecovenantmustprovidethatthephysicianwillnotbeprohibitedfromprovidingcontinuingcareand treatment to a specific patient or patients during the course of an acute illness even after the contract or employment has been terminated.

What we do not know is whether a physician non-compete must comply with the requirements of both 15.50(a) and 15.50(b). Texas courts have yet to rule on this issue.

CONCLUSIONThere are a myriad of issues that are beyond the scope of this paper. What should be clear is that non-competes in Texas will no longer be invalidated with rubber stamp speed against at-will employees. Employers with legitimate interests tied to the rationale for restricting future employment opportunities can obtain relief, under the right set of factual circumstances. Non-compete agreements present unique challenges for both employers and the departed employee. No one should litigate in this area without being aware of the unique legal principles and practical considerations that are involved, regardless of on which side of the docket you regularly practice.

Robert D. “Bob” Kilgore*BALL & WEED, P.C.10001 Reunion Place, Suite 600San Antonio, TX 78216Direct: (210) [email protected]

* Bob Kilgore is an attorney with the law firm of Ball & Weed, P.C. in San Antonio, Texas. His practice is limited to representing companies in labor and employment disputes.

23 Property Tax Associates v. Staffeldt, 800 S.W.2d 349, 351 (Tex. App.—El Paso 1990, writ den’d).


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ARIZONA

PHOENIX

RENAUD COOK DRURY MESAROS, PAOne North Central AvenueSuite 900Phoenix, AZ 85004-4417Tel: (602) 307-9900www.rcdmlaw.com

William W. Drury, [email protected] [email protected] G. [email protected]

CALIFORNIA

LOS ANGELES

HAIGHT BROWN & BONESTEEL LLP6080 Center Drive, Suite 800Los Angeles, CA 90045-1574Tel: (310) 215-7100www.hbblaw.com

William [email protected] G. [email protected]

SAN DIEGO

HIGGS, FLETCHER & MACK, L.L.P.401 West “A” Street, Suite 2600San Diego, CA 92101-7910Tel: (619) 236-1551www.higgslaw.com

Alexis S. [email protected] C. [email protected]

DOMESTIC

ALABAMA

BIRMINGHAM

BRADLEY ARANT BOULT CUMMINGS LLPOne Federal Place1819 Fifth Avenue NorthBirmingham, AL 35203Tel: (205) 521-8000www.babc.com

David G. [email protected] B. [email protected]

MONTGOMERY

BRADLEY ARANT BOULT CUMMINGS LLPAlabama Center for Commerce401 Adams Avenue, Suite 780Montgomery, AL 36104Tel: (334) 956-7700www.babc.com

Robert Emmett Poundstone [email protected]

BUSINESS LITIGATION PRACTICE GROUP DIRECTORY OF MEMBER FIRMS

mailto: [email protected]


24

CONNECTICUT (CONT.)

WESTPORT

HALLORAN & SAGE LLP315 Post Road WestWestport, CT 06880-4739Tel: (203) 227-2855www.halloran-sage.com

Stephen P. [email protected] P. [email protected]

DELAWARE

WILMINGTON

MORRIS JAMES LLP500 Delaware AvenueSuite 1500Wilmington, DE 19801-1494Tel: (302) 888-6800www.morrisjames.com

P. Clarkson Collins, [email protected] M. [email protected] W. [email protected]

FLORIDA

ORLANDO

DEAN, MEAD, EGERTON, BLOODWORTH, CAPOUANO & BOZARTH800 North Magnolia AvenueSuite 1500Orlando, FL 32803Tel: (407) 841-1200www.deanmead.com

Darryl M. [email protected] D. [email protected]

CALIFORNIA (CONT.)

SAN FRANCISCO

MANATT, PHELPS & PHILLIPS, LLPOne Embarcadero Center30th FloorSan Francisco, CA 94111Tel: (415) 291-7400www.manatt.com

Andrew A. [email protected]

COLORADO

DENVER

HALL & EVANS, L.L.C.1125 17th Street, Suite 600Denver, CO 80202-5800Tel: (303) 628-3300www.hallevans.com

Bruce A. [email protected] E. O’[email protected]

CONNECTICUT

HARTFORD

HALLORAN & SAGE LLPOne Goodwin Square225 Asylum StreetHartford, CT 06103Tel: (860) 522-6103www.halloran-sage.com

John B. [email protected] G. Fortner, [email protected] D. Royster, [email protected]



mailto:[email protected]


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ILLINOIS (CONT.)

CHICAGO

JOHNSON & BELL, LTD.33 West Monroe StreetSuite 2700Chicago, IL 60603Tel: (312) 372-0770www.johnsonandbell.com

Joseph R. [email protected]

KANSAS

OVERLAND PARK

BAKER STERCHI COWDEN & RICE L.L.C.51 Corporate Woods9393 West 110th StreetSuite 500Overland Park, KS 66210Tel: (913) 451-6752www.bscr-law.com

Thomas E. [email protected]. Scott [email protected]

WICHITA

HINKLE ELKOURI LAW FIRM L.L.C.2000 Epic Center301 North Main StreetWichita, KS 67202Tel: (316) 267-2000www.hinklaw.com

Mitchell L. [email protected] M. [email protected]

GEORGIA

ATLANTA

HAWKINS & PARNELL, LLP4000 SunTrust Plaza303 Peachtree St., NEAtlanta, GA 30308-3243Tel: (404) 614-7400www.hawkinsparnell.com

Jack N. [email protected] S. [email protected]

SAVANNAH

HUNTER, MACLEAN, EXLEY & DUNN, P.C.200 E. Saint Julian StreetP.O. Box 9848Savannah, GA 31412Tel: (912) 236-0261www.huntermaclean.com

Shawn A. [email protected]

ILLINOIS

BELLEVILLE

BROWN & JAMES, P.C.Richland Plaza 1525 West Main Street, Suite 200Belleville, IL 62220-1547Tel: (618) 235-5590www.brownjames.com

Steven H. [email protected]



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MARYLAND

BALTIMORE

SEMMES, BOWEN & SEMMES25 South Charles StreetSuite 1400Baltimore, MD 21201Tel: (410) 539-5040www.semmes.com

James A. [email protected] J. [email protected]

MASSACHUSETTS

BOSTON

MORRISON MAHONEY LLP250 Summer StreetBoston, MA 02210Tel: (617) 439-7500www.morrisonmahoney.com

Matthew W. [email protected]

MICHIGAN

DETROIT

PLUNKETT COONEY535 Griswold Street, Suite 2400Detroit, MI 48226Tel: (313) 965-3900www.plunkettcooney.com

George [email protected]

KENTUCKY

LOUISVILLE

WOODWARD, HOBSON & FULTON, L.L.P.101 South Fifth StreetSuite 2500Louisville, KY 40202Tel: (502) 581-8000www.whf-law.com

Patrick W. [email protected]

LOUISIANA

LAFAYETTE

LEAKE & ANDERSSON, L.L.P.600 Jefferson Street, Suite 800Lafayette, LA 70501-8920Tel: (337) 233-7430www.leakeandersson.com

Patrick M. [email protected]

NEW ORLEANS

LEAKE & ANDERSSON, L.L.P.1100 Poydras Street, Suite 1700New Orleans, LA 70163-1701Tel: (504) 585-7500www.leakeandersson.com

George D. [email protected]



27

MISSOURI

KANSAS CITY

BAKER STERCHI COWDEN & RICE L.L.C.Crown Center2400 Pershing Road, Suite 500Kansas City, MO 64108-2533Tel: (816) 471-2121www.bscr-law.com

John W. [email protected]. Scott [email protected] E. [email protected]

ST. LOUIS

BROWN & JAMES, P.C.1010 Market Street, 20th FloorSt. Louis, MO 63101Tel: (314) 421-3400www.brownjames.com

Steven H. [email protected]

NEW JERSEY

NEWARK

SILLS CUMMIS & GROSS P.C.One Riverfront PlazaNewark, NJ 07102Tel: (973) 643-7000www.sillscummis.com

Jeffrey H. [email protected]

MINNESOTA

MINNEAPOLIS

HALLELAND LEWIS NILAN & JOHNSON600 U.S. Bank Plaza South220 South Sixth StreetMinneapolis, MN 55402-4501Tel: (612) 338-1838www.halleland.com

Teresa J. [email protected] [email protected]

MISSISSIPPI

JACKSON

DANIEL COKER HORTON & BELL, P.A.4400 Old Canton Road, Suite 400Jackson, MS 39211Tel: (601) 969-7607www.danielcoker.com

Brenda B. [email protected] B. Bradley [email protected]. Michael Ellingburg, [email protected]

OXFORD

DANIEL COKER HORTON & BELL, P.A.265 North Lamar BoulevardSuite ROxford, MS 38655-1396Tel: (662) 232-8979www.danielcoker.com

Larry D. [email protected]




28

NEW YORK

ALBANY

CARTER, CONBOY, CASE, BLACKMORE, MALONEY & LAIRD, P.C.20 Corporate Woods Blvd.Albany, NY12211-2350Tel: (518) 465-3484www.carterconboy.com

Michael J. [email protected]

NEW YORK (Litigation)

LESTER SCHWAB KATZ & DWYER, LLP120 BroadwayNew York, NY 10271-0071Tel: (212) 964-6611www.lskdnylaw.com

Dennis [email protected]

NEW YORK (Transactional)

SILLS CUMMIS & GROSS P.C.One Rockefeller PlazaNew York, NY 10020Tel: (212) 643-7000www.sillscummis.com

Jeffrey H. [email protected]

OHIO

CINCINNATI

DINSMORE & SHOHL LLP255 East Fifth St., Suite 1900Cincinnati, OH 45202-3172Tel: (513) 977-8200www.dinslaw.com

James A. [email protected] P. [email protected]

DAYTON

DINSMORE & SHOHL LLPOne Dayton CentreOne South Main Street, Suite 1300Dayton, OH 45402Tel: (937) 449-6400www.dinslaw.com

James A. [email protected]

OREGON

PORTLAND

COSGRAVE VERGEER KESTER LLP805 SW Broadway, 8th FloorPortland, OR 97205Tel: (503) 323-9000www.cvk-law.com

David [email protected] H. [email protected]



29

PENNSYLVANIA

HARRISBURG

MCNEES WALLACE & NURICK LLC100 Pine StreetP.O. Box 1166Harrisburg, PA 17108Tel: (717) 232-8000www.mwn.com

James P. [email protected] B. [email protected]

PHILADELPHIA

GERMAN, GALLAGHER & MURTAGHThe Bellevue200 S. Broad Street, Suite 500Philadelphia, PA 19102Tel: (215) 545-7700www.ggmfirm.com

William J. D’[email protected] F. [email protected]

SOUTH CAROLINA

COLUMBIA

NELSON MULLINS RILEY & SCARBOROUGH LLP1320 Main StreetMeridian Building, 17th FloorColumbia, SC 29201Tel: (803) 799-2000www.nelsonmullins.com

S. Keith [email protected]

SOUTH CAROLINA (CONT.)

GREENVILLE

NELSON MULLINS RILEY & SCARBOROUGH LLPPoinsett Plaza, Suite 900104 S. Main StreetGreenville, SC 29601Tel: (864) 250-2300www.nelsonmullins.com

A. Marvin Quattlebaum, [email protected]

TEXAS

AMARILLO

MULLIN HOARD & BROWN, L.L.P.500 S. TaylorSuite 800, LB 213Amarillo, TX 79101Tel: (806) 372-5050www.mullinhoard.com

Mark [email protected]

DALLAS

STRASBURGER & PRICE, L.L.P.901 Main Street, Suite 4400Dallas, TX 75202Tel: (214) 651-4300www.strasburger.com

Mark S. [email protected] F. [email protected]


[email protected]


30

TEXAS (CONT.)

HOUSTON

LORANCE & THOMPSON, P.C.2900 North Loop West, Suite 500Houston, TX 77092Tel: (713) 868-5560www.lorancethompson.com

Eric R. [email protected] J. [email protected]

SAN ANTONIO

BALL & WEED, P.C.10001 Reunion Place, Suite 600San Antonio, TX 78216Tel: (210) 731-6300www.ballandweed.com

J.K. [email protected]

VIRGINIA

RICHMOND

MORRIS & MORRIS, P.C.700 East Main Street, Suite 1100Richmond, VA 23219Tel: (804) 344-8300www.morrismorris.com

Philip B. [email protected] R. [email protected]

WEST VIRGINIA

CHARLESTON

ROBINSON & MCELWEE PLLC700 Virginia Street East400 Fifth Third CenterCharleston, WV 25301Tel: (304) 344-5800www.ramlaw.com

Joseph S. [email protected] J. [email protected] M. [email protected] C. Palmer [email protected]

CLARKSBURG

ROBINSON & MCELWEE PLLC140 West Main Street, Suite 300Clarksburg, WV 26301Tel: (304) 622-5022www.ramlaw.com

Richard W. [email protected] A. [email protected]

WISCONSIN

MADISON

WHYTE HIRSCHBOECK DUDEK S.C.33 East Main Street, Suite 300Madison, WI 53703-3300Tel: (608) 255-4440

Eugenia [email protected]

[email protected]


31

WISCONSIN (CONT.)

MILWAUKEE

WHYTE HIRSCHBOECK DUDEK S.C.555 East Wells Street, Suite 1900Milwaukee, WI 53202-3819Tel: (414) 273-2100www.whdlaw.com

Nathan A. [email protected] [email protected]

INTERNATIONAL

AUSTRALIA

ADELAIDE, SA

COWELL CLARKELevel 563 Pirie StreetAdelaide, SA 05000 AustraliaTel: 61-8-8228-1111www.cowellclarke.com.au

Robert L. [email protected]

BRISBANE, QUEENSLAND

TRESSCOX LAWYERSLevel 40, Central Plaza 1345 Queen StreetBrisbane, Queensland 4000 AustraliaTel: 011-61-7-3004-3500www.tresscox.com.au

Alistair [email protected]

MELBOURNE, VICTORIA

CORNWALL STODARTLevel 10114 William StreetMelbourne, Victoria 03000 AustraliaTel: 61-3-9608-2000www.cornwalls.com.au

Leneen [email protected] [email protected]



32

AUSTRALIA, CONT’D

PERTH, WESTERN

TALBOT OLIVIER LAWYERS40 The EsplanadeGPO Box 2569Perth, Western 6001 AustraliaTel: 61-8-9420-7100www.talbotolivier.com.au

Brendan [email protected]

SYDNEY, NEW SOUTH WALES

TRESSCOX LAWYERSLevel 20135 King StreetSydney, New South Wales 2000 AustraliaTel: 61-2-9228-9200www.tresscox.com.au

Antonia [email protected] [email protected] [email protected] [email protected]

AUSTRIA

VIENNA

LAW OFFICES DR. F. SCHWANKStock Exchange Building34 WipplingerstrasseVienna, Austria A-1010Tel: 43-1-533-5704www.schwank.com

Friedrich [email protected]

CANADA

TORONTO, ONTARIO

FASKEN MARTINEAU DUMOULIN LLPToronto Dominion Bank Tower66 Wellington St. West, Suite 4200P.O. Box 20Toronto, Ontario M5K 1N6 CanadaTel: (416) 865-4364www.fasken.com

Robert W. [email protected] [email protected]

INDIA

MUMBAI

KOCHHAR & CO.17th Floor, Nirmal BuildingNariman PointMumbai 400 021, Maharashtra IndiaTel: +91-22-66559701 / 66370031

Kamni S. [email protected] [email protected]

ITALY

ROME

Sinisi Ceschini Mancini & PartnersVia Pasquale S. Mancini 2Rome, Italy 00196Tel: 39-06-322-1485www.scm-partners.it

Vincenzo [email protected]



33

UNITED KINGDOM

LONDON

CHARLES RUSSELL LLP5 Fleet PlaceLondon, United Kingdom EC4M 7RDTel: 44-20-7203-5000www.charlesrussell.co.uk

John [email protected]

DISCLAIMER

The ALFA International Business Litigation Update is intended for informational purposes only and not for the purpose of offering legal advice or a legal opinion on any matter. This publication does not create an attorney-client relationship between the reader and any attorney nor does it render legal advice on any specific matter. No reader should act or refrain from acting on the basis of any statement in the ALFA International Business Litigation Update without seeking advice from qualified legal counsel on the particular facts and circumstances involved. Readers are responsible for obtaining such advice from their own legal counsel.

business litigation update · 2013-07-29 · the business litigation update is published on our...

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