Non-Competition

May 18, 2023

Absence of Competitive Advantage – The First Line of Defense to Trade Secret Lawsuits

The touchstone of a trade secret is that it provides the owner of the information with a competitive advantage in their market.
Courts look at the cost of development, the difficulty in duplicating and measurable benefits to ascertain whether a bona fide trade secret exists.
The first step in the defense of a trade secret is to examine whether there is real economic value to keeping the information secret.

Trade secret laws, much like other types of intellectual property law, always have the potential to limit competition and restrict employee mobility. The result is that trade secret law can be used as a means to try to carve out a market space. Those cases, however, may involve benign information that is difficult to classify as a trade secret.

The first issue in the defense of any claim for misappropriation of a trade secret is to figure out if there is really a trade secret at issue, whether the claim is brought under the federal Defend Trade Secrets Act (DTSA), a state Uniform Trade Secrets Act (UTSA) (from which the DTSA was derived) or state common law.

The UTSA has now been enacted every state except New York and Virginia, as well as the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Continue reading

January 24, 2023

FTC Ban on Non-Competes Would Have Major Impact on Closely Held Businesses

by Jay R. McDaniel, Esq.

The Federal Trade Commission is considering an administrative rule that would enact a broad ban on non-compete agreements that would prohibit contracts that restrict the employee from working for a competitor or starting a competing business.
The rule would also apply to ‘de facto’ non-competes, such as non-solicitation agreements, that have the effect of limiting a worker’s activities after employment.
The proposed rule will likely have a negative impact on the competitiveness and value of closely held businesses. Non-competes in equity transactions would be prohibited unless the equity stake involved is at least 25 percent.

A proposed rule pending before the Federal Trade Commission would bar noncompete agreements across-the-board, and in a way that could bring some very profound changes to the business climate in this country. If it is adopted in its present form, it likely will have a direct effect on the value of the investments of business owners in their own businesses and make the smaller, privately held business less competitive.

This proposed rule is a big shift in resources from business owners to the employees. It is something to watch and understand because of the effect it is likely to have if the proposed rule is adopted in its present form. It’s controversial and has already run into opposition from the U.S. Chamber of Commerce.

October 1, 2022

Anatomy of a Business Divorce Lawsuit

by Jay R. McDaniel, Esq.

- A business divorce is the process by which the owners of a business separate their business interests. The process involves negotiation and may also require litigation.
- These cases can be divided into four phases: the emergent phase, the examination phase, the valuation phase and the resolution phase.
- Most owner lawsuits end in a negotiated transaction because it gives the parties more flexibility over the manner in which the case is resolved.

We’re going to look at business divorce in terms of the four phases that the typical case goes through from its start to the time that is resolved, either through settlement or trial.We should start with the most basic definition of what is a business divorce. I use the term to describe the process by which people who were in a business together disentangle themselves. Continue reading

June 9, 2021

Non-Solicitation Agreement May Be Enforceable Against Former Attorney

by Jay R. McDaniel, Esq.

An agreement prohibiting a former associate of a law firm from competing with his former employer within 90 miles of New York City was void and unenforceable.
Solicitation of the clients of a law firm by a former associate may be actionable, even if a potential restriction on practice, in limited circumstances.
The rule of professional conduct that precludes restrictions on practice will not bar a claim against a former non-lawyer employee.

March 23, 2021

Pharma Exec Bound by Restrictive Covenant After Sale

by Jay R. McDaniel, Esq.

Key employees of a company may be bound by restrictive covenants that are included in an agreement to sell the entity, but do not reference them individually.
A court should consider whether the restrictive covenant of a key employee was a significant element of the transaction and necessary to protect the good will of the business.
Restrictive covenants that are given in connection with the sale of a business may be broader than those given by an employee to an employer, and are more likely to be considered reasonable if they were an aspect of the transaction.

In some circumstances, an executive who received a portion of the proceeds of the sale of a business may be bound by the restrictive covenants that were part of the deal, even if he had not negotiated the covenant individually with the purchaser in a decision involving a pharmaceutical rebate company. drugs-2170816_1920-1024x576

The decisions we consider here frame an often relevant distinction between a restrictive covenant that is part of the sale of the business and a restrictive covenant that is part of a purely employment relationship. Here, the time period applicable to the restriction was three years, which may have been unenforceable against an employee but was reasonable when it was part of a sale of the business in which the defendant benefitted personally.

Executive with ‘Bonus on Sale’ Agreement

The defendant in this decision was James Larweth, an executive in the pharmaceutical rebate business, in which drug companies compete to have their products included on lists of preferred medications. Insurance companies receive rebates and engage pharmaceutical benefit management companies. The executive worked in an even narrower area of the business, “carve out” pharmaceutical rebates. Continue reading

March 16, 2021

Restrictive Covenant Term Tied to Vesting Schedule is Not Reasonable

by Jay R. McDaniel, Esq.

A restrictive covenant that is in force during a vesting period for securities granted as part of an employee incentive program may present an issue for enforcement, if not tied to to the protection of an employer’s legitimate interest.
A court considering a preliminary injunction request blue-penciled the duration of a covenant not to compete or solicit customers to base the time period on termination, not the vesting period for stocks and options sought by the former employer.
The duration of a restrictive covenant may not be reasonable if the duration is not tied to the former employer’s protection of a legitimate interest.

Restrictive covenants that were tied to the vesting and exercise schedules pf securities awarded through United Healthcare’s employee incentive programs were not reasonable, a federal court held recently. The court then limited the duration of the time when a former employee would be restricted from competing with or soliciting the company’s customers. binding-contract-948442_1920-1024x683

The case involved a former executive, Jeffrey Corzine, who worked in strategic marketing for United in its program offered as an option in Ohio’s Medicare program. Corzine was terminated by United in a corporate reorganization and then went to work for a competitor, Humana, Inc., during the time that both companies were competing under a Request for Applications (RFA) for contracted Medicare services. The case was before a federal district judge on United’s application to secure a preliminary injunction. Continue reading

March 2, 2021

Restrictive Covenant Legislation Limits Enforceability of Agreements

by Jay R. McDaniel, Esq.

Restrictive covenants that limit the ability of former employees to compete have been the subject of legislative limits in a number of states, including Maine, Maryland, Massachusetts, New Hampshire, Rode Island, Virginia and Washington.
Bills that would limit the enforceability of restrictive covenants in New Jersey have been introduced into the legislature since 2017 but have failed to be adopted.
Legislative restrictions on agreements not to compete may require minimum compensation, restrict the geographic scope and time frame of the agreement and prohibit courts from “blue penciling” unreasonable restrictive covenants rather than refusing to enforce them entirely.

Restrictive covenants continue to be disfavored or limited by legislatures in a number of states. New Jersey is among the states in which no legislative action has been taken to limit the types of employees that may be subject to restrictive covenants or the scope agreements not to compete. Bills that would limit the enforceability of restrictive covenants have been introduced in the New Jersey legislature since at least 2017 without gaining adoption. (See Assembly Bill 1650) time-731110_1920

The Illinois legislature this week advanced legislation that will limit the enforceability of restrictive covenants against many former employees earning $75,000 or less and set limits for enforceability. These statutory limitations on the enforceability of restrictive covenants are becoming more widespread. Continue reading

February 25, 2021

Share Purchase for $500,000 Required in Accounting Firm Breakup

by Jay R. McDaniel, Esq.

Accounting firm is compelled to repurchase the equity of departing shareholder who moved practice to competitor firm.
A shareholder agreement that is integrated and intended to be the parties’ complete agreement may preclude a claim for breach of corporate by-laws.
A shareholder in an accounting firm organized as a professional corporation did not breach any fiduciary duties by negotiating with a competitor and disclosing general information about his and the firm’s practice, even if he was to be compensated based on the clients who followed him to his new employer.

For 22 years Robert Dick worked in a growing accounting firm before he left for a competitor, taking with him a number of clients. Before giving his resignation, however, Dick put together an estimate of his billings and a description of his client base, although apparently not providing any details on client identify. This discussion – common in a professional move – was one of the principal defenses to a lawsuit that Dick brought to compel his former employer to repurchase his Acountant share repurchase shares.

Resignation of Account from Professional Corporation

Dick was a 30 percent shareholder in Koski Professional Group, P.C. who had built a following among health care clients, having purchased shares in the professional corporation on multiple occasions since 2005. In 2015 he moved his practice to a competitor, Bland and Associates under an arrangement in which he received base compensation plus a percentage commission on his client’s billings. At the time of his departure, Dick was one of four owners. He was followed by a number of clients, leading to the litigation and ultimately an appeal to the Nebraska Supreme Court. (Opinion here) Continue reading

February 17, 2021

United Health Care Rebuffed on Injunction Request

by Jay R. McDaniel, Esq.

Although a former executive was bound by a restrictive covenant, the fact that his duties after joining a competitor were directed to a different market made the scope of the restrictions unreasonable.
A restrictive covenant that is not narrowly tailored to protecting specific interests of the former employer at stake in a lawsuit is less likely to be enforced with a preliminary injunction.
A company that relies on the inevitable disclosure doctrine faces a high hurdle to show the certain use of a trade secret in a competitive manner.

An attempt by United Health Care to block an executive from joining a competitor failed when a federal judge found the medical insurance and services company had failed to establish it was likely to succeed when the case goes to trial. The dispute identifies some of the steps that a new employer take to prevent its just-hired employee from running afoul of a restrictive covenant.

The defendant Carlos Louro in this this case, United Health Care v. Louro, was an executive supervising the underwriting of national accounts at United. He had recently been promoted to vice president and served on a high-level, national accounts strategy group. He had also received stock options and restricted stock awards, which contained restrictive covenants and non-disclosure provisions..

The trial court construed Louros agreements with United that and restricted him from:“[e]ngag[ing] in or participat[ing] in any activity that competes, directly or indirectly, with any Company activity, product, or service that [Louro] engaged in, participated in, or had Confidential Information about during [Louro’s] last 36 months of employment with the Company” or assist anyone in any of those activities for one year after Louro’s termination of employment.” Continue reading

February 11, 2021

Restrictive Covenants May Be Enforceable Against Physician

by Jay R. McDaniel, Esq.

Physicians are subject to reasonable restrictions on post-employment activities that will limit their competition with a previous employer.
A restrictive covenant that prohibits competition must protect a legitimate interest, impose not undue hardship on the former employee and not injury the public interest.
Restrictive covenants must be narrowly tailored so as to only restrict activities in which the employer has a legitimate interest. Courts consider the geographic scope, duration and activities limited.
Enforcement of a restrictive covenant may also turn on such circumstances as how the covenant was agreed to and the circumstances of the separation of the physician.

Restrictive covenants limiting the activities of a physician may be disfavored, but they are not per se unenforceable. As with other restrictive covenants, the issue is whether the agreement not to compete is reasonable in scope and protects a legitimate interest of the beneficiary of the agreement not to compete. Cases-of-Note-Professionals-1024x536

The issue was last before the New Jersey Supreme Court in The Community Hospital Group v. More (full opinion here), a 2005 opinion in which the court was asked to overrule its existing precedent that permitted enforcement of restrictive covenants against physicians. The Supreme Court decided the issue just months after the appellate division had held that a restrictive covenant was unenforceable against a psychiatrist. (See Psychologists, Like Lawyers, Not Subject to Restrictive Covenants) Continue reading

The touchstone of a trade secret is that it provides the owner of the information with a competitive advantage in their market.

Courts look at the cost of development, the difficulty in duplicating and measurable benefits to ascertain whether a bona fide trade secret exists.

The first step in the defense of a trade secret is to examine whether there is real economic value to keeping the information secret.

The Federal Trade Commission is considering an administrative rule that would enact a broad ban on non-compete agreements that would prohibit contracts that restrict the employee from working for a competitor or starting a competing business.

The rule would also apply to ‘de facto’ non-competes, such as non-solicitation agreements, that have the effect of limiting a worker’s activities after employment.

The proposed rule will likely have a negative impact on the competitiveness and value of closely held businesses. Non-competes in equity transactions would be prohibited unless the equity stake involved is at least 25 percent.

A business divorce is the process by which the owners of a business separate their business interests. The process involves negotiation and may also require litigation.

These cases can be divided into four phases: the emergent phase, the examination phase, the valuation phase and the resolution phase.

Most owner lawsuits end in a negotiated transaction because it gives the parties more flexibility over the manner in which the case is resolved.

An agreement prohibiting a former associate of a law firm from competing with his former employer within 90 miles of New York City was void and unenforceable.

Solicitation of the clients of a law firm by a former associate may be actionable, even if a potential restriction on practice, in limited circumstances.

The rule of professional conduct that precludes restrictions on practice will not bar a claim against a former non-lawyer employee.

Key employees of a company may be bound by restrictive covenants that are included in an agreement to sell the entity, but do not reference them individually.

A court should consider whether the restrictive covenant of a key employee was a significant element of the transaction and necessary to protect the good will of the business.

Restrictive covenants that are given in connection with the sale of a business may be broader than those given by an employee to an employer, and are more likely to be considered reasonable if they were an aspect of the transaction.

Executive with ‘Bonus on Sale’ Agreement

A restrictive covenant that is in force during a vesting period for securities granted as part of an employee incentive program may present an issue for enforcement, if not tied to to the protection of an employer’s legitimate interest.

A court considering a preliminary injunction request blue-penciled the duration of a covenant not to compete or solicit customers to base the time period on termination, not the vesting period for stocks and options sought by the former employer.

The duration of a restrictive covenant may not be reasonable if the duration is not tied to the former employer’s protection of a legitimate interest.

Restrictive covenants that limit the ability of former employees to compete have been the subject of legislative limits in a number of states, including Maine, Maryland, Massachusetts, New Hampshire, Rode Island, Virginia and Washington.

Bills that would limit the enforceability of restrictive covenants in New Jersey have been introduced into the legislature since 2017 but have failed to be adopted.

Legislative restrictions on agreements not to compete may require minimum compensation, restrict the geographic scope and time frame of the agreement and prohibit courts from “blue penciling” unreasonable restrictive covenants rather than refusing to enforce them entirely.

Accounting firm is compelled to repurchase the equity of departing shareholder who moved practice to competitor firm.

A shareholder agreement that is integrated and intended to be the parties’ complete agreement may preclude a claim for breach of corporate by-laws.

Resignation of Account from Professional Corporation

Although a former executive was bound by a restrictive covenant, the fact that his duties after joining a competitor were directed to a different market made the scope of the restrictions unreasonable.

A restrictive covenant that is not narrowly tailored to protecting specific interests of the former employer at stake in a lawsuit is less likely to be enforced with a preliminary injunction.

A company that relies on the inevitable disclosure doctrine faces a high hurdle to show the certain use of a trade secret in a competitive manner.

Physicians are subject to reasonable restrictions on post-employment activities that will limit their competition with a previous employer.

A restrictive covenant that prohibits competition must protect a legitimate interest, impose not undue hardship on the former employee and not injury the public interest.

Restrictive covenants must be narrowly tailored so as to only restrict activities in which the employer has a legitimate interest. Courts consider the geographic scope, duration and activities limited.

Enforcement of a restrictive covenant may also turn on such circumstances as how the covenant was agreed to and the circumstances of the separation of the physician.