Dunkin' Donuts Pays Its Way Out of Starbucks Manager's Noncompete Promise

The Puget Sound Business Journal is reporting that Paul Twohig ran Starbucks retail operations in the Southeastern United States before taking the Dunkin’ job.

By switching companies, Starbucks alleged, Twohig violated an agreement in which he had said he would not work for a rival for 18 months. He left Starbucks in March and asked to have the non-compete lifted, but was denied.

“As part of the settlement Mr. Twohig will complete initial training but will otherwise not work at Dunkin’ until Jan. 15, 2010,” Starbucks said in a statement quoted by the Puget Sound Business Journal. “In addition Starbucks will be paid $500,000. Mr. Twohig also reconfirmed his commitments not to share Starbucks trade secrets and other confidential information with Dunkin’ at any time.”

So, per this report, Starbucks gets the benefit of some of the 18-month term in its noncompete promise from Mr. Twohig and they also get $500,000 for the effort.

Buy-outs of remaining term of a noncompete are not out-of-the-ordinary in the business world and they represent efficient legal solutions to often messy litigation.

Federal Appellate Court Holds No Error in $1.16 Million Noncompete Breach Verdict from Rhode Island

If you click on this link: http://newsroom.law360.com/articlefiles/129967-Astro_med.pdf or the title to this blog post you'll be able to read fresh analysis from the First Circuit in their affirmation of a lower court's entry of a $1.16 million verdict in a breach of noncompete and nonsolicitation trial.

But the part of the First Circuit's opinion that interested us most was an argument posed by the former employee and his new employer: if a covenant not to compete is deemed too broad to be enforced and is judically modified by the trial court to make it enforceable, can the employee be liable for breach of the original covenant BEFORE the covenant is judicially reformed or fixed? Employee was essentially asking: "how can I be liable in damages for breach of a promise the court says can't be enforced unless it is modified?" The employee acknowledged that he could be liable AFTER the trial court fixed the covenant - but he vehemently argued that he couldn't be liable for breach BEFORE the trial court fixed the covenant (which just happened to be when he engaged in all his breaching behavior).

The trial court found that he COULD be liable for his conduct that occurred before the judicial fixing and the First Circuit agreed. Here is their reasoning:

Defendants’ contention does not withstand analysis. Their logic would give the promisor in a non-competition agreement one free breach, requiring a prior judicial order before the provision could be said to have been violated. Such a proposition, the validity of which is without authority, would eviscerate all but the most narrowly tailored non-competition agreements, since a
modification of any term of the provision would justify a breach of all its terms. Further, because most breaching employees gain the full benefit of the breach the first time they compete with their former employer, a second breach after judicial warning would in most cases be cumulative. Also, once a court restricts the scope of the non-competition agreement, the breaching party is being held to a more narrowly circumscribed agreement than the one he signed, and the more restrictive terms of the agreement remain as effective
as the day they were agreed to.

We are not particularly persuaded by this logic and we think the Court had to craft a rule here so that this crafty litigant wouldn't get away with his plan to breach that covenant not to compete. The Court is essentially saying: "if you weren't liable for breach in the BEFORE MODIFICATION period, you'd be getting a free pass and we can't have that" and also "you were always obligated under the geographically reasonable restriction that the trial court modified the agreement to provide, you just weren't obligated under the geographically unreasonable parts."

There might be law review articles out there discussing this argument - you're bound by a geographic scope that is reasonable even though your's is unreasonable and if you run afoul of that reasonable provision, you're in trouble - and we'll keep an eye out for them. This is an interesting issue.

Todd Sullivan Interviewed in Technology Transfer Publication

RALEIGH, N.C.-Womble Carlyle attorney Todd Sullivan is quoted in an article in the August 2009 issue of Technology Transfer Tactics, a monthly newsletter for technology transfer professionals.

The article focuses on intellectual property disputes between research universities and inventors, and how proactive measures can prevent such disputes from becoming major headaches. The article was prompted in large part by a recent court battle between the Mayo Clinic and former employee Dr. Peter Elkin, who developed a software program for bioinformatics. The two sides now are battle over who controls the rights and revenues from the software.

Sullivan is quoted extensively on how companies and inventors can prevent such disputes. "Disputes essentially arise like a phoenix from the ashes of poorly drafted agreements," Sullivan tells Technology Transfer Tactics.

Todd Sullivan is a trade secrets litigation attorney in Womble Carlyle's Raleigh office. He is a co-author of the Womble Carlyle Trade Secrets Blog.

Click here to read the full article.

North Carolina Court of Appeals Finds Restricted Stock To Be Insufficient Consideration

The North Carolina Court of Appeals issued a decision that serves as a good reminder for businesses that when offering consideration to support a non-compete agreement, the consideration cannot be illusory.

In the case of MSC Industrial Direct Co. v. Steele, the employee worked for the company for 12 years before he was asked to sign an agreement with a non-compete provision. In consideration for the agreement, the employee was offered 85 restricted shares of the company’s stock. (Remember, in North Carolina, continued employment is insufficient consideration to support a non-compete agreement entered into after the employment relationship has begun.) The first 50% of the stock would not vest for three years, and the remaining 50% would vest over the two years following that. If the employee was terminated at any time before vesting, the shares were forfeited. In addition, before the shares vested, the employee had none of the attendant rights usually associated with stock, such as the ability to transfer the shares, receive dividends, or to vote the shares.

Under these facts, the Court of Appeals held that the award of shares was illusory consideration, and ruled that the non-compete agreement was not enforceable. The court reasoned that the company could divest the employee of the shares by terminating him “only moments after signing" the agreement. On that basis, the court found the restricted shares were insufficient consideration to support a non-compete.

As a final point, the Court of Appeals also noted that since the employee had worked for the company for 12 years, the company could not rely on the fact that it continued to provide him with access to confidential information as consideration to support the agreement. The court concluded that since he already had access to the information prior to the agreement, the company was not providing anything new of value to the employee.

This case serves as a good reminder that where it is critical to bind current employees to a non-compete agreement, the better course is to tie the agreement to an increase in compensation, a promotion, a signing bonus, or some other type of consideration that is of immediate benefit to the employee.

Massachusetts Judge Modifies Injunction - Permits Executive with Noncompete to Work for Hewlett-Packard in Limited Capacity

It is not common for a judge to modify an injunction - but it happens.

The Boston Globe is reporting that a Suffolk County Superior Court has cleared the way for former EMC executive David Donatelli to start work at rival Hewlett-Packard. But the court barred Donatelli from working at any HP business unit that competes with EMC for one year.

Until his surprise resignation last month, Donatelli was president of EMC's data storage products operation, the company's biggest business unit and one that competes directly with HP's storage business. In late April, HP said Donatelli would become its executive vice president for enterprise servers, storage, and networking. But Donatelli had signed a contract with EMC stating that if he left the company, he would wait 12 months before taking a job at a competing firm.

Donatelli sought to get out of the contract by filing a lawsuit in California, where HP is headquartered and where courts generally refuse to enforce noncompete agreements. EMC filed a countersuit in Massachusetts, where Superior Court Judge Stephen Neel issued an injunction on May 4 barring Donatelli from taking the HP job.

On Thursday, Neel modified his injunction. The new version allows Donatelli to work for HP as long as he steers clear of the company's storage business. In a statement issued yesterday, HP said Donatelli will serve as executive vice president for enterprise servers and networking, and will take on leadership of the storage business after the injunction is lifted a year from now. Until then, HP's storage operation will be run by senior vice president Dave Roberson.

Georgia Considering New Statute To Provide Guidance on Enforcement of Non-Competes

In response to the strict scrutiny given restrictive covenants by Georgia courts, a coalition is seeking to pass legislation that would allow for the enforcement of reasonable non-compete and non-solicitation covenants. The goal of the proposed statute, as emphasized in its legislative findings, is "to provide statutory guidance so that all parties to such agreements may be certain of the validity and enforceability . . . and know their rights and duties according to such provisions."

The proposed legislation can be found at http://www.legis.ga.gov/legis/2009_10/sum/hb173.htm.

Adult Showclub Claims “Near Permanent” Relationships with VIP Room Customers Are Exposed to Interference by Competing Former Employee

A pending case in Illinois is providing an interesting context for the analysis of the nature of customer relationships required to establish the protectable business interest necessary to support a non-compete agreement.

The Penthouse Club is an “adult showclub” in Sauget, Illinois. Penthouse filed suit on March 10, 2009 in federal court in the Southern District of Illinois seeking an injunction against its former Director, Michael McLean. Penthouse seeks to prohibit violation of his non-compete agreement and interference with the club’s customer relationships.

According to the complaint, the Penthouse Club operates a “VIP Room” that is open only to members who have to pay initiation and yearly membership fees. As the club’s director, Mr. McLean gained valuable inside knowledge about the VIP Room members, the names of the club’s entertainers and their working preferences, planned promotions, and the club’s specialized and unique training programs to increase business.

The lawsuit arose after Mr. McLean was fired from the club and went to work for a competing adult showclub. The Penthouse Club claimed that this violated his non-compete agreement, which prohibits Mr. McLean from working at an adult club within a 25-mile radius of the Penthouse Club.

The Penthouse Club has moved for a preliminary injunction. In arguing that it is likely to succeed on the merits of the case, Penthouse must show that the non-compete protects a legitimate business interest. That interest, according to Penthouse, is the “near permanent customer relationships with many of its members in its VIP Room.” In its motion, Penthouse contends that it “has spent a significant amount of money to build its clientele in the VIP Room.” Citing its “exclusive nature,” Penthouse claims that “finding and maintaining the clientele willing to become members and maintain his membership is difficult.” Because of his employment, Mr. McLean gained extensive knowledge about those members, and Penthouse believes that he will inevitably disclose that knowledge in his competing employment.

Under Illinois law, among the factors considered on the customer relationship issue are the time required to develop the customer relationships, the amount of money spent to do so, the employee’s personal contact and knowledge of those customers, and the length of the customer relationship.

The injunction motion is set to be heard next month. It will be interesting to watch how the court handles the argument about whether “near permanent relationships” with customers has been established. Given the current economy, there are doubtless many businesses in many industries that could make a similar argument premised upon the contention that finding customers who are “willing to become and remain” customers requires a significant investment of time and resources.

The case is IRC, LP v. McLean, Case No. 3:09-cv-00189, pending in the U.S. District Court, Southern District of Illinois.