Category Archives: Noncompete

Restaurant Noncompete Lawsuit, Part I

September 4, 2013 By in Noncompete, Trade secrets 1 Comment

In a recent post, I talked about how a Miami restaurant group, 50 Eggs Restaurant Company, dealt with the departure of a “celebrity chef,” known as Chef Bee, from its restaurant Khong River House. Now, 50 Eggs has filed a lawsuit against Chef Bee. A copy of the complaint is linked below.

This lawsuit pulls back the curtain on the development and opening of a high-profile restaurant. And it offers insights into and lessons about protecting proprietary information in the restaurant industry. This is the first in a series of posts discussing the lawsuit. I’m going to start by giving some background on the dispute (as alleged in the complaint) and then discussing one major hurdle 50 Eggs will need to overcome.

50 Eggs is a restaurant group based in South Florida. The complaint describes its marketing philosophy when opening a new restaurant: “the restaurant’s executive chef is designated as the ‘face,’ that is, the spokesperson, for the restaurant.” This is done because “diners generally know of the position ‘chef’ and thus equate everything about a restaurant with whoever is the chef.”

But 50 Eggs says that “the concept for a restaurant may come from a person who is not the executive chef.” Here, 50 Eggs’ CEO John Kunkel’s experience living in Thailand inspired the Khong River House concept.

While Kunkel was originally in negotiations with a New York chef to serve as Khong’s executive chef, he changed course when a local Miami chef he had befriended, Chef Bee, told Kunkel that Bee’s Thai restaurant was having financial difficulties and needed to close. Kunkel ended up hiring Chef Bee.

Chef Bee signed an offer of employment, which referenced the requirement that he sign 50 Eggs’ “standard non-compete agreements.”

50 Eggs uses a system that allows employees to electronically sign documents. Here’s where 50 Eggs may have a problem. The restrictive covenant agreement has several riders, including the noncompete provision. When Chef Bee electronically signed, he did not check the boxes to sign the riders, and thus his electronic signature was not included on those riders. I’ll discuss this in a moment.

After hiring Chef Bee, 50 Eggs “made substantial investments in public relations for the restaurant and making Chef Bee the ‘face’ of the restaurant.” But in the lead up to the restaurant’s opening, bizarre issues started to arise with Chef Bee. He was not contributing to the creation of recipes. He disappeared, only to be found working at his old Thai restaurant. Chef Bee said “he would get sick and break out in hives if he had to cook.” 50 Eggs also discovered that Chef Bee could not cook Thai dishes or run a professional kitchen, so it spent significant time training him by rotating him through Khong River House’s food stations. (It seems strange to me that a restaurant group like 50 Eggs would hire a chef without knowing that he could actually cook and operate a sophisticated kitchen. Perhaps we will learn more about this as the litigation progresses.)

Shortly after the training completed, Chef Bee resigned to open a restaurant in nearby Coral Gables. 50 Eggs now accuses him of taking 50 Eggs’ proprietary information and breaching the noncompete and nonsolicitation covenants. It alleges a number of contractual, tort, and statutory claims. It seeks damages and an injunction.

Back to the electronic signature. In Florida, the restrictive covenant statute provides that “A court shall not enforce a restrictive covenant unless it is set forth in a writing signed by the person against whom enforcement is sought.” Sec. 542.335(1)(a), Fla. Stat. Per the complaint’s own allegations, Chef Bee never signed the noncompete provision. This could present a significant obstacle. 50 Eggs is using several strategies to get around this problem, such as seeking to have the contract reformed based on either mutual or unilateral mistake. Time will tell whether the court will enforce the noncompete.

Using electronic signatures is becoming more and more common. But if companies are going to use this type of technology, it is critical to make sure that employees actually sign all necessary documents. If not, the company will likely face legal hurdles if it becomes necessary to enforce the contracts.

In future posts, I’ll discuss other interesting legal and factual issues in this case.

Complaint – 50 Eggs Restaurant (01330302)

The Boston Celtics Show Employers How to Leverage a Noncompete

June 20, 2013 By in Advice, Noncompete 1 Comment

protecting trade secrets noncompete

As you may have noticed, I live in Miami. And I’m a huge Miami Heat fan (and have been since long before LeBron James came to town). So my mind is squarely on tonight’s game 7. But the news coming out of the NBA isn’t all about the Heat and the Spurs. There’s also been a lot of chatter about the Boston Celtics’ head coach, Doc Rivers, being “traded” to the LA Clippers. Some of the news reports have mentioned that Doc’s contract contains a noncompete clause.

Ken Vanko has a very good blog post about Doc’s noncompete. I want to examine in more depth one point Ken makes: Leverage.

What’s happening between the Celtics and the Clippers is a great example of how having key employees execute a noncompete can benefit the company in unexpected ways. The Clippers want to hire Doc as their head coach. But they need to get the Celtics to waive the noncompete. In exchange, they are offering players like DeAndre Jordan, an up-and-coming young center. Essentially, because the Celtics must consent to Doc coaching for another team, they are in a position to demand valuable compensation.

The same can happen in other industries. I’ve seen situations where a competitor was willing to agree to refrain from competing in certain geographic markets, or not to target certain key clients, in exchange for allowing an executive with a noncompete to work for the competitor.

Of course, before waiving a noncompete, a company must be very comfortable that allowing the departing employee to work for the competitor will not damage the company. For example, this may work where the departing employee was likely to leave anyway, and she is leaving for a company that doesn’t present a real threat. Here, the Celtics seem to be entering a rebuilding phase, so it’s unlikely that they will be facing the Clippers—a team that’s not in their conference—in the playoffs anytime soon.

If a company is going to waive a noncompete, it is important to enter into a new contract with the departing employee and the company where she will be working that sets forth the conditions of the waiver. At a minimum, the contract should include strict nonsolicit and nondisclosure obligations and an acknowledgement that the departing employee returned all company property (including documents and electronically stored information).

It will be interesting to see how it plays out with the Celtics and Clippers. In the meantime, let’s go Heat!

Kentucky Court Finds No Insurance Coverage for Trade-Secrets Claim

May 16, 2013 By in Case Summary, Noncompete, Trade secrets 4 Comments

When a company faces a lawsuit, often one of the first questions asked is whether the company’s insurance policies cover the suit. In Liberty Corp. Capital Ltd. v. Security Safe Outlet, Inc., 2013 WL 1311231 (E.D. Ky. March 27, 2013), the court found that a commercial general liability policy did not cover a claim for misappropriation of trade secrets.

To make a long story short, a company that sold firearms online brought the underlying suit against a competitor. The defendant had hired the plaintiff’s former IT specialist, who signed a noncompete while working for the plaintiff. The plaintiff alleged that the IT specialist gave the defendant the plaintiff’s customer database, which the defendant used to send email marketing blasts  to the plaintiff’s customers.

The defendant had a commercial general liability policy with Liberty, which filed this suit seeking a declaratory judgment that there was no coverage. For our purposes, the central questions involved whether the customer list was “tangible property” and whether the underlying violation was based on a breach of contract.

Under the insurance policy, “property damage” was limited to tangible property. When determining whether the electronic customer database was tangible property, the court looked to Black’s Law Dictionary, which defined that term as “property that has physical form and characteristics.” The court concluded that a computer database “has no physical form or characteristics,” and thus was not tangible property.

The policy also covered personal and advertising injury. While the court found that the email blasts were advertisements, the policy excluded injuries arising out of a breach of contract. Because the defendant’s use of the database flowed from the IT specialist’s breach of his noncompete, the court found no coverage for personal and advertising injury.

The takeaway from this case is that companies that faces a real threat of a trade-secrets or noncompete lawsuit should find out from their insurance professionals whether they have coverage for such suits, and if not, what products are available that provide coverage.

Georgia Supreme Court Rejects Independent Claim for Inevitable Disclosure of Trade Secrets

May 7, 2013 By in Advice, Case Summary, Noncompete, Trade secrets 3 Comments

Under the inevitable-disclosure doctrine, a plaintiff can prove trade-secret misappropriation by showing that the defendant is now working for a competitor in a capacity that will require him or her to rely on the plaintiff’s trade secrets. Essentially, this doctrine allows a plaintiff to impose a noncompete in the absence of a signed agreement. There are broad discrepancies in whether, and how, this doctrine is applied in different states. Often, there is confusion surrounding these issues.

In Holton v. Physician Oncology Serv., LP, 2013 WL 1859294 (Ga. May 6, 2013), the Georgia Supreme Court clarified the applicability of this doctrine in Georgia and held that there is no independent cause of action for inevitable disclosure.

Here, the plaintiff operated facilities providing radiation therapy services. The defendant worked as an executive for the plaintiff, with oversight over facilities in Georgia. He signed a one-year noncompete agreement. One month after the plaintiff terminated him in October 2011, the defendant started working for one of the plaintiff’s direct competitors, which had four operating centers within the geographic scope of the defendant’s noncompete.

The plaintiff brought suit and sought a temporary restraining order based on violations of the noncompete, misappropriation of trade secrets under the Georgia Trade Secrets Act, and an independent claim based on the inevitable-disclosure doctrine. The lower court granted the injunction based on the inevitable disclosure of trade secrets.

By the time the appeal was heard, the one-year noncompete period had expired. Thus, the primary issue on appeal involved whether Georgia recognizes an independent cause of action for inevitable disclosure of trade secrets.

The Georgia Supreme Court reversed, holding “that the inevitable disclosure doctrine is not an independent claim under which a trial court may enjoin an employee from working for an employer or disclosing trade secrets.”

While this specific issue has now been resolved in Georgia, it remains unsettled in other states. To deal with this uncertainty when bringing a claim based on inevitable disclosure, it is important to present any evidence of actual misappropriation. That way, the court may have an independent basis to find for the plaintiff.

Arizona Case Examines When Customer Lists Can Be Trade Secrets

April 29, 2013 By in Advice, Case Summary, Noncompete, Trade secrets 1 Comment

Whether customer lists are trade secrets is one of the thorniest issues in the trade-secret world. In Caliss v. Unified Financial Services, LLC, 2013 WL 1490465 (Ariz. Ct. App. April 11, 2013), the court did a good job listing the factors considered when making this determination under Arizona’s Uniform Trade Secret Act.

The plaintiff previously worked for the defendants, who provide financial planning and tax services. After a falling out, the plaintiff left the defendants to work at a mortgage company that had a mutual referral agreement with the defendants. Soon thereafter, the mortgage company sent a mass email to all of its 2,000+ clients letting them know that the plaintiff had joined the firm. Because of the mutual referral arrangement, some recipients of this email were also clients of the defendants.

The plaintiff originally filed suit to recover unpaid compensation, and the defendants counterclaimed for misappropriation of trade secrets. After a bench trial, the court found that the plaintiff had misappropriated the defendants’ “customer lists and personal information.”

The Court of Appeals reversed. After first acknowledging that customer lists can be trade secrets, it described the factors to be considered when making this determination:

  • Whether the list “represents a selective accumulation of detailed, valuable information about customers—such as their particular needs, preferences, or characteristics—that naturally would not occur to persons in the trade or business.”
  • Was the list compiled through expending “substantial efforts to identify and cultivate its customer base such that it would be difficult for a competitor to acquire or duplicate the same information”?
  • “Whether the information contained in the customer list derives independent economic value from its secrecy, and gives the holder of the list a demonstrable competitive advantage over others in the industry.”
  • The extent to which the list was disclosed externally and internally.

Here, all of the factors weighed against granting trade-secret protection to the defendants’ customer list. In particular, the defendants did not offer evidence that they had specialized information about their clients and could not show they made significant efforts to develop the list.

Also, the defendants couldn’t show that they kept the list secret. For example, the mortgage company where the plaintiff worked knew the identity of a number of the defendants’ clients. The court reached this conclusion even though the defendants required that their employees sign confidentiality agreements and used electronic means to protect data.

Companies that want to keep their customer lists secret should maintain as much information about their clients as they can. By compiling as detailed a list as possible—with information that is not publicly known—a company can increase the likelihood that a court would later protect the list as a trade secret.

The list also needs to be kept secret. Only share the list with those employees who need it to do their jobs. Whenever possible, all such employees should be required to sign a noncompete and nonsolicitation agreement. That way, the company isn’t relying on the murky law regarding customer lists; it only needs to enforce the noncompete.

Florida Case Addresses Enforcing a Noncompete Agreement that Protects Trade Secrets

April 23, 2013 By in Advice, Case Summary, Noncompete, Trade secrets 2 Comments

In Florida, restrictive covenants like noncompete agreements are governed by Section 542.335, Florida Statutes. When determining whether a noncompete’s time period is reasonable, the statute applies different presumptions based on the interest being protected.

For example, a restrictive covenant against a former employee not predicated on trade secrets and not associated with a sale of the business is rebuttably presumed reasonable for a term of six months or less and unreasonable if for two years or more. In contrast, if the restrictive covenant is needed to protect trade secrets, it is rebuttably presumed reasonable if shorter than five years and unreasonable if more than 10 years.

In Zodiac Records Inc. v. Choice Environmental Serv., 2013 WL 1629134 (Fla. 4th DCA April 17, 2013), the plaintiff sought to enforce a noncompete against a company started by its former consultant. The noncompete barred the former consultant from soliciting the plaintiff’s customers or using the plaintiff’s trade secrets for 36 months after the consulting agreement expired in April 2009. The defendant left in June 2011 and admitted soliciting the plaintiff’s clients.

The plaintiff sought a temporary injunction barring the defendants from soliciting its customers or using its trade secrets until April 2012, 36 months after the consulting agreement terminated.

At the hearing, the parties addressed the issue of whether the plaintiff stole trade secrets. Apparently the defendants argued that if they did not actually use trade secrets, the noncompete—which was longer than two years—was presumptively unreasonable. The plaintiff’s counsel argued that he did not need to put on evidence of trade-secrets theft, since the agreement was designed to protect trade secrets and thus was presumptively reasonable.

The lower court did not hear evidence related to trade-secrets theft. It granted the injunction “but it based the injunction on the use of trade secret information, thus the thirty-six month period applied.”

The Fourth District Court of Appeal reversed, in part because the defendants did not have an opportunity to show that they did not misappropriate trade secrets. The court implied that a plaintiff does not get the benefit of the five-year reasonableness presumption unless it establishes that the defendant actually misappropriated trade secrets.

I think this is the wrong result. The statute only requires that the restrictive covenant be “predicated upon the protection of trade secrets.” Sec. 542.335(e), Fla. Stat. Thus, a plaintiff should only have to show that it needed the covenant to protect its trade secrets because, for example, the defendant had access to trade secrets. Requiring that the plaintiff show actual misappropriation renders meaningless the term “predicated upon.”

Regardless, given this decision and several others, attorneys attempting to enforce restrictive covenants in Florida need to carefully consider what evidence they intend to offer in support of an injunction motion, particularly when they need the benefit of the 5-year presumption.

Georgia Case Shows When Not to File a Trade-Secrets Lawsuit

April 16, 2013 By in Advice, Case Summary, Noncompete, Trade secrets Leave a comment

When an employee leaves to start her own business and takes clients with her, the former employer often reacts emotionally. There may be a sense of betrayal, which can be followed by a desire to lash out, frequently through filing suit against the former employee. Many times, there are real grounds for a lawsuit. But other times, a lawsuit is a waste of time and money. Drawdy CPA Services, P.C. v. North GA CPA Services, P.C., 2013 WL 1189274 (Ga. Ct. App. March 25, 2013) appears to be an example of a case that never should have been brought in the first place.

The plaintiff, an accounting firm, sued its former employee (Pritchett) and her accounting firm for breach of a nonsolicitation agreement and misappropriation of trade secrets. After Pritchett left the plaintiff, it determined through a log-in history report that she had accessed its client portal (through which clients and former clients could review their prior years’ tax returns). The plaintiff filed an emergency motion for injunctive relief, which sought to prevent the defendants from accessing the plaintiff’s client portals and soliciting the plaintiff’s clients.

Following Pritchett’s use of the portal to obtain tax returns, the plaintiff eliminated portal access for all former clients. Thus, the court denied the plaintiff’s request for an injunction barring Pritchett from using the client portal.

At the hearing, the plaintiff offered the affidavit of one of its clients stating that he had received a direct-mail flyer from Pritchett. In response, Pritchett called four of the plaintiff’s former clients, who all testified that they sought out Pritchett once she opened her own firm. One of these clients testified that his company printed and distributed a mailer for Pritchett to a list of 2,500 people compiled by a third-party company; by using this list, Pritchett apparently contacted the plaintiff’s client inadvertently.  Pritchett also offered 113 affidavits from her clients who were formerly the plaintiff’s clients, all of whom stated that she did not solicit them to leave the plaintiff.

Given this evidence, the court refused to enter an injunction.

When presented with evidence that a former employee violated her employment contract, it is critical to fully investigate what actually happened. While it’s impossible to know what steps the plaintiff and its attorneys took here, it certainly seems like communicating with the former employee could have revealed that there was no deliberate effort to violate the employment agreement, and that it would be very difficult to prove violations.

We all know that litigation is time-consuming and expensive. It should be used as a last resort, and only when it is impossible to resolve the dispute amicably. Even then, attorneys need to know when to tell their client that there simply isn’t enough evidence to support a claim.

On the flip side, this case is a great example of how to defend against a restrictive covenant and trade-secret misappropriation claim.

How to Use Exit Interviews to Protect Proprietary Information

April 10, 2013 By in Advice, Noncompete, Trade secrets 8 Comments

In an earlier post, I listed ten ways businesses can protect their trade secrets. Now, let’s look at one of these in a bit more depth: exit interviews.

An exit interview—i.e., a meeting with an employee who is leaving the company—can be an incredibly effective tool for employers for a wide variety of reasons, and all employers should conduct them whenever possible. For our purposes, let’s focus on how these interviews can be used to protect proprietary information.

When conducting an exit interview with an employee who signed a noncompete or a confidentiality agreement, the exit interview should include a frank reminder of the employee’s obligations. Have the employee sign an acknowledgement of his or her obligations. When the employer is particularly concerned about the employee’s future plans, consider giving the employee a letter from an attorney.

For an employee who has not signed a noncompete or or a confidentiality agreement, the exit interview offers an opportunity to safeguard proprietary information the employee had access to. Make sure that the employee is aware of his or her legal obligations not to disclose any trade secrets. And have the employee sign an acknowledgement that he or she was provided with proprietary information under circumstances that require the information to be kept confidential.

Whenever possible, the interview should explore where the employee will be working next.  If he or she will be working for a competitor or starting a competing business, the company knows that it needs to be on alert. An attorney should be consulted to discuss legal options.

Hopefully, the employer has been keeping an inventory of all company computers, phones, etc. issued to the employee. Have the employee bring these, along with any company documents in their possession, to the exit interview. The employee should also be asked whether he or she has any hard-copy or electronic company documents on a personal computer, mobile device, or other storage media.  The acknowledgement discussed above should contain language confirming that the employee has returned all such documents and destroyed any electronic copies.

Finally, be sure to get a phone number and address where the employee can be reached. If it later becomes necessary to communicate with or file a lawsuit against the former employee, this information is critical.

If anyone has additional suggestions for using exit interviews to protect proprietary information, feel free to discuss in the comments.

Trade Secrets and Due Diligence

April 2, 2013 By in Advice, Noncompete, Trade secrets 1 Comment

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We all know that when companies are looking to purchase/merge with/make a significant investment in another company, they have their attorneys conduct due diligence regarding the transaction and the acquisition target. Generally, this due diligence includes identifying key employees, determining whether these employees have executed noncompete agreements, and reviewing the agreements.

But acquiring companies too often fail to go beyond a noncompete review to look at how effectively the acquisition target is protecting its proprietary information. Thus, acquiring companies are unwittingly subjecting themselves to significant risk. Intentional or inadvertant disclosure of this information could destroy the target’s business post-acquisition.

To minimize this risk, due diligence should always include a comprehensive look at how the target protects its proprietary information. This should start with conversations with management and key employees to identify the company’s critical proprietary information. Once identified, all measures in place to protect this information should be reviewed.

To determine whether adequate protections exist, a number of questions need to be answered. For example, are there any employees who have access to proprietary information who have not signed a noncompete, or at least a nondisclosure agreement? Are employees periodically educated about their obligations regarding proprietary information? Is the company proactively using IT solutions to safeguard proprietary information? Is a trade-secrets policy in place?

By conducting this review as part of the due-diligence process, the acquiring company can identify protection gaps and make sure these can be addressed as part of or after the acquisition.

Every company seeking to acquire or invest in another company should speak with an attorney who specializes in trade-secrets law to assist with the due-diligence process. This involves a relatively minor cost, especially compared to the risk minimized.

The Final Four . . . Categories of People That Threaten Your Trade Secrets

March 20, 2013 By in Advice, Noncompete, Trade secrets Leave a comment

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Since everyone is focused on filling out brackets to identify the final four, let’s also take a look at  four important categories of people who threaten trade secrets: Employees, customers, vendors, and visitors.

Employees: No group poses a greater threat to trade secrets than employees. Virtually all companies with employees must share some proprietary information with them. And many of these employees will eventually work for a competitor. Thus, an employer can never be too vigilant about protecting itself from accidental—or worse, intentional—disclosure of trade secrets by its employees.

The best way to limit this risk is to have all employees with access to proprietary information sign a noncompete agreement that contains nondisclosure obligations as well. At a minimum, all of these employees should sign a nondisclosure agreement. Also, proprietary information should only be shared with employees who need that information to perform their jobs. And it is critical to educate employees about their trade-secret obligations.

In future posts, I will be talking frequently about how to best deal with employees.

Customers: While customers are obviously the lifeblood of any company, they present hidden risks for disclosure of trade secrets or proprietary information. Take pricing information in an industry where prices are not widely known, for example. (In certain circumstances, pricing information can be a trade secret. At a minimum, pricing information is valuable in a competitor’s hands.) Customers could tell competitors about pricing in an attempt to negotiate a better deal. This problem can be addressed with confidentiality provisions in customer contracts.

Vendors: Companies often provide their vendors with confidential information. Like with customers, the risk here can be minimized with confidentiality language in vendor contracts.

Visitors: By visitors, I mean not only actual visitors to a company’s physical location, but anyone who can access the company’s information in person or remotely. For example, anyone who can access a company’s website is a visitor. To keep visitors from accessing proprietary information, implement a formal visitation policy, including making all in-person visitors sign in and be accompanied by a staff member at all times. And make sure to work with an IT professional to ensure that online visitors cannot access confidential information.