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ASSERTING AND OVERCOMING
NON-COMPETE
AGREEMENTS ACROSS THE STATES
AND IN CANADA
November 15, 2006November 15, 2006
Presented byPresented by
Association of Corporate Counsel
www.acca.com
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Moderator
Mike G. Reinecke, Vice President and General Counsel
Accretive Solutions
Panel
William E. Pilchak R. Scot HarveyPilchak Cohen & Tice, P.C. Millisor & Nobil
Worklaw Network, Michigan Affiliate Worklaw Network, Ohio Affiliate
Bill C. Berger Daniel J. McKeownStettner Miller, P.C. Sherrard Kuzz, LLPWorklaw Network, Colorado Affiliate Worklaw Network, Ontario Affiliate
Contributing EditorRichard M. Escoffery, Partner
Elarbee, Thompson, Sapp & Wilson LLPWorklaw Network, Georgia Affiliate
Worklaw Worklaw Network is the proud sponsor of the Network is the proud sponsor of the ““General CounselGeneral Counsel’’s Executive Summary ofs Executive Summary ofEmployment Law in the 50 StatesEmployment Law in the 50 States”” Info-pak Info-pak available at available at ““accaacca.com.com””
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IntroductionProgram: An “Advanced Course” on non-competeissues in the U.S. & Canada
At left of screen areLinks to:
Evaluation forms
Speaker Biographies
A PDF file of the slides
Websites: Worklaw® Network and Speaker’s firms
A “Chat” box where attendees may type questions to thespeakers
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Introduction, continued
Information age + Service economy =
increased importance in protecting
confidential information and customer
relationships
Common law + Rule of reasonableness +
Equitable Principles = Judicial discretion
Therefore: Prepare, plan, strategize
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Covenants Not To Compete: Consideration, Signatures,Covenants Not To Compete: Consideration, Signatures,
Scope and RemedyScope and Remedy
Bill C. Berger1050 17th St., Suite 700
Denver, CO 80265-2008
(303) 534-0273
(303) 534-5036
Stettner Miller, P.C.
Worklaw Network Colorado Affiliate
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Consideration - Topics
What consideration is sufficient?
What consideration is illusory and
therefore insufficient?
When is the sufficiency of
consideration measured?
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Sufficient ConsiderationAs a practical matter, courts frequently look forthree things in consideration:
Something of real significance to the employee
Preferably, that assists in his or her careerdevelopment, and,
That is related toa. The employer’s proprietary interests, especially its trade
secrets, as well as,
b. The underlying reason for the covenant.
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Example of Sufficient
Consideration
In consideration for signing a covenant, the
employee is
Promoted to a management position,
Given a significant raise, and,
Begins working with the very trade secrets thatthe covenant protects.
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Illusory ConsiderationSee pp. 3-4 of outline
Is continued (esp. at-will) employment, sufficientconsideration?
Some courts hold that if all the employee receives is
continued employment, especially continued at-will
employment, then he has received nothing;
Some courts hold continuation of at-will employment
suffices;
Some courts cite statutes which allow modification of
contracts without consideration, if in a signed writing.
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When is consideration measured?
Not all jurisdictions have addressed this issue,and those that have, do not agree.
Generally, the courts measure the sufficiencyof consideration at or shortly after thecovenant was signed.
A recent Texas case, Sheshunoff, illustrates howsome courts are willing to measure it as late aswhen the covenant is enforced.
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Alex Sheshunoff Mgmt. Services, L.P. v. Johnson
See p. 3 of the outline
Illustrates principles associated with consideration
The Texas statute expressly required that considerationexist “at the time the agreement was made.”
A prior Texas case, Light, held that continued at-willemployment was insufficient, illusory consideration.
Otherwise an employer could obtain a covenant by promisingtraining, refuse to provide the training, terminate the at-will
employee, but still enforce the covenant.
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Exceptions recognized in Light
& Sheshunoff
The promise is not illusory and sufficientconsideration exists if the employer promises toprovide the training even after termination.
Sufficient consideration exists if the employeractually provides the training before the individual’semployment ends.
Then, although the promise itself was illusory, it has beenperformed, and the employee has actually received thebenefit of the bargain.
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Will courts follow Sheshunoff?
The case was apparently difficult for the court. It
was argued and submitted in 2004, took the Courttwo years to reach decision, and even then, with amajority and two concurring opinions.
By trial, the individual was working for acompetitor where he had signed another, morerestrictive covenant. But the employee testifiedthat he thought it was reasonable and enforceable.
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Consideration TipsDo not rely on continued at-will employment as the
only consideration for a covenant.
After each major promotion or the like, employees
should resign covenants.
As soon as practical after signing a covenant, the
employee should actually receive the training and other
job opportunities contemplated by the covenant.
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Must covenants be written & signed?
Obviously, covenants should be written and signed
But where the writing is missing from the personnelfile or the party neglected to sign the document, see:
Phone Connection v Harbst- Incorporator/officer was bound by theagreement signed by other incorporators, but not by him, becauseassent may be manifested by acts;
ADIA v Sansone- Though customer of temporary employmentagency never signed formal contract, signing/approving time cardswith fee for hire provisions made for an enforceable contract;
And, where courts adopt the inevitable disclosure rule, tradesecrets agreements become defacto restrictive covenants.
Pg. 4 of Outline
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What contracts are subject to the laws
regarding covenants not to compete.See p. 4 of outline
Depends on a state’s law.Certainly actual covenants not to compete.
Possibly,No-raiding clauses protecting customers.
No-raiding clauses protecting employees.
Non-disclosure agreements that restrain an individual’s ability towork.
Contracts that require an employee to pay a fee for customers taken.
No-hire agreements between companies.
When analyzing, focus on the practical impact of theagreement on the individual’s ability to compete.
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What is a reasonable term
(duration)?See outline pp. 6-7.
Covenants must be reasonable as to time and place.
Generally two years is not problematic; 3-5 yearshave been sustained.
But the real test is how long the company’s interestsactually need to be protected.
Example: In cases of high customer turnover,
that might be as short as days or weeks.
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What is a reasonable geographic
limitation?See outline pp. 7-8.
Again the touchstone is the employer’s protectableinterest.
Is a world-wide scope reasonable?
The issue is becoming increasingly significant in
technology-based industries.
Courts have begun to recognize this as a possibility.
See outline p. 9, point II(G)(4).
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What remedies are available for
breach of a covenant?Injunctive relief Outline P. 19
When considering whether to try to enforce acovenant, expect that, except in rarecircumstances, a company should seek immediateinjunctive relief.Failure to do so can be viewed as a failure tomitigate or even a waiver.Failure to do so may also jeopardize thecompany’s credibility in the eyes of the court andthe opposing parties.
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What remedies are available for
breach of a covenant?
Damages Outline p. 32
Lost profitsMust the plaintiff show it would have made the sale?
And/or disgorgement of the competitor’s ill-gottengains.
Sufficiency of damages argues against injunction.
TIP: Discovery in these cases often involves the needfor protective orders and other measures as the partiestry to discover aspects of each other’s trade secrets,employment practices and even profits.
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What remedies are available for
breach of a covenant?Attorney Fees Outline p. 33
Absent an attorney fees clause in the covenantor a statute, attorney fees are normally notavailable.
Available to the prevailing party.
Success in obtaining injunction generally suffices.
Declaratory relief may not suffice
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THE PROTECTABLE
INTEREST
R. Scot HarveyMillisor & Nobil Co., L.P.A.
9150 South Hills Blvd., Suite 300
Cleveland, Ohio 44147
(440) 838-8800
www.millisor.com
Worklaw Network Ohio Affiliate
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THE PROTECTABLE INTEREST
To enforce a restrictive covenant, the
employer must establish that it has a
legitimate business interest(s) and that
enforcement of the covenant is necessary to
protect this interest(s).
The covenant will be enforced only to the
extent necessary to protect the employer’s
legitimate business interest(s).
Outline pp. 8-9
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Types of Protectable Interests
The two that are invoked most often:
Trade secrets/confidential information.
Good will based on customer relations.
Others:
Unique services.
Specialized/extraordinary training.
“Disintermediation” (leased employees).
Outline pp. 10-17
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Trade Secrets/Confidential Information
The Uniform Trade Secrets Act – two
elements:
Information that derives independent economicvalue from not being readily ascertainable by
proper means by others.
Reasonable steps have been taken by theemployer to protect the secrecy of theinformation.
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Trade Secrets/Confidential Information
(cont.)
Confidential Information
Depending on the state, it may be easier to prove
information is confidential than it is to prove it isa trade secret.
E.g., Ohio – “Known only to a limited few, not
publicly disseminated.”
Can be defined by agreement (e.g.,
confidentiality/nondisclosure agreement).
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Trade Secrets/Confidential Info. (cont.)
Types of trade secrets/confidential information:Financial information (e.g., profit/loss, pricinginformation, cost structures, billing rates).
Supplier information (e.g., which supply the best product).
Manufacturing/production processes.
Sales/marketing strategies.
Customer lists (where customer identities are not readilyascertainable from other sources).
Customer information (contact information; informationregarding wants, needs and preferences).
Outline pp. 10-12
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More Trade Secrets/Confidential Info.
Negative Research
Recipes
Unique bundling or combination of well-
known concepts
Information on employees
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Trade Secrets/Confidential Info. (cont.)
The “Inevitable Disclosure” Doctrine.General statement of doctrine: A threat ofirreparable harm of disclosure or use of tradesecrets/confidential information exists warrantingan injunction against competitive employmentwhere the former employee has knowledge ofhis/her former employer’s trade secrets and/orconfidential information and has commencedemployment with a competitor in a position that issubstantially similar to his/her position held withthe former employer.
Outline pp. 12
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Trade Secrets/Confidential Info. (cont.)
PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995).Did not involve a restrictive covenant.
Claims - misappropriation of trade secrets, breach ofconfidentiality agreement.
Since Trade Secrets Act permits injunction barringthreatened disclosure/use of trade secrets, competitiveemployment can be enjoined if it poses threat ofdisclosure/use of trade secrets, regardless of employee’sgood faith intent.
“PepsiCo finds itself in the position of a coach, one ofwhose players has left, playbook in hand, to join theopposing team before the big game.”
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Trade Secrets/Confidential Info. (cont.)
Despite PepsiCo, courts will rarely enjoin competitive
employment in the absence of an enforceablerestrictive covenant. However, courts areincreasingly picking up on this doctrine in thecontext of restrictive covenants.
Proctor & Gamble v. Stoneham, 140 Ohio App.3d 260,747 N.E.2d 268 (Hamilton Cty. App. 2000).
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Good Will Based on Customer
Relationships Outline pp. 14-16Outline pp. 14-16
Where the former employee has developed relationships withthe employer’s customers, a restrictive covenant can beenforced without a showing of trade secrets or confidentialinformation.
The restrictive covenant will often be enforced only withregard to customers with whom the former employee has arelationship; but:
Some courts prohibit competition within former territory
On rare occasions, courts prohibit competition if the employee wasreasonably anticipated to cover the territory.
Prohibition against doing business with all customers isoverbroad, unless the employer can show the employee is athreat to disclose/use trade secrets or confidentialinformation.
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Good Will Based on Customer
Relationships (cont.)Two types of covenants:
Covenant not to compete (i.e., barringemployment with competitors).
Difficult to enforce if no tradesecrets/confidential information are involved.
Non-solicitation covenant.Much easier to enforce.
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Good Will Based on Customer
Relationships (cont.)
Non-solicitation Covenants:
Geographic scope – generally irrelevant.
Duration – some courts will measure it by howlong it will take a replacement employee todevelop relationships with the customers (e.g., bydemonstrating his/her effectiveness to them).
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Attacking, Overcoming
Non-Compete Agreements
William E. PilchakPilchak Cohen & Tice, P.C.
3026 East Walton Blvd.
Auburn Hills, Michigan
(248) 409-1900
www.MI-EmploymentLaw.com
Worklaw Network Michigan Affiliate
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Procedural/Quasi-Procedural Attacks
The Employment Agreement Contains An
Arbitration Clause;
The Agreement Is With A Predecessor, AndIs Not Assignable
The “Employer” Is Defunct
The Employer Has Delayed In Seeking An
Injunction
Outline pp. 22-24
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Defenses Arising From TheDefenses Arising From The
Contract orContract or Other Contracts
Later Agreement With Less Onerous Covenants
May Supersede Former As A Matter of Law
Later Agreements with Less OnerousCovenants Confess: Less Protection Suffices
If Higher-ups Have No Agreement, Protection
Must Not Be Necessary
There Is A Collective Bargaining Agreement
Outline pp. 24-25, 31
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Restraint of Trade Arguments
The Agreement Restrains Ordinary
Competition & Use of Skills Acquired
The Position Is Not Worthy of Protection
An Improper Business Interest Is Asserted:
Protecting Against Turnover
Retaining Employees To Recoup Recruiting Costs
Outline pp.25-26, 18-19
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Attacks on Confidentiality of
Information Protected
The information has been disclosed in:
Trade journals
Patents (and copyrights?)
Litigation
SEC filings
Websites touting “our customers”
Commission statements listing customers
Outline pp. 26-7
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More Attacks on Confidentiality
The Company allows plant tours
The Company has failed to require non-disclosureagreements or non-competes of all
The information can be culled from other sources (butis it “readily accessible?”)
Employees have been allowed to work from homeand access and print all info remotely
The company requires employees to use their personalcell phones, and contact info is stored there
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Attacks On Customer Relationship
Interest
The employee has no influence over the customer
The customer relationship is not of the sort thatrequires protection:
Glass shop manager
VP of Operations
Funeral Home Director
Leased employees
The employee brought the customer to theemployer
Outline pp. 28-29
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More Customer Relationship
Interest Arguments
The customers followed the employee without
solicitation- “They had my cell number.”
The employer would not be doing the work anyway
The new employer is not a competitor
Different plants, business units of large company
Different marketing plans
Different types of similar products
The new employer sells product, service to the former
Outline pp. 30
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The Restraint Is Not “Necessary”
“Industry” proclamations re: free movementAttorney ethical provisions
American Medical Association
American Staffing Association
Encompasses concepts discussed above:New employer is not a competitor,
Absence of non-competes with higher-ups
Extends beyond reasonable business interest, etc.
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Defenses That Key On Remedies
An injunction would serve no purpose, as the
employer has already lost the business;
Money damages suffice- eg: Only a single customeris at issue;
Damages & Unjust Enrichment = net profits only;
Arguably, employer must prove it would have made the
sale/done the business.
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Restrictive Covenants in Employment Contracts:
an Overview of Canadian Law
Daniel J. McKeownNovember 15, 2006
155 University Ave Suite 1500
Toronto, Ontario Canada M5H 3B7
Tel 416.603.0700
Fax 416.603.6035
24 Hour 416.420.0738
www.sherrardkuzz.comWorklaw Network Ontario Affiliate
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EMPLOYMENT CONTRACTS Outline p. 34-36
All employees in Canada have a contract of
employment
Employment contracts in Canada consist ofterms and conditions that are implied or
express
Distinction exists between “fiduciaries” and
“mere employees” with respect to implied
terms and conditions
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IMPLIED TERMS IN CANADIAN
EMPLOYMENT CONTRACTSFiduciaries:
“Disqualified from usurping or diverting to another, amaturing business opportunity”
Honestly, and in good faith, advancing employer’s best
interests
Cannot enter into engagements in which they have apersonal interest
Cannot solicit former employer’s customers/employees
for a reasonable period post employment
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IMPLIED TERMS IN CANADIAN
EMPLOYMENT CONTRACTS
Who is a ‘fiduciary’?
Scope for the exercise of discretion or power
May unilaterally exercise that discretion or powerto affect beneficiary’s legal or practical interests
Beneficiary vulnerable to fiduciary holdingdiscretion or power
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IMPLIED TERMS IN CANADIAN
EMPLOYMENT CONTRACTS
Non-Fiduciaries
Usually not “top management”
Subject to implied terms: to act honestly andfaithfully in the course of employment; respecttheir employer’s business interests; and, not useconfidential information or trade secrets,acquired during employment, for profit againstformer employer
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EXPRESS TERMS/RESTRICTIVE
COVENANTS
Consideration Outline pp. 36-37
Issue doesn’t usually arise if restrictive covenant is part of
original hiring documentation
Problems arise where employer purports to require an
employee to execute an agreement containing restrictive
covenants after employment commences
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RESTRICTIVE COVENANTS
Acceptable Consideration:
Pay, incentives, promotion
“Forebearance of dismissal”?
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Restrictive Covenants
Party seeking to enforce must satisfy a three-part
test:
covenant must protect a legitimate proprietary interest
covenant must be reasonable … breadth of activities,geographic scope and duration
covenant must not be contrary to the public interest
Outline pp. 37-38
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Clarity and Severance Rules
Clarity = restrictive covenant must be clear and
unambiguous
Severance = Court may sever a portion of acovenant if doing so would not render remainingaspects unclear
Canadian Courts tend to strike and do not “bluepencil”
Outline pp. 38-39
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RemediesInjunctions Outline pp. 39-40
Moving party must show:
– strong ‘prima facie’ case
– would suffer irreparable harm if injunction not granted
– balance of convenience favours granting the injunction
Damages
Calculate loss suffered by the employer
or
Calculate gain acquired by the employee
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Canadian Jurisprudential
TrendsCourts do not like restrictive covenants in
employment (i.e. void as restraint of trade)
Courts will not enforce a non-competition clauseif a non-solicitation clause would suffice
Expansion of scope of individuals who aresubject to fiduciary duties
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Q&A-Contact Our Speakers, Contributors:Q&A-Contact Our Speakers, Contributors:Mike G. ReineckeAccretive Solutions
Bill C. Berger R. Scot HarveyStettner Miller, P.C. Millisor & NobilWorklaw Network, Colorado Affiliate Worklaw Network, Ohio Affiliate(303) 534-0273 (440) 838-8800
[email protected] [email protected]
William E. Pilchak Daniel J. McKeownPilchak Cohen & Tice, P.C. Sherrard Kuzz, LLPWorklaw Network, Michigan Affiliate Worklaw Network, Ontario, Canada, affiliate(248) 409-1900 (404) 659-6700
[email protected] [email protected]
Richard M. Escoffery, Contributing EditorElarbee, Thompson, Sapp & Wilson LLP
Worklaw Network, Georgia Affiliate(404) 659-6700
[email protected] WorklawNetwork.com
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