Third Quarter 2008
Many professionals are using social networking sites such as LinkedIn to maintain and manage business and personal contacts. LinkedIn is one of a growing number of business networking services that allows individual users to create and manage profiles similar to firm bios or résumés. LinkedIn features 25 million such profiles, each affiliated with a user. Each user may build a network of other users on the site. Once linked together, users can take advantage of each other's contact lists to establish and maintain new business contacts. In England, the High Court of Justice, Chancery Division recently ordered a former employee of an English recruiting service to disclose limited information from his LinkedIn account. Hays Specialist Recruitment (Holdings) Ltd. v. Ions, (2008) EWHC 745 (Ch).
Mark Ions was employed with Hays until he left to start a competing firm. Hays became concerned that Ions, following his departure, had taken business contact information with him in violation of his employment contract, which prohibited him from making use of a range of confidential information, including client database information, and from soliciting clients with whom he had had business contact during his employment.
Hays was concerned primarily with Ions' LinkedIn account. LinkedIn includes a feature that allows a user to upload e-mail contacts and send those contacts invitations to join LinkedIn. In its lawsuit, Hays alleged that Ions uploaded confidential customer contacts to LinkedIn shortly before terminating employment. Hays' then applied to the High Court of Justice for "pre-action disclosure," seeking information held on the networking site.
After argument, the High Court ordered Mr. Ions to disclose his LinkedIn business contacts as requested by Hays and all emails sent to or received by his LinkedIn account from Hays' computer network. Mr. Ions was also ordered to disclose all documents, including invoices and emails, that showed any use by him of the LinkedIn contacts and any business obtained from them.
TIP: Employers may wish to review IT usage and confidential information policies to ensure confidential contact information remains confidential, and, to the extent desired, provide guidelines on use of business networking sites. Employers may also wish to discuss and review these issues as part of the exit process.
An Eastern District of Michigan court crafted a narrowly tailored injunction order preventing a former employee from violating her non-compete and non-solicit agreements but allowing her to remain employed by her new employer, pending the expiration of restrictive covenants. Zimmer, Inc. v. Albring, 2008 WL 2604969 (E.D. Mich. 2008).
Albring had entered into a creative arrangement to become employed by a competitor pending expiration of her restrictive covenants. Her deal paid her "$3,000 per week to do nothing as the company is waiting for her non-compete agreement with [her former employer] to run out and then she will begin selling . . . products for them." The judge found that Albring's agreement with her new employer did not violate the non-compete, because she was not actively selling competing products.
TIP: Ordinarily compensating employees while the term of a non-compete expires is the province of the former employer and militates toward the enforceability of a restrictive covenant. This case inverts the usual dynamic and provides a means for a new employer to hire an employee subject to a non-compete without running afoul of the non-compete restrictions.
On Aug. 6, 2008, New York Gov. David A. Paterson signed legislation prohibiting non-compete agreements for broadcast employees. The Broadcast Employees Freedom To Work Act prohibits a broad range of media employers from requiring or seeking to enforce post-employment non-competes based on time, geography or company. The new law defines "broadcast industry employer" to include "television stations or networks, radio stations or networks, cable stations or networks, Internet or satellite-based services or networks similar to a broadcast station or network, any broadcasting entities affiliated with any of the employers [included in this legislation], or any other entity that provides broadcasting services such as news, weather, traffic, sports or entertainment reports or programming."
The new law applies to both "on-air" and "off-air" employees. The law includes all employees, with the exception of "management employees," though there is no definition of who is deemed to fall within the term. Unlike other states with similar provisions, such as Illinois, Maine and D.C., New York's new law does not exclude sales employees, a group that had previously been bound by non-competes under New York's common law. The prohibition only applies to post-employment restrictions.
Despite the broad scope of the new law, there are many open questions that New York courts will eventually need to address. First, the law does not define exactly what constitutes a "management employee" for purposes of being exempt from the law. Second, the effect of this law on non-solicitation clauses, notice periods (garden leave) and other forms of restrictive covenants that do not outright prohibit competition, is not evident on the face of the statute. The statute does not expressly regulate any restrictions on competition during the term of an employment agreement. The statute expressly provides that all covenants which violate the statute and were in effect as of Aug. 6, 2008 are "null and void."
Other jurisdictions that have laws restricting or prohibiting non-competes for broadcast employees are Arizona, Washington, D.C., Illinois, Maine and Massachusetts.
TIP: Unfortunately, it may be some time before the full scope of this statute is known. In the interim, employers are advised to review their agreements in light of this new law.
On Aug. 7, 2008, the California Supreme Court rejected a "narrow restraint" exception to the prohibition on covenants not to compete, which are set forth in California Business and Professions Code Section 16600. The statute provides that absent a statutory exception, "every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void." Several California federal courts had applied a "narrow restraint" exception to this general rule. These courts had enforced certain narrowly tailored non-competition agreements designed to prevent terminated employees from working for competitors or customers, so long as the agreement did not prevent the former employee from working in another "substantial part" of the market. See IBM Corp. v. Bajorek, 191 F.3d 1033 (9th Cir. 1999) (enforcing restriction on working for only one competitor); General Comm. Packaging v. TPS Package 126 F.3d 1131(9th Cir. 1997) (enforcing restrictions as to one customer and related entities introduced through that relationship).
In a 5-2 decision, the California Supreme Court rejected a "narrow restraint" exception and affirmed the state's long-standing policy of favoring employee mobility. Edwards v. Arthur Andersen LLP, No. BC 294853 (Cal. Aug. 7, 2008). The Supreme Court held that non-competition agreements between an employer and employee that even just "partially" or "narrowly" restrict an employee's ability to practice the employee's trade or profession are prohibited, expressing a strict interpretation of California law, contrary to what several federal courts had previously interpreted.
Under his employment agreement with Arthur Andersen ("Andersen"), Edwards was subject to an 18-month non-solicitation clause and could not provide services to any of Andersen's clients for a year. When Andersen sold its tax practice to another employer in 2002, Edwards was required to execute a "Termination of Non-Compete Agreement" (the "Agreement") in which he agreed, among other things, to release all claims he might have had against Andersen, and in return, Andersen would release him from his non-compete obligations. Edwards refused to sign the Agreement. In response, Andersen terminated Edwards' employment and withheld his severance benefits. The new employer subsequently withdrew its offer. Edwards sued Andersen, alleging, among other things, intentional interference with prospective economic advantage. Edwards claimed that Andersen's non-compete agreement was invalid under Section 16600, and Andersen forced the new employer to withdraw its offer.
Andersen argued that the court should adopt the narrow restraint exception as applied by the Ninth Circuit. The court, which rejected Andersen's argument, held that the non-compete agreement violated Section 16600. In so holding, the court expressly rejected the "narrow restraint" exception, stating "no California state court decision has ever endorsed [the exception] and we are of the view that California Courts ‘have been clear in their expression that Section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat." The court added that Section 16600 is unambiguous, and "if the legislature intended the statue to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect."
TIP: Agreements concerning California employees will continue to require extra scrutiny, and employers are advised to review existing agreements to comply with this decision and to ensure that all agreements contain enforceable severability clauses to minimize the impact of changes in the law in this area.
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