BLOGS: Womble Non-Compete and Restrictive Covenants Blog

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Friday, May 30, 2008, 10:23 AM

Securities Advisor Enjoined by Federal Judge in Pittsburgh

By Todd
The authors of this blog have experience litigating departing broker and financial advisor cases - and as market turmoil and institutional shake-ups continue to roil that industry, these cases are flourishing.

The cases all seem to allege a common theme - a financial advisor with an employment agreement promising to be loyal and not to solicit customers upon termination has privately decided to leave for greener pastures communicates with customers advising of the departure and, when the employer catches wind of the same, all hell breaks loose. Millions of dollars of customers' invested money, and the fees generated therefrom, are at risk and everybody lawyers up for a federal court injunction hearing.

Well, the Pittsburgh Tribune-Review is reporting that a federal judge in Pittsburgh issued an injunction against an investment adviser who defected to another company, taking from his old employer a number of clients and their $4 million worth of investment assets.

U.S. District Court Judge Gary Lancaster's order on Thursday bars Mark A. Kovacs of Uniontown from using any confidential information from his former employer, NatCity Investments, Inc.

Kovacs resigned last month from NatCity and joined BPU Investments Inc.

Kovacs joined NatCity's Private Client Group in 1996 and handled "many of NatCity's largest and most valuable individual and institutional clients," according to the motion.

NatCity accused BPU of using the client information to "divert potential customers away from NatCity to BPU," according to the filing.

NatCity is an investment unit of National City Corp., with offices in Pittsburgh, Ligonier and Uniontown.

BPU Investments has offices in Pittsburgh and Greensburg.

Kovacs was accused by NatCity of breach of contract and fiduciary duty, misappropriation of trade secrets, conversion of corporate assets, unfair competition and unjust enrichment.
According to the injunction motion, Kovacs, who managed $100 million in investments at NatCity, resigned from NatCity on April 18 but four days earlier began "to systematically e-mail highly confidential NatCity documents" containing the names, account numbers and financial information to his new employer.

Four days after he resigned, NatCity alleged that BPU President Robert Unkovic sent letters to NatCity clients announcing that Kovacs was joining BPU. NatCity alleges that the company lost $4 million worth of business when 18 clients jumped to BPU.

Seeing as the financial advisor only successfully persuaded $4 million worth of assets-under-management to leave with him, we'd consider this a big win for NatCity. They've still got 96% of the financial advisor's book-of-business under control and have an injunction against the financial advisor that likely impairs his ability to service the $4 million the client's transferred to the new operation.

Thursday, May 29, 2008, 11:42 AM

Have you looked at your customer non-solicitation provisions for your Georgia employees lately?

If it has been a while since you looked at the customer non-solicitation restrictive covenants signed by your Georgia employees, it's time to pull them out and give them a careful read. In Trujillo v. Great Southern Equipment Sales, LLC, 289 Ga. App. 474, 657 S.E.2d 581 (2008), the Georgia Court of Appeals ruled that a customer non-solicitation covenant was overbroad and unenforceable because it prohibited an employee from soliciting customers "about whom Employee had confidential or proprietary information because of his/her position with Employer." This ruling has added some additional wrinkles to the already murky area of Georgia law addressing the level of "material contact" required between an employee and a customer in order for an employer to legally restrict the employee from soliciting the customer after the employee is no longer employed by the employer.

Companies trying to broaden their customer non-solicitation protection need to be aware of this recent decision. Worse yet, companies should be reminded that a void customer non-solicitation restrictive covenant will knock out an otherwise valid non-competition restrictive covenant in Georgia.

Wednesday, May 28, 2008, 3:46 PM

Clear Channel Seeks, and Obtains, Injunction Against Tribune Co. Hire of Executive

By Todd
Crain's Chicago Business is reporting that a federal judge has temporarily prohibited a former member of Clear Channel's management team from working on a business venture involving Tribune Co.'s broadcast stations.

Clear Channel claims in its lawsuit that Mr. Friedman had agreed to a non-compete clause that was to last through year-end as part of his employment contract. However, Mr. Friedman claims in a court document that the non-compete obligation was nullified when he rejected his severance package. The injunction issued by the Court is based on threatened misappropriation of trade secrets and confidential information grounds.

Andrew Friedman, who recently joined the staff of Kentucky-based Local TV LLC, has taken a 10-day leave of absence to comply with a court order issued late Friday afternoon by U.S. District Court Judge Joan Gottschall in Chicago. Clear Channel of San Antonio, Texas requested the temporary restraining order as part of its federal suit filed May 19 against Tribune, Local TV and Mr. Friedman.

Mr. Friedman recently resigned from Clear Channel and went to work for Local TV as vice-president of a new broadcast management venture that is a wholly-owned subsidiary of Tribune. Local TV is a private-equity firm created in 2007 to purchase nine television stations.

Judge Gottschall granted Clear Channel's request on the grounds that the company would "undoubtedly suffer irreparable harm if the (temporary restraining order) is denied and (Mr.) Friedman uses the knowledge of interactive content strategies for the benefit of Tribune." Mr. Friedman, she wrote, "will suffer little to no harm, other than being unable to work in his chosen profession for a few weeks."

Mr. Friedman is also temporarily barred from using confidential information he gleaned during his employment at Clear Channel Communications Inc. and from hiring away other Clear Channel employees. He is also to "immediately return" to Clear Channel any documents, data and files as well as portable storage devices used to transfer proprietary information.

Judge Gottschall, however, denied Clear Channel's request for a temporary restraining order against Tribune and Local TV.

"The court made no findings of wrongdoing by either LocalTV or the Tribune, and both will continue to resist Clear Channel's attempts to interfere with their mutual business interests," Tribune said in a statement.

Tuesday, May 27, 2008, 10:24 AM

Buyer Beware: Non-compete agreements may not be assignable to buyers in asset-only purchases in North Carolina

For many years, no one seems to have paid much attention to the assignment of non-compete agreements in North Carolina. In the context of a sale of a business, practitioners have generally assumed that basic contract principles would make a non-compete agreement as assignable as any other contract. That assumption is no longer safe in North Carolina.

In a recent decision, the North Carolina Business Court emphasized that in an asset-only purchase, the buying company has two options when seeking to acquire employees with non-compete agreements with the seller. The buyer can either enforce the non-compete from the date of the purchase (presumably by not hiring the seller’s employees and preventing them from competing), or the buyer must enter into new non-compete agreements with the acquired employees.

In Covenant Equipment Corp. v. Forklift Pro, Inc., Case No. 07 CVS 21932 (N.C.Super. Ct. May 1, 2008), in an asset-only purchase, the buyer acquired an employee who had entered into a 2-year non-compete agreement with the seller. That employee continued his employment with the buyer, working under the same employment agreement with restrictive covenants that he had originally entered into with the seller. More than two years after the purchase, the acquired employee left and went into competition against the buyer. The buyer brought suit to enforce the restrictive covenant.

Building upon a decision it issued in late 2007, the Business Court refused to enforce the non-compete agreement, finding that it had already expired two years after the buyer's purchase. The Business Court stated that there is a "clear difference between an asset purchase and a stock purchase" and that it would not be fair to the acquired employees in an asset purchase to allow the assignment of the restrictive covenants. Rather, the buyer must choose to enforce the covenants from the purchase date, or enter into new agreements with the acquired employees. The Business Court reasoned that "[t]his policy is fair because the buyer may have a business which substantially changes the nature and scope of the restriction originally agreed to by the employee."

Obviously, this evolving trend in North Carolina regarding the assignment of non-compete agreements will provide a further basis for employees to challenge those agreements, and certainly adds another issue for buyers--and their attorneys--to be aware of in an asset purchase. In cases where the seller's employees are an important asset, it will be critical to review any restrictive covenants and renegotiate them. If there is an upside for the buyer, it may be that in those cases where the restrictive covenants originally entered into by the seller and its employees have drafting or enforcement problems, the asset purchase will provide an opportunity for the buyer to identify and correct those issues.

Thursday, May 22, 2008, 7:15 PM

Eastern District of Virginia Rejects Non-Duties-Based Non-Compete

In a memorandum opinion issued on April 15, 2008, the Eastern District of Virginia rejected a non-duties-based non-compete as facially overbroad under Virginia law. The case is Nortec Communications, Inc. v. Carl Lee-Llacer (Case No. 1:08cv127).

The two-part non-compete prohibited Lee-Llacer, a former Nortec information technology consultant, from becoming employed by or performing services for any existing Nortec client for whom he had provided services while employed with Nortec if such employment or services "relates to the products or services offered by" Nortec for twelve months following the termination of his employment with Nortec. It also prohibited him during that time from engaging in any business in direct competition with Nortec in Maryland, Virginia, or the District of Columbia.

In dismissing the non-compete claim, Judge Lee focused on the failure to limit the non-compete to the same work that Lee-Llacer performed for Nortec. In so doing, Judge Lee noted that the non-compete prohibited Lee-Llacer from working for an existing Nortec client to the extent the employment relates to products or services offered by Nortec, however, there was no regard for whether Lee-Llacer's employment with the client involves the use of any skills or knowledge gained through his prior work for Nortec or whether the employment relates to a product or service Nortec offers to that client.

Judge Lee also dismissed the client non-solicitation claim on the basis that it contained certain ambiguous phrases, such as "urge or suggest," "solicit, encourage or induce," and "interfere with or disrupt," which made it similarly overbroad.

This decision is consistent with other recent cases suggesting a trend towards greater judicial focus on the need to demonstrate direct employee access to confidential information and clients in enforcing non-competes.
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