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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

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””

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

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

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

Consideration - Topics

What consideration is sufficient?

What consideration is illusory and

therefore insufficient?

When is the sufficiency of

consideration measured?

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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).

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.


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.


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

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

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

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

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.

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).

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

More Trade Secrets/Confidential Info.

Negative Research

Recipes

Unique bundling or combination of well-

known concepts

Information on employees


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


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.”


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).

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.


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.


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).

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

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

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

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

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

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

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

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

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.

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.

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

47

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

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


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


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

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

RESTRICTIVE COVENANTS

Acceptable Consideration:

Pay, incentives, promotion

“Forebearance of dismissal”?

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

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

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

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

Q&A-Contact Our Speakers, Contributors:Q&A-Contact Our Speakers, Contributors:Mike G. ReineckeAccretive Solutions

[email protected]

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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