Enforcing Restrictive Covenants in a Multistate Business Labor & Employment Educational Webinar Series Susan M. DiMickele, Partner Squire Sanders (US) LLP Labor & Employment Susan.DiMickele@squiresanders.com +1.614.365.2842 Jeffrey J. Wedel, Partner Squire Sanders (US) LLP Labor & Employment Jeffrey.Wedel@squiresanders.com +1.216.479.8767 Ryan A. Sobel, Senior Associate Squire Sanders (US) LLP Labor & Employment Ryan.Sobel@squiresanders.com +1.216.479.8489 37 Offices in 18 Countries
Before Litigation: Get Your Ducks in a Row This litigation can be Pandora’s Box • Avoid knee-jerk reactions Not all departing employees may be in violation Evaluate the situation based on upon real harm to business Presumably non-competes are used strategically, not for everyone If you elect to proceed, consider the following… • First: Stop the bleeding as much as you can Secure/limit access to employee’s company-issued electronic devices, networks, email If a current employee, put on administrative leave while investigating what s/he’s been doing – strict admonition of no customer/employee contact Get people in place to secure customer relationships 2
Get Your Ducks in a Row cont. • Second: Find out what is really going on Identify your issues (trade secrets, non-compete, etc.), and identify supporting facts (copied files, solicitation of customers, etc.) If you have to go to the Court, you’ll want to “show,” not “tell” – Judge may view employee at a disadvantage, and injunctive relief as extraordinary—you want compelling evidence , not argument – A TRO can set the tone for the rest of litigation—it’s a must-win Consider utilizing a computer forensics company, and quickly – What are you dealing with? What’s been taken, who’s/what’s at risk? – Is there a smoking gun? – Minimizes/eliminates the need for customer involvement » Involving a customer in litigation can negatively impact the relationship—the more evidence you can obtain, the less the need to involve customers directly – Internal IT vs. External Forensic Specialists » The latter are more expensive, but tend to be more sophisticated and capable— it might be worth the investment 3
Get Your Ducks in a Row cont. • Third: Weigh your options – is litigation the right course? Litigation ramps up quickly and is costly—you’re put to your proofs within weeks—so determine the right course before you set out Litigation can have unintended consequences – Negatively impact customer relationships – Negatively impact standing within industry, with customers or partners – Invalidation of a non-compete can impact multiple employees – Ties up personnel and resources, impacts business operations – This is as much a business decision as it is a legal decision On the other hand… – Failure to act to protect trade secrets or enforce non-competes can undercut legal basis for future protection – Employees may take notice that a coworker’s activities went unchallenged 4
Get Your Ducks in a Row cont. Embark on litigation for the right reasons, not as a bullying tool – Are you really harmed by an employee’s departure? – If s/he was a marginal employee, what makes you think s/he’ll be a threat with a competitor? Are there alternatives to litigation that can protect your interests? – Cease and desist letter » Pros – Could avoid expensive litigation if new employer wasn’t aware of restrictive covenant – Opens a dialogue to resolution – Sets up tortious interference claim – Puts employee/new employer on notice to preserve discovery » Cons – “Pound salt” response more likely – Could trigger a race to the courthouse for a declaratory judgment action in a different forum – impact forum selection clause – Potential for tortious interference claim, public policy violation in certain jurisdictions 5 – Negotiated resolution
Bringing Suit: Fast & Furious Enforcement litigation overview : 1. Temporary Restraining Order 2. Expedited Discovery 3. Preliminary Injunction 4. Additional Discovery 5. Permanent Injunction/Damages The TRO is a must-win : • If you can’t get an ex parte TRO, how likely are you to get a preliminary injunction in the face of opposition? • Sets the tone for litigation/settlement discussions The real battles are the TRO/preliminary injunction : • Not likely to win permanent injunction otherwise • Outcome of TRO/preliminary injunction hearing drives potential resolution • Can occur within two weeks of one another 6
Filing Suit Forum: Choose wisely… • File suit in the most favorable forum that bears a relationship to the employment or activity • Use choice-of-law/forum-selection provisions where possible, but… Forum selection clause unenforceable if the product of overreaching, if against public policy, or if unreasonable or overly burdensome Choice-of-law provision unenforceable if chosen state lacks substantial relationship, or application of its law is contrary to state with materially greater interest Courts can reach different conclusions as to enforceability on similar facts Wrong forum in state court can result in dismissal—in federal court you will simply get transferred You can find yourself in a jurisdiction you didn’t intend 7
Filing Suit cont. Forum: Choose wisely (cont.)… • Avoid California at all costs Non-competes/non-solicitations are unenforceable – Cal. Business and Professions Code Sec. 16600 – Edwards v. Arthur Anderson , 44 Cal. 4th 937 (2008) Can’t restrain competition/solicitation to protect misappropriated trade secrets – The Retirement Group, Inc. v. Galante , 176 Cal. App. 4th 1226 (2009) – You can get an injunction to prevent further use of trade secrets Can face liability if efforts to implement or enforce result in employee’s job loss – D’Sa v. Playhut, Inc. , 85 Cal. App. 4th 927 (2000) Choice-of-law/forum-selection provisions are unenforceable 8
Filing Suit cont. Forum: Choose wisely… (cont.) • Know your state… Some states regulate this area by statute, others by common law– stay on top of recent changes… – New Hampshire: New law (HB 1270) effective July 14, 2012, makes non- compete/non-piracy agreements unenforceable if not presented to employee before or at time of offer or change in position. – Georgia: New law (O.C.G.A. § 13-8-51 et seq.) effective May 11, 2011, makes restrictive covenants enforceable if reasonable. – Texas: Supreme court ruling makes enforcement under Tex. Bus. & Com. Code § 15.50(a) easier, by expanding scope of acceptable consideration. Marsh USA Inc. v. Cook , 354 SW 3d 764 (Tex. 2011). – Update choice-of-law/forum agreements, and support with consideration Is it a “blue pencil” state? Be aware of your potential bench • Ohio is generally a favorable forum Restrictive covenants are enforceable if reasonable Blue pencil state 9
Filing Suit cont. Other considerations: • Go after the new employer? Tortious interference – Business relationships – Employment relationship – Contractual relationship Anti-trust/fair competition claims Pros – Protect interests/relationships as much as possible – “Deep pocket” if there’s a case for money damages – Party to injunction rather than simply on notice – Discovery easier to obtain against a party 10
Filing Suit cont. Other considerations cont. : Cons – May not have come to employee’s defense but for being sued – Brings additional resources into fight – Added expense – Is there jurisdiction? – Draw customers into dispute? – Negative consequences within business community? • Criminal issues? Be careful: can’t use threat of criminal prosecution as leverage in civil litigation 11
Enforcement Procedure Federal Civil Rule 65: • TRO (may be ex parte ) Verified Complaint or Affidavit – Include separate motion or application – Also include: » Proposed TRO stating reasons, terms, activity restrained » Motion for appointment of special process server » Motion for expedited discovery Reasonable effort to notify defendant or counsel Effective for 14 days, unless extended by Court for another 14 days, or for longer time with defendant’s consent May be dissolved upon defendant’s motion and 2-days’ notice 12
Enforcement Procedure Federal Civil Rule 65 cont. • Preliminary Injunction Must be upon motion (serve with TRO application) and hearing Requires notice to adverse party prior to hearing Opportunity for expedited discovery prior to hearing Hearing is a mini-trial which must be held at earliest possible time • Permanent Injunction Adjudicated as a trial after full discovery Adjudicated with any claims for money damages • Most states have similar procedure, with some time differences E.g., Ohio follows federal rule (Ohio Civ. R. 65); California: court must hold preliminary injunction hearing within 15 days of TRO, or 22 days if for good cause (Code Civ. Pro. 527) Check your forum’s civil and local rules!!! Courts are sticklers on TRO/preliminary injunction rules. 13
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