Noncompetes - PowerPoint Presentation

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Noncompetes & Trade Secret Protection: An In-House Counsel's Guide to a Big Year of Change

Presented by:Stephen Dellinger & Kevin Murphy

May 19, 2015Slide2

Stephen D. Dellinger

Shareholder

Littler Mendelson, P.C.

Charlotte Office

704.972.7010

sdellinger@littler.com

Presented by:

Kevin P. Murphy

Associate

Littler Mendelson, P.C.Charlotte Office704.972.7044kmurphy@littler.comSlide3

Be Prepared: Drafting for Success in Restrictive Covenant LitigationSlide4

Consider state law (which varies drastically from jurisdiction to jurisdiction)

Consider the legitimate interests involvedTailor to the position at issue Don’t be greedy!One Size Does Not Fill All When it Comes to Noncompete AgreementsSlide5

Plan for Implementation and Make Sure Consideration is Present

North Carolina allows for offer of employment to suffice for consideration upon hireHave a strategy for employees who refuse to signScript FAQs/Talking points ahead of roll-outConsider e-sigs carefullySlide6

Contracts Are Works in Progress

– Never Consider Them “Done”State law constantly changing/evolvingCompany’s business and/or geographic scope of operations may changeSlide7

Common Mistakes in Employee Restrictive Covenants Slide8

Mistake #1: Overbroad Geographic Terms in Non-Compete ProvisionGeographic and Temporal Restrictions will be considered in tandemAnalysis is very fact specific

area assigned to employee; area in which employee actually worked/operated;nature of the business; nature of employee’s duty and knowledge of employer’s business operationOutdoor Lighting Perspectives Franchising, Inc. v. Harders, 747 S.E.2d 256, 263 (N.C. Ct. App. 2013)North Carolina courts uphold restrictions nationwide in scope and invalidate provisions limited to a few statesSlide9

Drafting TipConsider “Russian Doll” format when drafting restrictive covenants Within (a) 100 miles; (b) 75 miles; (c) 50 miles; (d) 25 miles; and (e) 10 miles of employee’s

former office.Slide10

Drafting TipAvoid Check-off geography formsMany managers neglect to check each and every county or state that should be restricted

Resulting in the restricted area being left BLANKEmployee shall not compete in:____ Mecklenburg County____ Cabarrus County____ Iredell County____ Union County

____

Gaston County

____

Lincoln County

>Slide11

Mistake #2: Overbroad Temporal Terms in Non-Compete Provision

5 years or more will almost certainly be unenforceable3-5 years: high risk of being unenforceableConsider time frame for replacing departed employee and how long proprietary information remains freshAvoid Backward Looking TermsFor 1-year post-employment, no competitionwith customers who did business with us in last 2 years = 3 year

restriction

Farr

Associates, Inc. v. Baskin

, 138 N.C. App.

276, 280, 530 S.E.2d 878, 881 (2000)Slide12

Mistake #3 – Overbroad Restricted Activity in Non-Compete ProvisionGenerally, restricted activity should relate towork performed by employee;

and/or employee’s exposure to confidential, proprietary information/trade secretsRestriction should not prohibit against working for competitor in any capacity (i.e., the “Custodian Rule”)Should not prevent indirect ownership in any form (“direct or indirect”)Slide13

Balance is needed to avoid Janitor/Custodianproblem, while still accomplishing goalsToo NarrowDemand Letter will be ignored as former employee claims not to be doing prohibited duties

Too BroadLitigating will endanger your agreements with other employeesMistake #3 – Overbroad Restricted Activity in Non-Compete ProvisionSlide14

Mistake #4 – Overbroad Non-Solicitation ClauseGeography/TimeRemember the “look back” rulePrevious exposure to prohibited customers

North Carolina courts can go either wayProhibited customers must have been with company when employee departed Exception: prospective customer for which employee was involved/learned confidential informationSlide15

Drafting TipFor best chance at enforceability, Connect prohibited customers to:

those employee was responsible for relationship with; at time of departureThese are the ones theemployee is most likely to reach out to anywaySlide16

Mistake #5: Lack of ConsiderationEmployee does not agree to restrictive covenants at inception of employmentcontinued employment for

guaranteed period (i.e. departing from at-will);a raise, bonus, stock or other change in compensation;a promotion or some other increase in responsibility; &additional trainingHejl v. Hood, Hargett & Associates, Inc., 196 N.C. App. 299, 304, 674 S.E.2d 425, 428-29 (2009)In North Carolina, continued employment is not sufficient consideration if employee remains at-willSlide17

Drafting TipRecite start date in non-compete agreement to remove questions about whether agreement was signed at inception of employmentSlide18

Mistake #6 – Agreements are not updated with employee transfers or promotionsExample: consider effect of a geographic provision when employee has been transferred from smaller region to larger regionHigher the role in the company, the more lenient court will be

with broad restrictionsSlide19

Mistake #7 – Restrictions are not neatly divisibleNorth Carolina Blue-pencil rule limits judicial contract reformation to striking divisible portions of agreementSlide20

Drafting TipInclude a provision authorizing the Court to modify the agreement to save it from overbroad or

unreasonable restrictionsReformation (Rule of Reason States)The parties intend for the courts to enforce this covenant after modifying it to the extent necessary to protect the employer’s interests without imposing undue hardship on the employeeSeverability (Blue Pencil - NC)if one clause or section of the agreement is found to be unenforceable, the parties intend for the remaining provisions to be enforced as written.Slide21

Mistake #8:Contract is Not AssignableNon-Assignment clausesRoutine in other contracts, but displace employer protections with non-competes

Asset purchase v. Stock AcquisitionStock AcquisitionsBuyer steps into shoes of original employerAsset PurchaseBuyer has right to enforce non-compete as of the date of sale (if part of sale), but does not step into shoes of target company Covenant Equip. Corp. v. Forklift Pro, Inc., No. 07CVS 21932, 2008 WL 1945973, at *9 (N.C. Super. May 1, 2008)Slide22

Mistake #9: No Tolling Provision/Overbroad Tolling ProvisionWithout Tolling Provision, restricted period is likely to expire before litigation is over

Should be tied to period of noncompliance or litigationSlide23

Mistake #10: Not Signed or Dated

Consider mention of non-compete agreements in offer letterInclude Date on Signature PageSlide24

Mistake #11: No Choice of Law or VenueState law differs dramaticallyagreements are carefully crafted to comply with a specific state’s lawsSelect Venue as wellEven if state law is chosen,

foreign courts often preferto apply their own law andmay hold that foreign lawviolates their public policy ifit differs from their ownSlide25

But Hiring Him Seemed Like Such a Good Idea at the TimeSlide26

Clear understanding of what the candidate requires

Can she come aboard without exposing the company to risk?Assess costs/benefits if risk existsIf risk exists, is there a reason to relocate the employee?Preemptive lawsuitDos and Don’ts for Hiring Someone With a Restrictive Covenant

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Clear Understanding of New Employer’s RisksDamagesAttorney’s fees

Does former employer sue departing employees Is new employer intending to restrict the candidate with a covenant similar to that of former employer?Dos and Don’ts for Hiring Someone With a Restrictive Covenant

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Provide employee and hiring execs with clear instructions/expectationsNo taking information/property of former employersNecessity of representations to new employer

Evolution of employee responsibilitiesSeparating on the best possible terms/no misrepresentationsDiscerning when the soon-to-be former employer is readying to sueKeeping new employer informed about little thingsDos and Don’ts for Hiring Someone With a Restrictive Covenant

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Offer letter/employment agreement should include the following:Employee represents that he is not violating any commitment to any previous employerEmployee represents that he has not taken any information or property of any former employer

Memorialize the employee’s position at the new employer if it minimizes the competitive impact relative to the former employerFor X months/1 yearOffer letter onlyDos and Don’ts for Hiring Someone With a Restrictive Covenant

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Dos and Don’ts for Hiring Someone With a Restrictive CovenantCircumstances under which new employee should communicate with former employer at the outset

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Reconciling new employer’s restrictive covenants with avoidance of previous employer’s restrictions

Tailor restrictions to be consistent with litigation positionUse of standard restrictions may compromise litigation positionDos and Don’ts for Hiring Someone With a Restrictive Covenant

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Response to cease and desist letters

Reply or not?Carefully crafted replyDon’t leave the reply for the operations folksDos and Don’ts for Hiring Someone With a Restrictive Covenant

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Pre-litigation negotiationsDos and Don’ts for Hiring Someone With a Restrictive Covenant

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Dos and Don’ts for Hiring Someone With a Restrictive Covenant

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Facts, facts, facts….the facts are probably determinativeSlide35

Dos and Don’ts for Hiring Someone With a Restrictive CovenantSometimes (hopefully not often) it may be necessary to cut bait

Misrepresentations made by new employeeExecution inconsistent with what was strategized

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Litigating Restrictive Covenant Cases for Maximum Success

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Hero v. Villain – Importance of Theme

in Covenant CasesCases turn on equity—balancing of competing interestsMalleable and vague legal standards often get applied against the “bad actor”Employee vs. Employer themesSlide38

Computer Forensics

– Small Upfront Investment/Big Evidentiary DividendsE-mail and computer forensic evidence critical in most covenant and trade secret casesKnow your IT/back-up capabilities/policies/chain of custody so company can quickly obtain and review key evidencePhase 1—review of e-mail on servers/back-upPhase 2—forensic examination

of computers and electronic

devicesSlide39

Credibility – Be Careful with Affidavits and Verified Pleadings in Covenant Cases

Credibility with the judge/jury is paramountCarefully vet affidavits/verified complaints/say minimum possible in sworn statementsDon’t claim a document is a trade secret when it is on the company website or handed out at a trade showSlide40

Damages v. Injunction (what is real damage v. cost)Setting example for other employeesEffect on customers—will customers resent you suing their former favorite sales person and take other business/hate being involved and pull businessEffect on executive time/company resources

Effect on enforceability of company’s own covenantsAttorneys’ fees—can you get them or will you have to pay other side’s?General Strategy ConsiderationsSlide41

Questions?Slide42

Best Practices for Employment

and

Noncompete

Agreements

and Protecting Trade Secrets

Stephen D. Dellinger

Shareholder

Littler Mendelson, P.C.

Charlotte Office

704.972.7010sdellinger@littler.com

Kevin P. Murphy

Associate

Littler Mendelson, P.C.

Charlotte Office

704.972.7044

kmurphy@littler.com