In a breach of contract and non-compete case I was recently hired to defend, I had a very odd first phone conversation with my adversary. And at the end of the call, I told him that I would be following up with a short e-mail memorializing our “pleasant conversation.”

His response took me by surprise: “Please don’t include in the letter that our conversation was pleasant; I might want to forward it to my client, and I don’t want them to know that our conversation was cordial.”

My response: “Are you serious?”

Answer: “Yes. Let’s just keep it professional.”

I admit, I was taken aback. And even though this isn’t the first time another lawyer has told me such a thing, it still bothers me. Here’s why: I go out of my way to emphasize to my clients that I will always try to be as pleasant as possible, and to extend courtesies to my adversaries. And there is nothing “unprofessional” about it.

To the contrary, as one of my colleagues recently put it: “You can disagree without being disagreeable.”

Quite frankly, I think attorneys who insist on maintaining that “litigation means war” or scorched earth policy do their clients a grave disservice. Here are but three (3) important reasons :

(1) by refusing to extend courtesies, the case will last longer, and prove more expensive for their clients, as they pursue needless fights over unimportant issues;

(2) by taking uncompromising and intractable positions, they may very well assure that either they or their client (or both) is viewed less favorably by the judge or jury; and,

(3) by refusing to work with the other side to the litigation, they are likely to alienate them, making it far more difficult – if not impossible – to resolve the case short of a full-blown trial, which is often contrary to the client’s best interests.

The moral of this story should be clear. If you think you want “an animal” who knows only one way to litigate, and is hell-bent on the other side’s destruction, stop and consider this: will he be working in your best interests?

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Nearly one year ago, we wrote in general terms about how good faith is implied in New York contracts. This article, however, will focus on the underlying factors that New York’s courts will consider when applying this doctrine to non-solicitation agreements.

Fortunately, a hot-off-the-presses decision from New York State’s highest court offers some guidance – and some instructive language:

“Under New York common law, a seller has an “implied covenant” or “duty to refrain from soliciting former customers, which arises upon the sale of the ‘good will’ of an established business” (Mohawk Maintenance Co. v Kessler, 52 NY2d 276, 283 [1981]) … A seller’s “implied covenant” not to solicit his former customers is ‘a permanent one that is not subject to divestiture upon the passage of a reasonable period of time … This is so because “[t]he essence of [these types of] transaction[s] is, in effect, an attempt to transfer the loyalties of the business’ customers from the seller, who cultivated and created them, to the new proprietor” (id.) …

“Notwithstanding this “implied covenant,” a buyer assumes certain risks when he purchases an existing business and attempts to transfer the loyalties or “good will” of that business as his own. For example, the customers of the acquired business, “as a consequence of the change in ownership,” may choose to take their patronage elsewhere (id.). Indeed, “the occurrence of a certain amount of attrition is one of the risks that the purchaser must assume when he acquires an established business” (id.). Moreover, the seller of a business is free to subsequently compete with the purchaser and even “accept the trade of his former customers, provided that he does not actively solicit such trade …  [such as by] sending targeted mailings or making individualized telephone calls to his former customers informing them of his new business ventures … On the other hand … so long advertisements [are] general in nature — and not specifically aimed at the seller’s former customers — [they are] permissible under New York law.

“While the “implied covenant” places certain barriers on a seller’s conduct, it in no way prohibits a former customer or client from gathering information about that seller. In the free market, consumers of goods and services have the right to make informed choices …Thus, a seller of “good will” may answer the factual inquiries of a former client, so long as such responses do not go beyond the scope of the specific information sought …[but may not] explain, for example, why he believes his products or services are superior …

For additional information on this topic, please see “New York Court Clarifies Standard For “Improper Solicitation of Old Clients.”

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In a fascinating – and significant – April 28 decision, New York State’s highest court answered the following question:

How far can you go to help your new employer solicit your former clients under New York law?

Here are some of the salient facts in the breach of contract and breach of fiduciary duty case of Bessemer Trust Co., N.A. v. Branin:

In this case, Branin was a former executive of Brundage, who sold its assets, including its good will, to Bessemer for $75 million in August, 2000, with $50 million of the purchase price being payable up front, and the remaining $25 million being contingent on Bessemer and its principals meeting certain performance benchmarks. Branin, who was Brundage’s largest individual shareholder, received just over $9 million as his share of the sale. Branin continued to work for Brundage for just under 2 years, at which point he sought different employment.

Although Branin did not have any written non-compete agreement barring solicitation of former clients (which, given the magnitude of the asset purchase agreement is, to say the least, rather puzzling), he went out of his way not to actively solicit any of his former clients that were part of the asset purchase agreement when he finally left in June, 2002. In fact, he didn’t even tell any of those clients he was leaving; rather, when these clients contacted Branin privately, he informed them that he was pursuing work with a different firm in the field because this new firm’s operating philosophy “was more appropriate for him.”

Some clients, including his largest one, went out of their way to follow him, and left Bessemer. And this lawsuit followed.

In response to a question posed by a federal appeals court, New York State’s highest court concluded its opinion as follows:

“The issue in which the Second Circuit seeks our guidance is to what degree a seller may assist his new employer in responding to inquiries made by a former client. Since the seller of “good will,” absent a restrictive covenant, may compete with a purchaser, we conclude that certain activity within a new employer’s firm must be permissible …

“While a seller may not contact his former clients directly, he may, “in response to inquiries” made on a former client’s own initiative, answer factual questions … a seller’s “largely passive” role at [a client] meeting does not constitute improper solicitation in violation of the “implied covenant.”

To my thinking, this is a good and logical rule.

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Although I’ve written extensively on the subject of non-compete agreements, setting forth some of the general principles and the exceptions to those rules that help dictate whether a particular non-compete agreement will or won’t be enforced by a New York court, I must concede that it’s often hard to predict with any degree of certainty what a New York court will do.

That’s why I give kudos to attorney Stephen Kramarsky, Esq., who authored an excellent article on New York non-compete agreements that recently appeared in the New York Law Journal.

The premise of his article is this: critical analysis of the courts’ treatment of non-compete agreements has shown time and again that the question of whether these provisions will be upheld or rejected turns on the unique and specific facts of each case. Further complicating an attorney’s ability to predict the outcome of a challenge to a non-compete agreement, the courts have frequently vacillated on these provisions  – even when the employees’ agreements and positions were essentially the same, and even at the same company.

For example, in International Business Machines Corp. v. Visentin, a Federal Court in New York denied IBM’s request for a preliminary injunction seeking to enforce a non-compete agreement;  But in IBM Corp. v. Papermaster, a case that was decided just over two years ago, the same Federal Court upheld the restrictive covenant, holding that by allowing Visentin to work for Apple would “inevitably” lead to the disclosure of critical proprietary information.

Quite frankly, it is hard to fault IBM for assuming they would win this fight; after all, both Papermaster and Visentin were “key, high-level technical managers, members of IBM’s most important senior management committee with responsibility for some of the company’s most important business initiatives.”

But that underscores the essential point made above: it is very difficult to predict accurately whether a New York court will enforce a non-compete agreement, particularly when you’re dealing with senior-level employees.

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Apparently even the high-end technology sector has to play by the same rules regarding non-compete agreements as the rest of us; or, at least that’s the Department of Justice’s position.

In two actions that were recently filed in federal court in Washington D.C. (United States v. Adobe Systems, Inc., and United States v. Lucasfilm, Ltd.) the DOJ claimed that some of the highest-end companies worked together to bar recruiters from calling their most in-demand and skilled employees, creating a “do-not-call” list. Some companies went even further, agreeing to notify each other when making offers to each others’ employees and to not make counteroffers to their own employees offered a position by the other company.

And according to the Justice Department, that’s going too far, and inherently constitute (“per se,” in legalese) unlawful restraints on competition because they are not “reasonably necessary” to maintain the companies’ competitive advantages.

The DOJ is actually taking a smart tack in these cases, as they are not attacking the agreements in a  broad-based wholesale fashion; their settlement proposal carves out a niche for non-solicitation agreements that are of the variety commonly seen in joint ventures or settlement agreements that are reasonably limited in geographic scope and duration (much the same as is currently the law regarding non-compete agreements and non-solicitation agreements in New York).

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Here’s the general rule in New York: if an employee is fired without cause, any non-compete agreement he or she signed will no longer be enforceable. And the reason for this is fairly straightforward – because once the employer is no longer keeping up their end of the contract, the employee shouldn’t be forced to do so (in legalese, “there no longer exists the mutuality of obligation on which the covenant rests”).  The seminal case in New York addressing the issue of what constitutes termination for cause, and what constitutes termination that is without cause in the context of non-compete agreements (a.k.a. “restrictive covenants”) is Post v. Merrill Lynch, Pierce, Fenner & Smith Inc., 48 NY2d 84, 87 (1979). For more information on that topic, please see “When NY Courts Will Uphold Non-Compete Clauses – No Matter How Unreasonable,” and “When NY Employers Condition Receipt of Post-Employment Benefits on a Non-Compete.”

But what about if the employee is terminated for cause? Will the non-compete be enforceable then under New York law?

The short answer is this: Yes.

Although there are relatively few reported decisions on this particular issue, both New York State and Federal trial courts have read the Post v. Merrill, Lynch decision to permit enforcement of non-compete clauses against employees that were terminated for good cause. See, e.g., Gismondi, Paglia, Sherling, M.D., P.C. v. Franco, 104 F.Supp.2d 223 (S.D.N.Y. 2000); MTV Networks v. Fox Kids Worldwide, Inc., 1998 WL 57480 (Sup.Ct. NY Cty. 1998).

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Earlier today, it was reported that Microsoft has sued Matt Miszewski, the former General Manager of one of its sales teams, as well as his new employer, Salesforce.com, who happens to also be one of Microsoft’s direct competitors, to enforce Miszewski’s non-compete agreement, and bar him from working for a direct competitor – particularly as their VP of the Global Sector, for one year.

From the allegations set forth in the article, this case sounds like the paradigm of a case where a New York court would enforce the non-compete. Here are some of the sordid details:

• Immediately prior to leaving Microsoft, Miszewski downloaded roughly 25,000 pages of business files and 600 MB of data to his personal laptop, much of which included sensitive, confidential and proprietary information;
• In the month of his departure, Miszewski helped author a memorandum setting forth Microsoft’s business strategy for the Public Sector for the coming year of 2011. This material was compiled well after his agreement to assume a new position as Salesforce’s VP of Global Sales was, for all intents and purposes, a “done deal”; and,
• While working for Microsoft, his job duties specifically entailed working with and modifying their “Worldwide Public Sector Government Cloud Playbook,” which containing Microsoft’s confidential and proprietary sales strategy for marketing Microsoft’s cloud computing offerings. Importantly, the Playbook contained vital information regarding Microsoft’s evaluation of its competitors in this market – including Salesforce.com.

This is precisely the type of trade secret material that New York’s courts will look to protect, and the type of non-compete agreement that the New York courts will likely uphold, because to do otherwise would all but encourage trade secret theft and unfair competition.

Thus, it is not surprising that, at least for the time being, the Washington State judge assigned to this case signed Microsoft’s proposed order temporarily restraining Miszweski from working for the new company in this capacity pending a hearing on the issue.

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Maybe the third time is the charm.

In a high-profile breach of contract and tortious interference lawsuit, the National Football League’s Tennessee Titans have sued former NFL coach ,and current USC coach Lane Kiffin, charging that he improperly poached their coaching ranks, inducing Titans running backs coach Kennedy Pola to breach his employment agreement with the Titans in favor of joining Kiffin at USC.

Unfortunately, the article discussing this lawsuit gives precious little details about the nature of the breach of contract. My guess is that there was some sort of non-compete clause in the agreement.

Assuming that is the case, here are some important factors that would be considered if it had been brought in New York: as noted in “Is My Non-Compete Agreement Enforceable Under New York Law?“, New York’s courts, as a general rule, strongly disfavor non-compete agreements because there are “‘powerful considerations of public policy which militate against sanctioning the loss of a man’s livelihood.”

Therefore, a New York court would look to see if the agreement with this coach was reasonable in its geographic scope and duration, whether it imposes an undue hardship on this particular coach, and whether it is reasonably calculated to protect the legitimate interests of the Titans.

That aside, since tortious interference claims require proof of an intentional act, the Titans would likely face an uphill battle in a New York court on those claims.

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In a blog piece that was published in yesterday’s Wall Street Journal, it was reported that OfficeMax has sued A & P, the well-known supermarket chain, seeking a restraining order barring them from poaching key employees. Apparently, OfficeMax felt compelled to take this action after 3 of their key employees left, including their former chief operating officer and two of his subordinates.

As part of their claim, they have also charged the former COO, Sam Martin, with violating the non-compete clause of his employment agreement, with breach of contract and breach of fiduciary duty, claiming that his employment contract with OfficeMax explicitly barred him from soliciting, or poaching, employees away OfficeMax’s ranks.

There’s just one big fly in this particular ointment, however.

Since A & P has filed for bankruptcy protection, certain legal actions against A & P are prohibited, such as pursuing litigation against the bankruptcy debtor’s property. (For additional information on this, please see Bankruptcy Code Section 362).

The question is whether this particular claim would also be subject to bankruptcy protection. A & P’s argument that forcing it to defend this lawsuit would effectively deprive it of one of the chief benefits of bankruptcy protection – i.e., immunity from lawsuits – definitely has some merit.

But I don’t think that it is the better policy in cases of this nature. While I understand shielding a bankruptcy debtor from money judgments, that protection should not be without limits; it should not allow them to act deliberately and intentionally raid other companies’ leadership without consequence.

My guess is that OfficeMax will attack A & P’s response as follows: a restraining order is inherently equitable in nature -  it does not seek damages, and therefore is not the type of claim insulated from suit by the Bankruptcy Code. In addition, to the extent any damages are sought, it would appear that they are targeted at the individual defendant, Mr. Martin, rather than at A & P.

For now, we’ll just have to wait and see how this case shakes out.

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Reading the appellate court’s rendition of the facts in this breach of contract, breach of non-competition agreement and fraudulent inducement/concealment case, it is clear that the court empathized with the plaintiff, and wanted to allow the plaintiffs their day in court. The sordid details are as follows:

In GoSmile, Inc. v. Levine, the defendant founded the plaintiff corporation, which develops and sells tooth-whitening and oral hygiene products, and, he, together with his wife, were the company’s sole stockholders, directors and employees. In 2003, they sold a majority interest in the company to investors (the plaintiffs).

At that time, the defendants executed confidentiality and non-competition agreements that granted plaintiff exclusive ownership rights of all intellectual property, and prohibited defendants from using this information to compete with the company. In exchange for a cash payment, the defendants became at-will employees, directors and minority owners of plaintiff.

After the parties became embroiled in arguments over the company’s financial difficulties, the defendants were terminated, and later resolved their wrongful termination lawsuit arising therefrom via a settlement agreement with plaintiff and several other parties “which contained a broad mutual release of all claims of all kinds, whether known or unknown, that the parties ever had or now had.”

As part of the settlement agreement, plaintiff insisted upon – and defendant warranted – that he had neither breached the 2003 confidentiality and non-compete agreement in the past, and was also not in breach of those agreements at that time. That settlement agreement resulted in a payout to defendants of over $3 million, and an additional payout of $1 million over the following 4 years in exchange for the remainder of defendant’s stock in the company.

Later plaintiffs learned that defendant had, in fact, breached his fiduciary duties to the company, and used this confidential information to unfairly compete with the plaintiff. In other words, he deliberately lied about (in legalese, misrepresented) his breach of fiduciary duty and breach of the non-compete agreement to the plaintiff company in order to fraudulently induce them into entering into the settlement agreement, and pay him over $3 million.

Although the Court was required to sidestep some general rules in order to reach this result, and allow the plaintiff’s claims for breach of contract, rescission and fraudulent inducement to succeed, are you surprised that they did so?

I thought not.

(But if you’re interested in the legal nitty-gritty of why, see “How Breach of a Non-Compete Can Sustain Both Fraud & Breach of Contract Claims in NY“).

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