Employer Law Report : Employment and Labor Relations Lawyer & Attorney : Porter Wright's Employer Law Report : Employment Litigation, Non-Compete, Trade Secrets

Describing it as a “rather novel issue,” a federal court recently held that a former employee’s public posts on his personal Facebook page did not constitute solicitation of his former co-workers under the terms of his non-solicitation agreement with his former employer. [See Pre-Paid Legal Services, Inc. v. Cahill, No. 12-CV-346, Doc. 31 (Jan. 22, 2013), Report and Recommendation affirmed and adopted, Doc. 32 (Feb. 12, 2013)] The court further noted that invitations sent to former co-workers to join Twitter were not solicitations under the agreement because the invitations did not request the co-workers to “follow” the former employee, they did not contain any information about the new employer, and they were sent by Twitter instead of as targeted email blasts by the former employee.

Though the court found that the former employee’s social networking activities did not constitute solicitation under his agreement, it did enter a preliminary injunction against the former employee based on his direct solicitation of one of his former co-workers through a private in-person meeting and follow up text messages sent to the co-worker. The court entered the injunction until the issues could be presented to an arbitrator pursuant to the parties’ arbitration agreement.

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There has always been a tension between a health care employer's desire to protect its patient relationships and a physician's obligation not to abandon patients when a physician either resigns or is terminated from employment. In Ohio, physician non-compete agreements are legal so long as they (1) are no broader than necessary to protect the employer's business interests; (2) do not unreasonably restrain the physician's ability to practice in the future; and (3) are not injurious to the public. As a result, many physician employment agreements contain post-employment non-competition and non-solicitation provisions. While reasonable non-competition provisions remain viable, recently enacted Ohio HB 417 may put an end to physician non-solicitation agreements at least insofar as they relate to patients.

Specifically, HB 417, which goes into effect on March 22, 2013, requires a health care entity to either send a notice to patients after a physician's employment has been terminated for any reason or to provide the physician with the names and contact information of the patients so that the physician can directly send the notice. The notice must be sent to any person who received physician services from the departing physician in the two year period immediately preceding the termination. The legislation contains exemptions for physicians providing episodic or emergency services, medical students, hospice medical directors and for physicians working a community mental health agency, a federally qualified health center or a federally qualified health center look-alike.

For purposes of the act, a health care entity is any of the following that employs a physician to provide physician services: (1) a hospital registered with the Department of Health, (2) a for-profit or nonprofit corporation, (3) a limited liability company, (4) a health insuring corporation, (5) a partnership, or (6) a professional association that, under Ohio law, must be composed only of individuals authorized to perform a professional service. In addition, a "termination" is defined as the end of a physician's employment with a health care entity for any reason, other than those situations where a physician becomes an independent contractor for the health care entity and continues to provide services to patients.

Each notice provided under the act, whether sent by a health care entity or a physician, must be sent no later than the date of termination or 30 days after the health care entity has actual knowledge of termination or resignation of the physician, whichever is later, and in accordance with rules adopted by the State Medical Board. The notice must include at least all of the following:

1. A notice to the patient that the physician will no longer be practicing as an employee of the health care entity;
2. The physician's name and any information provided by the physician that the patient may use to contact the physician. This portion of the notice is not required to be included if the health care entity has a good faith concern that the physician's conduct or the medical care provided by the physician would jeopardize the health and safety of patients.
3. The date on which the physician ceased or will cease to practice as an employee of the health care entity;
4. Contact information for an alternative physician employed by the health care entity, or contact information for a group practice that can provide care for the patient;
5. Contact information that enables the patient to obtain information on the patient's medical records.

Covered health care employers should continue to include non-competition provisions in physician employment agreements to the extent that they are necessary and appropriate to protect their legitimate business interests. In addition, nothing in HB 417 will prevent Ohio health care employers from restricting a physician's ability to solicit its employees or referral sources following departure.
 

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In Nitro-Lift Technologies, L.L.C. v. Howard, the U.S. Supreme Court this week held that if a contract contains an arbitration provision and there is a challenge to the validity of the contract, it is for the arbitrator and not a court to hear that challenge. The case is important for employers because the challenge was to the validity of a non-competition agreement. More specifically, the Supreme Court held that if a contract contains an arbitration provision, it is up to an arbitrator, and not a court, to determine whether the non-competition provision of the contract runs afoul of a state law limiting the enforceability of such restrictive covenants. In so holding, the Court reaffirmed its earlier precedent that when a contract contains an arbitration provision, the Federal Arbitration Act. (“the FAA”), is the law of the land and that the FAA promotes a “national policy favoring arbitration.” So, the Supreme Court held, the Oklahoma Supreme Court erred when it held that a state law limiting the enforceability of non-competition agreements essentially negated the arbitration provision of the contract and allowed a court to declare the non-competition agreement void. Rejecting this judicial hostility towards arbitration, the U.S. Supreme Court held that pursuant to the arbitration provision, the validity of the contract as a whole, including the non-competition agreement, was a question for the arbitrator and not an Oklahoma state court.

Nitro-Lift Technologies, L.L.C. provides services to operators of oil and gas wells that enhance production of those natural resources. Nitro-Lift entered into confidentiality and non-competition agreements with two of its employees, Eddie Lee Howard and Shane Schneider. Each of those agreements also contained an arbitration clause providing in pertinent part: “Any dispute, difference, or unresolved question [between the parties] shall be settled by arbitration[.]” Howard and Schneider quit working for Nitro-Lift and began working for one of its competitors.

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This past May, we reported that the Ohio Supreme Court ruled in Acordia of Ohio, L.L.C. v. Fishel that following a merger, the surviving company may not be able to enforce employees’ non-compete agreements, where the agreements failed to contain an assignment clause, and the time period of the employees’ non-competes began to run as of the date of the merger. The Court reconsidered its decision, and issued a new decision today. Upon quick review, the bottom line seems to be that the Court has decided that it mis-read earlier precedent regarding corporate mergers. Here is part of the summary from the Office of Public Information:

Justice Lanzinger wrote, "Upon further consideration, we now recognize that the lead opinion's reading of Morris [v. Investors Life Insurance Co.] was incomplete. While Morris does state that the absorbed company ceases to exist as a separate business entity, the opinion does not state that the absorbed company is completely erased from existence. Instead, the absorbed company becomes a part of the resulting company following merger. The merged company has the ability to enforce noncompete agreements as if the resulting company had stepped into the shoes of the absorbed company. It follows that omission of any 'successors or assigns" language in the employees' noncompete agreements in this case does not prevent the L.L.C. from enforcing the noncompete agreements."

While we now hold that the L.L.C. may enforce the noncompete agreements as if it had stepped into each original contracting company's shoes, we agree with Justice Cupp's assertion in his dissent in Acordia I that even though the agreements transfer to the L.L.C. by operation of law, the transfer does not 'foreclose appropriate relief to the parties to the noncompete agreement under traditional principles of law that regulate and govern noncompete agreements.' ... In other words, the employees still may challenge the continued validity of the noncompete agreements based on whether the agreements are reasonable and whether the numerous mergers in this case created additional obligations or duties so that the agreements should not be enforced on their original terms."

The language in Acordia I stating that the L.L.C. could not enforce the employees' noncompete agreements as if it had stepped into the original contracting company's shoes or that the agreements must contain 'successors and assigns' language in order for the L.L.C. to enforce the agreements was erroneous. We hold that the L.L.C. may enforce the noncompete agreements as if it had stepped into the shoes of the original contracting companies, provided that the noncompete agreements are reasonable under the circumstances of this case. We accordingly reverse the judgment of the court of appeals and remand this cause to the trial court so that it may determine the reasonableness of the noncompete agreements."

If you are involved in merger and acquisition due diligence, this removes one potential problem from your checklist. But the issue of whether a non-compete agreement is reasonable "under the circumstances" still needs to be considered.

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In a case that vividly demonstrates how employers are vulnerable to insider cyber attacks, a recent federal court decision out of the Southern District of Ohio addressed the scope of federal statutes designed to address such activity. In Freedom Banc Mortgage Services, Inc. v. O'Harra, the plaintiff's complaint alleged that an employee began remotely downloading software programs on 27 of the employer's computers and five servers. Through these programs, O'Harra, with the assistance of others, allegedly was able to access the employer's employees' email accounts, deleted hundreds of email from these accounts, uninstalled the employer's security camera, deleted pictures that the camera had recorded, and monitored employee Blackberry usage, among other activities. As a result of these unauthorized intrusions into the plaintiff's computer system, the plaintiff's computers began to operate slowly and eventually, 22 computers and three servers became inoperable. The plaintiff alleged that it lost business, productivity, and revenue as a result of the damages to its computers and, in December 2010, ceased business operations.

Freedom Banc filed its complaint against O'Harra and her alleged accomplices alleging violations of the federal Computer Fraud and Abuse Act ("CFAA"), the Stored Communications Act ("SCA") and state law tort claims of trespass to chattels, conversion and conspiracy. In response, the defendants moved for dismissal. With respect to the CFAA count of the Complaint, the court rejected each of O'Harra's arguments that attacked the statute's applicability. First, O'Harra argued that the computers at issue were not "protected computers" within the meaning of the CFAA, but the Court concluded, as have virtually all courts that have addressed this issue, that any computer that is connected to the Internet is "protected" for purposes of invoking the CFAA. Next, O'Harra argued that for the CFAA to apply, the plaintiff must allege damages of at least $5,000 caused by a single unauthorized intrusion into a protected computer. Again, the Court had little difficulty rejecting this argument and found that the plaintiff's alleged damages of at least $5000 in the aggregate was sufficient to invoke the CFAA's protection.

The Court also permitted the plaintiff's state law tort claims to proceed. The Court concluded that the plaintiff's complaint sufficiently pleaded a trespass to chattels claim by alleging that O'Harra deprived plaintiff of the use of its computers and impaired those computers as to their condition and value. Similarly, plaintiff's complaint also alleged a cause of action for conversion by alleging that O'Harra downloaded software programs onto plaintiff's computers that gave them "complete access to and control over” plaintiff's email accounts and security camera, among other things, and by alleging that the defendants deleted hundreds of email messages from plaintiff's email accounts, deleted photographs from plaintiff's security camera, and continued to access and initiate contact with plaintiff's computers until they were ultimately rendered inoperable. Finally, the Court upheld the conspiracy count of the complaint based on the allegations that O'Harra conspired with her co-defendants in a "malicious combination" to gain unauthorized access to the plaintiff's computer systems.

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The Ohio Supreme Court ruled 4-3 on May 24, 2012, that following a merger the surviving company may not be able to enforce employees’ non-compete agreements where the agreements fail to contain an assignment clause and the time period of the employees’ non-competes began to run as of the date of the merger.

In Acordia of Ohio, L.L.C. v. Fishel et al., the Ohio Supreme Court ruled that a merger causes the original corporate party to non-compete agreements to cease to exist, while the surviving company takes ownership of the agreements. But where the non-compete agreement fails to contain an assignment clause, the surviving company may not enforce the non-compete agreement as if it “stepped into the shoes” of the company that had originally contracted with the employees. Although the employees’ non-compete agreements transferred automatically by operation of law to the surviving company, the Ohio Supreme Court held that the non-compete agreements at issue provided only that the employees would avoid competition following their termination from the specific company identified in the non-compete agreements. Because the non-compete agreements did not state they could be assigned or would carry over to a successor, the Ohio Supreme Court ruled that the named parties intended the agreements to operate only between themselves — the employees and the specific employer. According to the Acordia decision, the termination of the employees’ employment with the original company was triggered by the merger, which commenced the running of the non-compete periods. These periods expired on their own terms after two years of employment with the successor — Acordia — and thereby made the non-compete agreements unenforceable by Acordia when the employees later joined a competitor.

The dissenting opinion in Acordia noted that the lead opinion runs counter to Ohio’s century-old precedent that in a merger, the consolidated party steps into the shoes of the constituent companies and that by operation of law, and in the absence of explicit contract language to the contrary, the surviving entity is vested with all the assets and obligations of the constituent entities. Those assets and liabilities historically have included agreements such as non-compete agreements and the ability to enforce them as if the surviving entity were a signatory to them.

Recommendations
It is too early to know the reach and impact of this ruling, but we can foresee that Acordia’s analysis might be applied by Ohio courts to contracts other than non-compete agreements. Therefore, at a minimum, Acordia serves as a reminder to contracting parties to be mindful of the importance of considering the portfolio of contracts in place at a company involved in a merger.

Clients are cautioned to examine all of their agreements governed by Ohio law with respect to provisions that may be viewed as triggering a termination or dealing with an assignment by operation of law in the context of a merger to assure that the Acordia decision is followed. In order to assure that an agreement is fully transferred by a merger and that a surviving company may enforce the agreement on the same terms as the original corporate party, we recommend clients assure agreements do not restrict the “company” only to the original corporate party but that the term specifically includes the original corporate party’s “successors and assigns.”

Specifically with respect to non-compete agreements, we recommend clients review the language to assure it includes an appropriate assignment clause so that the commencement of a non-compete period is not triggered by a merger in which the original party to the agreement is not the surviving entity.

Acquiring companies’ due diligence investigations on potential Ohio target companies will need to include a review of all business agreements to determine if Ohio law governs and to assure that the surviving entity in a merger is assuming full rights and responsibilities for all obligations of the constituent entity, including enforcement of such agreements on the same terms as the original corporate party.

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In a much anticipated decision, the Ninth Circuit Court of Appeals held in an en banc decision in United States v. Nosal that the Computer Fraud and Abuse Act ("CFAA") was not intended to cover employee misappropriation of trade secrets, violations of corporate computer use policies or violations of an employee duty of loyalty. The decision, which overrules a previous Ninth Circuit panel decision in Nosal, creates a conflict with the Fifth, Seventh and Eleventh Circuits, all of which have interpreted the CFAA broadly to include such employee misconduct. As a result, we can probably expect this issue to show up on the Supreme Court's docket sometime in the future.

In Nosal, a former employee of an executive search firm convinced some of his former colleagues who were still working for the firm to help him start a competing business. The employees used their log-in credentials to download confidential data from a company computer and then transferred it on to Nosal. Under the firm's computer use policy, the employees had authorization to access the data, but were prohibited from disclosing it outside the firm. When his involvement in the plot was discovered, Nosal was indicted on several criminal counts, including a count alleging that he had violated the CFAA by aiding and abetting the current firm employees in "exceed[ing] their authorized access" with intent to defraud.

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More and more these days it seems like the obligations of being a lawyer, husband, father, son, sports fan, etc, get in the way of blogging. As a result, I end up accumulating a number of worthwhile topics for blog posts that end up in the discard pile. Twitter helps keep the backlog to a minimum, but I really don't know how many of you actually follow me @briandhallesq (hint, hint). So, while I am by no means committing to make this a regular feature of Employer Law Report, I will now clear – in no particular order -- my backlog for the month:

According to a Wall Street Journal article, a recent lawsuit seeks a declaration from the New York Department of Labor that putting a GPS tracker on an employee's family car to uncover time sheet violations was a violation of the state constitution's guarantee against unreasonable searches and seizures. According to the lawsuit, the monitoring continued during evenings, weekends and a family vacation. This won't turn out well for the employer.

An Ohio appellate court has upheld a physician's non-compete agreement that prohibited him from engaging in a hematology or oncology practice in his former employer's "primary service area." This decision continues the Ohio trend of upholding physician non-competes and Ohio courts have repeatedly rejected the argument that covenants are not enforceable against physicians solely because they impair patients’ choice.

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Yesterday the Ohio Supreme Court agreed to hear an appeal that addresses the extent to which a corporate merger may impact the surviving company's ability to enforce restrictive covenants that its predecessor companies entered into with their employees.

In Acordia of Ohio LLC v. Fishel et al., several Acordia employees (called the "Fishel team") left the company in 2005 and began working with a competitor, Neace-Lukens. These employees had previously signed noncompete agreements with Acordia's predecessor companies, prohibiting them from competing with the predecessors for two years after termination. They did not sign new agreements with the surviving company. When Acordia tried to enforce the restrictive covenants against the departing employees, the Hamilton County Court of Appeals decided that the two-year noncompetition clock in those agreements had already expired. The court concluded that the restrictions under the employees' noncompete agreements were triggered when Acordia's predecessors merged, saying: "Because the predecessor companies ceased to exist following the respective mergers, the Fishel team's employment with those companies was necessarily terminated at the time of the applicable merger. By their own terms, the agreements' restrictions were triggered by the relevant mergers and acquisitions."

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It's hard to believe that fewer than 10 years ago, there was widespread concern that our computers were all going to blow up and there would be anarchy in the streets. Since the clock struck midnight on January 1, 2000, we have seen an unprecedented technology boom that has had a widespread impact on the workplace. Remember the anxiety caused by cameras on our cell phones due to their impact on protecting trade secrets and our privacy in the locker rooms? Since then, we have grown comfortable with workers using laptops offsite though we still need to concentrate better on keeping track of them and what is on them!

Now, the social media craze -- Facebook, Linked-In, Twitter, etc. -- seems to be causing employers the most recent concern. As editor of employerlawreport.com, I have come to achieve a certain comfort level with social media, but I think that what primarily is keeping many employers up at night is fear of the unknown. That is why I'm going to summer camp! Starting this past Tuesday and running through the second Tuesday in August, I will be attending Social Media Summer Camp, a Columbus Business First initiative. The first session, "Social Media 101," provided a nice overview of everything that is out there and how businesses have been and could be using social media to market their services and products. The attractiveness of social media from a marketing perspective is often easy to see and hopefully we will be able to use some of what we learn at camp to improve our blog and to otherwise better communicate with our clients and friends.

In addition, I'm keeping my employment lawyer hat on to identify potential issues for employers that are encouraging their employees to "friend" others or to "tweet" or are attempting to regulate how and when they do it. This past Tuesday's session left me with one particular impression: Whether or not companies choose to use social media to foster their business, they would be wise to monitor the various social media outlets to make sure that others, including disgruntled and former employees, are not messing with their messages or creating unwanted ones.

So that's why I'm going to summer camp. I'm taking my laptop with me, but fortunately for all involved, I'm leaving my bathing suit at home.

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With the economy down, many well-known employers in virtually every industry across the country have increased their efforts to protect their customer relationships, market share, and confidential business information by bringing no-compete and/or trade secret misappropriation litigation against former employees and competitors. These lawsuits have included:

• Bear Stearns suing a former executive director who joined a competitor in Massachusetts;
• Motorola suing a former executive in Illinois who joined Apple;
• Clear Channel suing a former vice president who joined The Tribune Co. in Illinois;
• Wachovia suing Banc of America and three former Wachovia employees in Virginia;
• Countrywide suing an ex-manager in Oklahoma;
• Merrill Lynch suing a former financial advisor in Florida;
• American Express Bank suing Credit Suisse in Florida (over alleged trade secret misappropriation);
• National Oilwell Varco, L.P. (NOV) suing a rival oil field supply company and four former employees in Texas; and
• IBM suing a former director of sales and current Hewlett Packard employee in California (claiming trade secret theft).

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In Ohio, courts have the discretion to redraw an overly broad non-competition agreement so that its restrictions are no greater than are needed to protect the employer's legitimate business interests. As a result, Ohio employers often cavalierly draft the terms of their employee non-competition agreements as broadly as possible, believing the worst case scenario is that a court will rein in and “re-draft” the terms if necessary to make them reasonable and enforceable. Unfortunately, a federal district court in Illinois and the Seventh Circuit court of appeals clearly were unwilling to endorse this somewhat common Ohio employment practice despite analyzing a non-competition agreement’s enforceability under Ohio law pursuant to the agreement’s choice of law provision.   

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In Al Minor & Assoc., Inc. v. Martin, 2008-Ohio-292, Martin, a pension analyst, signed neither a non-competition nor a non-solicitation agreement during his employment with Al Minor. When he resigned to establish a competing business, Martin contacted and successfully solicited 15 clients using information that he memorized while working for Al Minor. Al Minor sued Martin for misappropriating its trade secret client information. Following trial, Martin was ordered to pay nearly $26,000 in damages to Al Minor, representing lost earnings from former clients successfully solicited by Martin. Although Martin appealed, the Franklin County Court of Appeals upheld the trial court’s decision. Martin then appealed to the Ohio Supreme Court where his arguments in support of his actions were once more rejected.

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If a Franklin County Court of Appeals decision is upheld, Ohio employers may reap the benefits of even greater protection against former employees who engage in competing business endeavors. For this reason, the Ohio Supreme Court’s ruling will be closely watched by employers and employees alike.

“In the absence of a no-compete agreement between an employer and its former employee, does the employee's compilation from memory and competitive use of a list of his former employer's customers constitute a violation of Ohio's Uniform Trade Secrets Act?” That is how the Ohio Supreme Court framed the issue pending before it in Al Minor & Associates, Inc. v. Robert E. Martin, a case in which the Court held oral argument on November 6, 2007. The case has been briefed and argued – all that awaits now is the Court’s decision.

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