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www.winston.com

In This Issue

1. Texas Supreme Court Upholds Florida Forum Selection Clause
   
   
2. State and Federal Computer Fraud and Abuse Acts a Potential Resource to Protect Company Information and Prevent Unfair Competition
   
   
3. New York's Highest Court Affirms Employee Choice Doctrine and Enforces Non-Competition Agreement
   
   
4. Winston & Strawn Attorneys Enforce TyMetrix Agreement Applying Connecticut Law
   
   
5. Ninth Circuit Finds California Employer Potentially Liable for Unfair Competition in Raiding Competitor's Employees
   
   

A. Texas Supreme Court Upholds Florida Forum Selection Clause

The Texas Supreme Court recently required a Houston auto salesperson to litigate a dispute with his former employer concerning a non-compete and non-solicitation agreement in Florida.  In re AutoNation, 228 S.W. 3d 663, 670 (Tex. 2007).  Garrick Hatfield left a Houston, Texas AutoNation dealership to join a competitor, A-Rod O C, L.P. in January 2005.  In February 2005, AutoNation brought suit in Broward County, Florida to enforce a one-year non-compete and non-solicitation agreement Hatfield had entered into in 2003 as a condition of his continued at-will employment.  That agreement provided:

The Agreement will be governed by and construed in accordance with the laws of the State of Florida, without regard to principles of conflict of laws.  The parties agree that any action, suit or proceeding arising out of or relative to this Agreement or the relationship of Employee and the Company shall be instituted only in the state or federal court located in Broward County, in the [S]tate of Florida and each party waives any objection which such party may now or hereafter have to such venue or jurisdictional court in any action, suit or proceeding.

In March 2005, Hatfield and his subsequent employer filed suit in Texas seeking a declaratory judgment that the non-compete obligation was governed by Texas law and unenforceable.  They then sought injunctive relief to enjoin AutoNation from pursuing the first-filed Florida action.  On April 6, 2005, a Texas court granted an anti-suit injunction against AutoNation.

On appeal, the Texas Supreme Court held that while Texas public policy favored application of Texas law to non-compete agreements, this did not require that "every employment dispute with a Texas resident must be litigated in Texas."  Id. at 669.  The court declined to find the parties' freely-negotiated forum selection clause violated Texas Public Policy solely because it concerned a covenant not to compete.  Because Hatfield did not demonstrate any of the other factors that would excuse compliance with the forum selection — clause, fraud, overreaching or undue hardship — it held that the clause should be honored.  The court also held that honoring the clause in this case was consistent with the principles of interstate comity since AutoNation had filed the first action in Florida.

TIP: The enforceability of forum selection clauses should be analyzed separately from non-competition provisions, and may provide a valuable tool in ensuring predictability in enforcement of non-competes and minimize the expense of enforcement by allowing actions to take place near corporate witnesses and records.

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B. State and Federal Computer Fraud and Abuse Acts a Potential Resource to Protect Company Information and Prevent Unfair Competition

A recent New Jersey case highlights the utility of state and federal computer use statutes in protecting valuable employer information. In P.C. of Yonkers, Inc. v. Celebrations! The Party and Seasonal Superstore, L.L.C., 2007 U.S. Dist. LEXIS 15216 (D.N.J. 2007), the United States District Court for the District of New Jersey held that plaintiffs, a group of Party City stores, had sufficiently demonstrated that the defendants had purposely and knowingly taken the plaintiffs' computer data, without authorization, to state a claim under the federal Computer Fraud and Abuse Act, 18 U.S.C. § 1030 ("CFAA") and the New Jersey Computer Related Defenses Act ("CRDA"), N.J. Stat. Ann., § 2A: 38A-1, et. seq., among other claims. The plaintiffs alleged that defendants, former senior level employers, had improperly accessed revenue and store ranking information in order to determine where to locate Celebrations! stores, and to unfairly compete with plaintiffs. Importantly, the court held that amounts spent investigating and responding to the defendants' actions, including the costs of remedial actions to prevent future violations by defendants, could be used to satisfy the CFAA threshold of $5,000 in damages or loss.

TIP: Even if an employee is not party to a written restrictive covenant, federal and state computer use laws can be effective tools in preventing misappropriation of electronic data and unfair competition. Employers who wish to rely on such statutes are advised to develop and enforce clear and consistent computer usage and authorization policies.

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C. New York's Highest Court Affirms Employee Choice Doctrine and Enforces Non-Competition Agreement

New York's highest state court recently affirmed the "employee choice" doctrine. Morris v. Schroder Capital Management International N.A. Inc., 2006 WL 3359077 (N.Y. Nov. 21, 2006). The doctrine recognizes an exception to the "rule of reasonableness" generally applicable to non-compete provisions under New York law, i.e., that the covenant be reasonable in terms of time and geographic scope, and no more restrictive than necessary to protect the employer's legitimate interests. Under the employee choice doctrine, where an employer conditions an employee's receipt of post-employment benefits (e.g., deferred compensation, etc.) upon the employee's compliance with a restrictive covenant, the covenant will be enforceable [without regard] to reasonableness, so long as the employee's separation from the employer was voluntary.

In Schroder, plaintiff Morris left his employer to work for a competitor. Defendant took the position that, under the forfeiture for competition provision of its deferred compensation award plan, plaintiff had relinquished his right to deferred compensation benefits. Plaintiff argued that he had not left his employment voluntarily, but had been "constructively discharged" in that defendant had reduced the amount of assets over which he had control by eighty percent, from $7.5 billion to $1.5 billion. The "narrow question" certified to the New York Court of Appeals was whether "involuntary termination" in the context of the employee choice doctrine should be determined by the stringent constructive discharge test developed by federal courts in employment discrimination cases. Under that test, a constructive discharge occurs when an employer intentionally makes an employee's working conditions so intolerable, difficult or unpleasant that a reasonable person in the employee's position would have felt compelled to resign. The Court of Appeals concluded that "the well-established constructive discharge test is appropriate in the context of the 'employee choice' doctrine."

TIP: The New York high court's confirmation not only of the continued viability of the employee choice doctrine, but of the rigorous standard for establishing constructive discharge under it, warrants consideration of such provisions as part of executive employment and other agreements.

D. Winston & Strawn Attorneys Enforce TyMetrix Agreement Applying Connecticut Law

Winston & Strawn attorneys achieved a significant victory for TyMetrix in this case in which the company sought to enforce, through issuance of a temporary injunction, restrictive covenants contained in its former employee's employment agreement prohibiting the employee from competing with the company, or soliciting its clients, prospective clients or employees, for two years following the termination of his employment. TyMetrix, Inc. v. Szymonik, No. CV 06-4019412S (Conn. Super. Ct. Dec. 28, 2006).

The TyMetrix decision is notable in that the employee did not voluntarily leave his employment, but was fired by the company as a result of disagreements with management. Notwithstanding the involuntary termination, the court found that the employee had failed to meet his burden of showing that the two-year duration and international scope of the covenant (which prohibited the employee from competing anywhere in the continental United States or in any foreign country in which TyMetrix had sold products or services within one year preceding the termination of his employment) were unreasonable, or that enforcement of the covenant would be unduly burdensome to the employee.

TIP: The court's acknowledgment that "a restrictive covenant is a valuable business asset which is entitled to protection," and its conclusion that the equities of this case lay with the employer, suggest that Connecticut employers may enjoy a heightened level of receptiveness to restrictive covenants in that state's courts, and underscore the importance of carefully considering choice of law and forum selection clauses in drafting agreements.

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E. Ninth Circuit Finds California Employer Potentially Liable for Unfair Competition in Raiding Competitor's Employees

In this case, a former employer, CRST, brought suit against its competitor, Werner, which had solicited and hired certain of CRST's employees who were subject to one-year employment agreements. CRST Van Expedited, Inc. v. Werner Enterprises, Inc., 479 F.3d 1099 (9th Cir. 2007). Although the solicited employees were not subject to non-compete agreements (highly disfavored under California law), CRST had provided training to the employees at its expense, and the employees were subject to employment agreements that provided for liquidated damages in the event of breach. A district court granted Werner's motion to dismiss the complaint and the Ninth Circuit reversed, finding that the complaint stated cognizable claims for intentional interference with contract and prospective economic advantage, as well as for violation of the California Unfair Competition Law.

TIP: Employers wishing to avoid liability in hiring from competitors should carefully review hiring and recruiting practices to avoid claims of interference with contract and similar claims.

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If you have questions about items that appeared in this bulletin, or would like to learn more about any of these topics, please contact one of the other Labor & Employment Relations partners listed here:

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