by Lee Gesmer | Mar 8, 2006 | Business Lit. Session, Noncompete Agreements
Noncompete Agreements. Our firm used to write “year in review” articles [link], and I decided it was time for a reprise. Here is a year-in-review summary of the most significant Massachsetts state court cases from late 2004 through calender year 2005 involving the attempted enforcement of noncompete or nonsolicitation contracts. Rather than getting bogged down in the detailed facts of the cases I’ll provide a quick summary of the key facts and legal issues that led to the outcome in each case. The goal is to get a feel for how judges are approaching these kinds of cases – what works and doesn’t work in the state courts when employers are attempting to enforce noncompete/nonsolicitation agreements against former employees.
L-3 Communications v. Reveal Imaging [link] involved a complex series of corporate sales, the result of which was that the defendant-employees were several corporate acquisitions down the road from the companies with whom they had signed their agreements years earlier. Their new employer, who had “acquired” the employees via acquisitions, had failed to require the employees to enter into new agreements. Tough luck for the plaintiffs, as Judge Van Gestel concluded in the Suffolk Business Litigation Session in a decision issued on December 2, 2004. One of the employees had signed a noncompete agreement with a company that wasn’t even a predecessor-in-interest with the plaintiff. Another group of employees had signed noncompetes with a predecessor-in-interest, but unfortunately for the plaintiff they had signed a weaker intervening agreement which provided that it superceded the first agreement. Again, the plaintiff was out of luck, since the superceding agreement didn’t contain a post-employment noncompete provision (it contained a noncompete that only applied during the period of employment). Another noncompete agreement signed by this group of employees was not assigned as part of a sale to the current employer, and therefore was not enforceable.
The corporate purchases and sales in this case, and all of the agreements involved, are quite complex. But, the lesson of this case (and a number of other unreported Superior Court cases) is straightforward: if you buy a company make sure that you don’t expect employees who come with the acquisition to be bound by a pre-existing noncompete unless the employee agrees to assignment of the noncompete. Even better, have the employee sign a new noncompete agreement that states the terms you want enforced, rather than relying on the old agreement.
Accordia v. Academic Risk Resources resulted in two decisions. The first decision [link], on a motion for temporary restraining order, was decided by Judge Margot Botsford in Suffolk Superior Court on January 5, 2005. The second decision [link], on a motion for preliminary injunction, was decided a week later by Judge Nonnie S. Burnes.
This case involved the mass defection of an insurance department of 14 employees, who formed a competing company, followed immediately by a swift, targeted appropriation the former employer’s major clients. All of the employees had agreed in writing not to solicit their employer’s clients.
This was the kind of case that puts smiles on the faces of lawyers trying to enforce noncompete/nonsolicitation agreements, and makes the blood of defense lawyers run cold.
Not only did the department resign en masse, but the employees took Accordia client files with them, and even unilaterally moved one client’s business to the new company. These facts made Judge Botsford see red. Her decision is sprinkled with references to breach of fiduciary duty, “arrogation” of Accordia’s business and unfairness in the defendants’ behavior. Judge Botsford gave the former employes 24 hours to return all of Accordia’s property to it, and enjoined them from providing services to their former clients at Accordia. In other words, she shut them down cold.
However, the former employees got a break a week later when, in a second hearing, Judge Burnes took some of the sting out of the ruling by permitting the former employees to service the clients, but ordered them to put all fees from these services into an escrow account. Not surprisingly, that growing pot of money, which couldn’t be touched by either side, led to a quick settlement.
This case has a least two lessons, both of which are as old as the law itself. First, this is a case study in what not to do when leaving an employer – don’t take the employer’s property; don’t solicit your co-employees while you’re still employed if you’re an officer or executive; don’t resign en mass; and don’t move clients to your new company without written prior permission. The second lesson is that even in a case with facts this extreme what may be abhorrent to one judge may leave the next judge cold. However, Judge Burnes may have had the wisdom of Solomon – by permitting the former employees to service their former customers at Accordia (who may have gone to a third party provider and been lost to both parties, had she maintained the injunction), but ordering fees to be paid into escrow, she created a financial incentive for both sides to settle which, after all, is every judge’s primary goal.
by Lee Gesmer | Nov 27, 2005 | Copyright
Copyright.
“Imagine the cultural impact of putting tens of millions of previously inaccessible [books] into one vast index, every word of which is search able by anyone, rich and poor, urban and rural, First World and Third, en tout langue — and all, of course, entirely for free.”
Eric Schmidt, Google CEO
“Mr Schmidt fails to mention that Google’s intent . . . is to make even more money. . . . Can it be so greedy that it seeks to bolster it profits by freely exploiting the rights of publishers and authors?”
Patricia Schroeder, President, American Association of Publishers
The legal controversy over Google’s plan to use a proprietary high speed scanning process to copy (to start with) the entire book collections in the libraries at Michigan, Stanford, Oxford, the New York Public Library and Harvard, whether or not a particular book is under copyright, and to require copyright owners to notify Google if they wish to “opt out” of this program, has reached fever pitch. Indeed, its easy to see why. In almost every case until now, copyright litigation has implicated the legal rights of one copyright owner and one alleged infringer. In the few cases to involve broader rights, such as the Napster/Grokster line of file sharing cases, it was easy for anyone with a moral compass to conclude that wholesale copying and distribution of copyrighted music (or the encouragement of same) was wrong, and was a violation of the copyright laws.
Google’s is not threatening to Napsterize the book publishing industry, but its chutzpah is breathtaking: “Google Book Search” (f/k/a Google Print) proposes to scan every book, in every language, in-print or out-of-print, in-copyright or out of copyright, and make it freely searchable. If the copyright owner gives permission, make available for Internet searches the full page on which a search result appears, and adjacent pages. If Google doesn’t have the copyright owner’s permission, present only a “snippet” from the book to searchers using Google.
Whew! You would be hard pressed to come up with anything to make the book publishing industry angrier (short of outright Napsterization), and Google’s proposal has had a predictable effect (although its not clear whether the Googlers in Mountain View anticipated that their altruistic undertaking would result in copyright infringement lawsuits brought by both the American Association of Publishers and the Author’s Guild).
Here’s my view on the debate over the legality of Google’s on-again/off-again project. For the views of numerous other academics and observers (and more than you could possibly ever want to know about this issue, unless you are a lawyer for one of the sides in these lawsuits and are trolling for arguments), read here and here.
First, just as was true for many people when the peer-to-peer music file sharing issues first arose, there’s a lot of emotion over this issue. We are all consumers of information, and what consumer wouldn’t want “one giant electronic card catalogue that makes all the world’s books discoverable with just a few keystrokes by anyone, anywhere, anytime”? (Google’s Schmidt again). However, unless the courts rewrite the law (as Lawrence Lessig suggests), the legality of Google Book Search is going to be decided under the law as it exists today, not based on what’s good for the planet or Utopian philosophies of copyright law.
Second, I suspect that what’s really keeping the publishers and authors up nights is this question: who’s going to have control over this compilation of data? Sure, it’s “Do No Evil”-Google today, but who might have the resources to do the same thing, even on a smaller scale, in the future? And remember, the future is a long time. One can imagine the great-to-the-nth descendants of today’s publishers cursing their literary ancestors for allowing Google to take the first step down the slippery slope that leads, who knows where?
And, if that’s not enough to keep a good capitalist publisher awake nights, how long will it before the entire estimated 20 million books can be copied onto some kind of high capacity optical/nanotech data storage (blah, blah, woof, woof) DVD? Fifty years? Less? What’s to stop some Google employee who only pretended to buy this “do no evil” stuff from stealing this collection someday, and selling a copy to a wealthy collector? What if Google goes bankrupt (stranger things have happened), and the compilation is sold to . . . . ? (complete the sentence yourself, Constant Reader – your imagination is almost certainly better than anything I could provide).
Bottom line: for the publishers, this is the Battle of the Somme and the Battle of Normandy rolled into one. For the publishers, lose here, and the consequences are too horrible to imagine. Or at least they so imagine.
Now, the dry legalities. There is no question that Google is making literal copies of copyrighted works. Not only do they not deny it, they boast about it. By doing so, they are violating the first of the six “exclusive rights” that belong to a copyright owner, the right to “reproduce the copyrighted work.” Accordingly, Google must fall back upon the copyright “fair use” doctrine, which states:
[T]he fair use of a copyrighted work, including such use by reproduction in copies . . . for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include-
(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;
(2) the nature of the copyrighted work;
(3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
(4) the effect of the use upon the potential market for or value of the copyrighted work.
This statute may appear reasonably straightforward on its face, but of course in application it’s not. The courts have applied these factors in many different contexts, and reversals by appellate courts (including SCOTUS on many occasions) has proved that applying them in a given case is no simple matter.
It is almost inconceivable that any court would give Google summary judgment in this case (although the same is not true if the publishers/authors move for summary judgment). Assuming a trial, what kind of evidence might the jury expect to hear in the copyright “trial of the century” ? Well, on the first factor, start with evidence of Google’s expected profits from this project, including all internal memos and analyses by Google projecting its business plans for Google Book Search, as well as Google’s contracts with the universities, one of which has already been made public. I’d be surprised if the publishers can’t show that Google Book Search is motivated by commercial interests. On second factor, the jury will learn that many of the copyrighted books involved are works of fiction, which are granted far stronger protection than factual works.
On the third factor, consider that although Google claims it will display only “snippets,” it is copying the full text of the works, and the publishers/authors have no guarantee that Google will forever comply with its promise. What will the jury focus on, the amount and substantiality of the material copied, or the substantiality of the material displayed in a single search? Finally, the fourth factor, which focuses on the effect on the potential market or value. What effect might a compliation of this magnitude have on the market if Google lost control of all or even a part of it, a concern that is far from hypothetical, and that the publishers/authors are likely to press aggressively?
Bottom line: while as a consumer I would love to have access to a fully stocked Google Book Search, as a lawyer I would place my bets with the copyright owners. I do not agree with Jonathan Band’s argument that the Ninth Circuit’s decision in Kelly v. Ariba Soft is controlling, or even persuasive precedent in this case. Arriba held that an online database of photographs, displayed as thumbnails and linked to the original web site that hosted the photo, fell within the fair use exception. The most significant difference, of course, is that in that case the copyright owners had freely put their works on the Internet themselves, and Ariba made copies only for the purpose of providing a directory for them.
When the publishers and authors first filed suit my water cooler prediction was that Google would back down. Since then, Google has made aggressive statements to the press, asserting that it believed in its position, and that it would take this case through the courts. Frankly, I don’t believe it, and I expect to see some form of out-of-court resolution that can be held up as a victory for both sides, but which is far less than Google Book Search as it was originally conceived.
by Lee Gesmer | Nov 21, 2005 | Trademark
Trademark. What do you do when someone sets up a web site almost identical to yours, but you can’t find the owner of the site in order to sue them?
This was the problem faced by American Girl , which sells wholesome girls dolls, clothing and books targeted at pre-adolescent girls, when it discovered that someone was publishing pornography on www.amercangirl.com. (Note the missing letter).
American Girl sued the registrar and “John Doe” (legalese for, “I’ll name you when I identify you”) but was rebuffed by a Federal District Court Judge in Wisconsin, who held that a John Doe suit was inappropriate in these circumstances. However, this judge really did his homework, and the decision is an excellent road map on how to go about obtaining an injunction under these circumstances, including remedies such as an in rem action against Verisign under the ACPA or arbitration under the UDRP. The decision also provides an excellent summary of the domain name system and the laws that regulate it.
Read the full decision here.
p.s. Rest easy parents. www.amercangirl.com now links to the American Girl site.
by Lee Gesmer | Nov 20, 2005 | Business Lit. Session, Minority Shareholder/Fiduciary Duty
. . . of your company, that is.
OK, here the facts, minus the legal jargon.
You’re a businessman with a successful company. You meet someone that wants to go into business with you in a related area. You start a new company, making sure that you hold a majority interest (52.5%). Your new “partner” gets 37.5%, and the rest of the stock goes to a couple of employees. Although your partner is a minority shareholder he’s running the business, so you make him president of the company.
Almost ten years go by, and although the company is making money you’re unhappy with your partner. He’s bad at finances, and tensions arise over bookkeeping and other business issues.
Eventually you reach your boiling point, and one morning you fire your minority partner.
Simple enough you think. After all, you own a majority of the company, what’s stopping you from doing this?
In O’Connor v. U. S. Art Co., a recent case decided by Judge Allen Van Gestel in the Suffolk County Business Law Session, the minority shareholder was awarded $218,000 in damages based on these facts. The judgment was against the other three shareholders, personally.
Here’s the rub: in Massachusetts, shareholders in “close” corporations (nonpublic companies with a small number of shareholders) owe each other a fiduciary duty. You can’t fire a minority shareholder unless you have a “legitimate business purpose,” and there is no “less harmful alternative.” Harmful to the minority shareholder, that is.
In the U.S. Art case Judge Van Gestel found that the majority shareholders could have hired a bookkeeper, among other possible solutions. In other words, even assuming there was a problem, they could have solved the problem without firing the guy.
What’s interesting about this case? Nowhere in the 11 page decision did Judge Van Gestel indicate that the minority shareholder had invested any money when U.S. Art was formed. Usually, the rationale behind cases like this is that the minority shareholder invested in the company, expecting to earn a living from the company, only to find him or herself fired, and out both the investment and the job. That appears not to have been the case here.
What could the majority shareholder have done to avoid this outcome? Easy: enter into an agreement when the business was formed, permitting termination, either at will or for cause. If that wasn’t feasible, take proper steps before terminating the minority shareholder. In the U.S. Art case the Judge described the majority’s actions as “ham- handed.” It doesn’t take a Supreme Court Justice to see that the Judge thought the majority shareholders behaved offensively, and that this contributed to the result.
If you’re interested in further details on this case you can read the full decision here.
by Lee Gesmer | Nov 15, 2005 | DMCA/CDA
[Update: this case was affirmed by the First Circuit in 2007; link here]
Massachusetts Lawyers Weekly reports, on the front page of its October 31, 2005 issue, that Federal District Court Judge Robert Keeton has dismissed, under the Communications Decency Act, claims that Lycos was responsible for third-party defamatory postings on Lycos’ Raging Bull website. The case is Universal Communications Systems, Inc. v. Lycos, Inc. Apparently there is no written decision from Judge Keeton.
The idea that a web site is not liable for defamatory postings is not, I repeat not, news. The Communications Decency Act provides:
No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.
Translation: A web hosting service that permits third parties to post on its site is not the publisher or speaker of that information, and therefore cannot be liable for defamation posted by the third party.
This may be the first decision applying this law in Massachusetts, but it’s old news everywhere else. Cases across the country have uniformly interpreted the CDA to immunize ISPs and web hosts accused of defamation posted on their sites by third parties.
