BLOGS: Womble Carlyle Non-Compete and Restrictive Covenants Blog

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Tuesday, April 6, 2010, 3:34 PM

Thomas Weisel Partners Wins Breach of Fiduciary Duty Claim Against Former Director Who Joined BNP Paribas and Orchestrated En Masse Resignations

By Todd

This out of California - on April 1st, a federal judge (The Honorable Marilyn Hall Patel) found Praveen Chakravarty liable for breach of fiduciary duty to Thomas Weisel Partners in connection with his departure as a Director for Thomas Weisel Partners and his "facilitation of" the resignations of at least 18 employees, who promptly became re-employed with BNP Paribas or its affiliated company, BNP Paribas Securities (Asia) Limited. In carefully chosen words, Mr. Chakravarty admitted he served as "an intermediary of information between BNPP and his co-workers in the hope that some of them might secure alternative employment." That, according to Judge Patel, was a no-no.


Some related evidence certainly didn't help Mr. Chakravarty. Apparently before the court was an e-mail to Mr. Chakravarty from Jonathan Harris, BNP Paribas Asia's Head of Company Research. Before Mr. Chakravarty had even resigned, Mr. Harris sent an e-mail to Mr. Chakravarty's e-mail at Thomas Weisel Partners as follows:


"As we discussed, the way we'd like to take this forward is to first identify the core group of your team, I think you said about 20-25 individuals. We'd like to then work on preparing employment documents for all of them. Once you have them and all is satisfactory, we'd look to you to resign from Thomas Weisel enmass [sic]. If their [TWP's] reaction is that they'd move to shut down the remainder of the office, we can step in and offer to take over the remainder as a gesture to save them the office shutdown costs.


First step would be to get from you the list of all employees, their current comp and job descriptions. Next I'd like you to highlight the 20 or 25 key individuals, and a bit more info on their job descriptions and background. For this group, please provide an indication of what comp levels you would think about for their move to BNP Paribas. Once I get this from you, you and I can arrange for a call to talk through the info."


Editor's note: this doesn't look good. This sounds like Harris knows exactly what the "enmass" departures will do to Thomas Weisel. But, of course, Mr. Chakravarty didn't send this data to Mr. Harris, did he? Well, yes. He did. That same day he sent it, noting "you are not obligated to take the entire team. The minimum we can go with is 8 analysts and the rest are available as needed. If we close the deal with 8 analysts, me and the HR/Prod Mgmt. person quickly, then we can try to big for the office space and others." Ooops. That's not good either. Seems Mr. Chakravarty knows exactly what the "enmass" departures will do to Thomas Weisel too.


Well, you can click on the link above to read the rest of Judge Patel's decision and order but suffice it to say this one is a long way from over. We would assume Mr. Chakravarty will appeal this decision and order. If he doesn't, Thomas Weisel Partners now has a guy in pretty serious legal trouble and there's more in this case to follow.


Wednesday, March 24, 2010, 11:20 PM

Georgia House Passes Proposed Constitutional Amendment On Non-Compete Agreements

A proposed amendment to the Georgia Constitution to allow for enforcement of reasonable non-compete agreements easily cleared the Georgia House of Representatives on March 22, 2010. The proposal now heads to the Georgia Senate. If passed by the Senate, the amendment could be presented to Georgia voters for ratification this November.

Thursday, February 18, 2010, 2:17 PM

Goldman Sachs Alleges Credit Suisse Picked Its Pocket in Atlanta

By Todd

Reuters is reporting that Goldman Sachs has sued seven former wealth managers for allegedly soliciting an en masse departure of employees and clients. Goldman has also reportedly sued Credit Suisse for inducing the departures with oodles of up front departure bonus cash.


The seven immediately began "pirating" Goldman clients and colleagues to join them at Credit Suisse, according to the suit, filed in federal court in Atlanta on Wednesday. The seven violated their non-solicitation agreements and stole confidential information, the suit said.

Credit Suisse and Goldman declined to comment on the matter.

Goldman's lawsuit comes amid heated competition among the largest U.S. wealth management firms to poach advisers and their customers.

Credit Suisse's Americas private banking head told Reuters earlier this month that he wants to grow the U.S. wealth management business from 400 advisers to 700 over the next few years.


According to the Goldman lawsuit, one of the seven defectors, David Greene, told Goldman Atlanta office head David Fox that Credit Suisse agreed to pay him $11 million to join the firm.


The seven began soliciting Goldman's clients and employees on Feb. 6, a day after they resigned from Goldman, according to the suit.

Greene called Goldman Sachs Vice President Justin Berman on Feb. 8 at 6:15 a.m. and offered him $10 million to join Credit Suisse, the suit said.

Goldman also accused the defectors of telling Goldman clients that the defections had "destabilized" the Atlanta office, which is in the same building as Credit Suisse's wealth managers.

Goldman's Atlanta team advised 140 Goldman clients in several Southeast states, according to the filing.

The suit alleges that the departing advisers attempted to skirt non-solicitation agreements by having Dennard and Tyson -- who did not sign such agreements -- call former clients on behalf of the team. Clients were asked to contact Goldman advisers who were moving to Credit Suisse, the suit said.

The departing executives also targeted Goldman's internal list of potential wealth management clients, another violation of their employment agreements, Goldman said. The New York bank draws attention to a similar wave of defections that hit Credit Suisse in 2007 , and says “It is beyond ironic that Credit Suisse having been so damaged by the departure of its key private wealth asset managers in October 2007 has similarly preyed on Goldman Sachs.”

Goldman asked the court to restrain the seven defectors from using Goldman information and order them to return documents.

The case is captioned In re: Goldman, Sachs & Co. v. Greene et al, U.S. District Court, Northern District of Georgia, No. 1:10-cv-00453.

Tuesday, October 27, 2009, 9:48 AM

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

By Todd

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.


Friday, October 23, 2009, 9:29 AM

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

By Todd
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.

Tuesday, September 22, 2009, 10:31 AM

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.

Wednesday, September 9, 2009, 11:46 PM

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.
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