Commercial and Civil Litigation

NONCOMPETE AGREEMENTS (April 2010)

Agreements between employers and their employees prohibiting or restricting competition by a departing employee are nothing new, but their use is growing—and not just for the highest levels of management. This trend makes it all the more important to understand the limits that courts have placed on such agreements, with a view toward balancing employers’ interests with policies favoring competition and unfettered opportunities for individuals to pursue their livelihoods. While courts have sometimes struck down noncompete agreements in their entirety, occasionally they effectively have rewritten parts of an agreement, a practice known as "blue penciling," so as to fix offending parts while retaining acceptable provisions. Other courts will refuse to engage in "blue penciling" and just stuck down overbroad non-compete agreements in their entirety.

In employment contracts, restrictive covenants, as they are sometimes called, are from the outset suspect as restraints of trade that are disfavored at law, and they must withstand close scrutiny as to their reasonableness. For the same reason, they generally are not to be construed to extend beyond their proper import, or farther than the contract language absolutely requires. In cases of ambiguous language, to borrow a term from baseball, the "tie" goes to the former employee.

The requirements for enforcing a noncompete agreement may vary some from state to state, but a typical set of conditions requires that the agreement (1) be necessary for the protection of the employer that is, the employer must have a protectable interest justifying the restriction imposed on the activity of the former employee; (2) provide a reasonable time limit; (3) provide a reasonable territorial limit; (4) not be harsh or oppressive as to the former employee; and (5) not be contrary to public policy. In keeping with the law’s predisposition against such agreements, generally the employer has the burden of proving the reasonableness of a noncompete clause.

In a recent case involving a company that distributed novelty items to convenience stores and similar businesses, a noncompete clause that prohibited a route salesperson from interfering with or attempting to entice away customers—who were customers of the employer during a one-year period before the employee’s termination, and whom the employee had serviced, dealt with, or obtained special knowledge about during his employment—was found by a court to be reasonably necessary and enforceable to protect the employer’s business. The employer had a legitimate interest in prohibiting solicitation of its recent past customers and in winning back their business, and, as to such customers, the former employee would be in a far better position than an ordinary competitor, with a distinct advantage were it not for the noncompete restriction.

The case of the novelty items business resulted in a split decision for the employer. A separate clause in the agreement, referred to as the "business" clause, prohibited a former employee, for 24 months following his or her termination, from engaging "in any business which is substantially similar to" the employer’s business. The court concluded that this provision went too far. It did not protect a legitimate business interest and was thus unenforceable. The engagement of a former employee in a similar, but noncompetitive, enterprise posed little, if any, additional danger to the employer.

When a tax return preparation firm sued a former employee for breach of a noncompete agreement, the court used a standard providing that an agreement of that kind will be enforced only if the business interests the employer seeks to protect and the effect the covenants have are reasonable as to (1) duration; (2) the capacity in which the former employee is prohibited from competing against his or her former employer; and (3) the geographic territory in which the former employee is restricted from working. The court held that the noncompetition clause in the tax preparer’s employment contract was overbroad for failing to properly limit the territory to which it applied, making the entire covenant unenforceable. The clause purported to limit the former employee from working for any employer whose business included the preparation and electronic filing of income tax returns, if that employer was located, conducted business, or solicited business in the geographic district where the former employee had previously worked or within 10 miles of the district’s borders, even if the former employee did not propose to work in or near that district. Such a clause cannot stand, because, as the court put it, it "overprotects" the employer at the expense of a former employee’s right to earn a living.

The reason for the termination of employment may also be a factor in determining if the court will enforce the agreement. Where a sales person is terminated for poor performance the court would not enforce a covenant even though the same court in another case upheld a similar agreement where the employee was hired away by a competitor.

In addition to agreements prohibiting former employees from competing, provisions restricting limited activities, such as only limiting the former employee from calling on former customers as opposed to an absolute prohibition from employment in the field within the geographic area, are more likely to be upheld as reasonable restraints.

The rules and current positions of courts vary from state to state and continue to be modified by the courts based on new decisions. Any agreement between an employee and an employer should be reviewed by counsel before being signed to insure that you understand its provisions and enforceability.  Employees considering leaving employment to start a new company or for employment with a competitor should have their existing agreements reviewed by counsel before terminating employment and potentially winding up in litigation.

represent both employees and employers (existing and the company hiring a new employee with a covenant from a prior employer). Contact us to see how we can assist you about a restrictive covenant.

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COLD FEET COST GROOM $150,000 (July 2009)

Sometimes even the best laid marital plans go astray. Usually when that happens, litigation does not ensue, but there are precedents for a cause of action for breach of a contract to marry. In one such recent case, a jilted bride‑to‑be recovered a substantial jury verdict from her fiancé after he called off the planned wedding. It was the second time that the same man had balked at marrying the same woman. This time, he had asked her to pull up stakes in Florida, where she then lived and worked, and move to live with him in Georgia. He also offered her a diamond ring and agreed to pay off about $40,000 in debt that she had accumulated. Only two weeks into the new arrangement, the man called off the wedding, citing his poor health and apologizing for making promises he would not be keeping.

Despite the canceled wedding, the couple stayed together for a few more months. Then the last straw came for the former bride‑to‑be when she found her boyfriend with another woman. He claimed that he had started his romance with the second woman only after the wedding was canceled, but this claim was belied by evidence that he had given that woman $500 just before his ill‑fated marriage proposal to the jilted bride.

The woman sued for breach of contract, seeking damages for financial and emotional harm. While it may seem that the most obvious injury in such cases is emotional in nature, in this case all but a small amount of the jury verdict was attributable to the value of the employment package that the bride to be had given up to be with her fiancé. After coming to Georgia, she had struggled to find work and ultimately settled for a much less attractive job after the breakup.

No doubt it did not make a good impression on the jury that the boyfriend had broken the news that there would be no wedding by leaving his fiancée a note in the bathroom. This fact dovetailed nicely with the woman’s attorney’s closing argument, which could be summed up as "He’s a cad."

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Economic Loss Rule Bars Misrepresentation Claim (April 2009)

Where parties have entered into a contractual relationship and damage occurs occasioning merely economic losses, the economic loss rule bars the complaining party from asserting tort remedies and limits that person to the contract remedies that were bargained for and agreed upon. Economic losses are distinguished from physical harm or damage to property other than the defective property itself. The rationale for the rule is that parties to a contract should resolve disputes emanating from that contractual relationship under the legal remedy that is most appropriate and most in keeping with their expectations when they signed the contract.

After a couple purchased a home, they discovered that the home had some leaks in its roof, despite what they said were assurances given both verbally and in disclosure forms that the sellers had never had a problem with the roof. When the new owners experienced water damage to interior ceilings, walls, and flooring due to the leaky roof, they sued the sellers for negligent misrepresentation. That theory ran aground on the economic loss rule, notwithstanding an argument against its application. The buyers argued to no avail that the rule should not apply because the claim was not for damage to the leaky roof itself, but to the resulting damage inside the home.

The court declined to split up the house, figuratively speaking, for purposes of the economic loss rule. As the court put it, the buyers purchased a finished home from the sellers, not a collection of component parts. Both the roof and the other damaged parts of the house were under the umbrella of the sales contract. Accordingly, any assurances that had been given by the sellers had to be examined and evaluated through the agreement, not on tort principles.

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EMPLOYERS AND JOB REFERENCES  (April 2009)

Whether an employer-employee relationship ends on good terms or with acrimony, a common final act—the employee’s request for a reference for a new job—is increasingly leading to litigation.

From the former employer’s standpoint, it can be a case of damned if you do and damned if you don’t. A candid, negative response to the request can invite a suit by the former employee. A glowing recommendation that omits some serious shortcomings in the employee’s performance, or that declines to say anything about the employee except perhaps dates of employment, could result in litigation brought by the new employer, who would have preferred to be warned about a subpar employee. The prevalence of such disputes only figures to increase in the current economic downturn.

The growing dilemma is such that some employers are telling their employees from the outset that they will get no job reference—good, bad, or indifferent—when they leave. Under such a policy, inquiring prospective employers would get only the employment equivalent of "name, rank, and serial number." Other employers are willing to give a reference, but only after they have in their files documents in which an employee consents to having prospective employers find out all there is to know, and waiving their right to sue over anything that is said in the reference.

The good news for businesses is that their exposure to liability to disgruntled former employees who requested references is constrained in most states by statute. These laws generally provide immunity to the givers of references, so long as their actions were not motivated by malice. Of course, former employees, perhaps hurting while in between jobs and inclined to blame former employers for their predicament, are quick to argue that a negative response to a reference request was malicious.

In one such case, a nurse sued her former supervisor for defamation when the supervisor responded to a request for a job reference by stating on a form, without elaboration, that the nurse had "unacceptable work practice habits." A court ruled that the statement came within a statutory privilege or immunity for former employers’ communications to prospective employers concerning former employees, because it was information provided about a former employee’s work performance at the request of both the former employee and a placement agency.

Although the nurse made the general argument that the immunity was lost because the statement about her was made with malice, she was unable to back up that contention with factual evidence of ill will or spitefulness directed toward her. She argued, to no avail, that if the former employer considered her work habits to be acceptable enough not to fire her, then it was reasonable to infer that the later negative inference must have been motivated by malice.

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CLAIM AGAINST MOVER  (April 2009)

A family hired a moving company to pack up their belongings in their home and move them to a new house in another state. The mover packed up everything, but failed to come back for the loading and moving. This was more than merely inconvenient, because the family’s sale of their old house was contingent upon delivery of a vacant house. When the purchasers arrived to find a house full of packed boxes, the sale fell through.

The family sued the moving company for breach of contract and negligence. Their attorney wrote to the mover demanding reimbursement for lost profits when the family had to regroup and find a new buyer, and for the additional mortgage payments, utilities, and taxes they had to pay during that time. The letter stated that it was not possible to give an exact dollar amount on the damages until the home was actually sold to a new buyer.

Under a federal law known as the Carmack Amendment and accompanying regulations, a carrier must issue a receipt or bill of lading, under which it may be liable for loss or injury to property if the claimant makes a timely claim for the payment of a specified or "determinable" amount of money. The Amendment preempts any state law claims such as the family had alleged in their lawsuit.

The mover argued without success that the family could not recover the mortgage payments and other forms of damages under the Carmack Amendment because the letter from the family’s attorney, lacking a dollar amount for the claimed damages, had not sought a "determinable" sum of money. A federal court ruled that valid claims against a carrier are "determinable," not because they include some dollar amount, but because they provide enough information about the nature and extent of the carrier’s liability to allow the carrier to understand its potential exposure to liability. The attorney’s letter satisfied that requirement. Although a valid claim against a carrier will often include an estimate of the shipper’s damages along with enough factual information to inform the carrier of the basis for the claim, a dollar amount is not an absolute requirement under the Carmack Amendment.

The case also illustrates the importance of providing all relevant documents in reviewing potential claims as contract terms, releases, waivers, or in this case, federal law, may have significant impact on a case.

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DOES THE ADA APPLY TO WEBSITES?  (June 2007)

Recently a federal trial court became the first court to find that a commercial website must be accessible to the disabled, and to blind customers in particular, because of the prohibition against disability discrimination by places of public accommodation contained in the Americans with Disabilities Act (ADA). Whether the retailer would, in fact, be liable on the particular facts of the case remained to be decided, but the court declined to dismiss the class action complaint.

Requiring businesses to make their websites fully accessible by the blind will likely involve adding computer code for "alternative text" that permits screen‑reading software used by blind individuals to vocalize the text and describe the contents of the webpage. Using this code when the site is initially designed is less expensive than retrofitting a website later.

The retailer argued to no avail that the demands of the ADA do not apply, because a website, since it is not really a physical place at all, is not a "place of public accommodation" within the meaning of the ADA. The court reasoned that the ADA requires full and equal enjoyment of the services "of" any place of public accommodation, not services "in" a place of public accommodation. The ADA is not only about physical access to places.

The court found that the retailer’s many brick‑and‑mortar stores constituted the "places" of public accommodation. The retailer’s website serves as a "gateway" to such stores, especially for blind customers. If the website is not fully accessible to them, it impedes those customers from coming through the gateway, that is, from having the "full and equal enjoyment" of the stores’ goods and services that the ADA mandates. The court drew an analogy to a case in which a telephone screening process for prospective contestants for a television game show violated the ADA by discriminating against the hearing disabled, even though the discrimination took place away from the studio where the show was produced.

Although the decision broke new ground in ADA jurisprudence, the court’s "gateway" reasoning relied on the connection between the business’s website and its many retail stores. The court did not have occasion to address the variation on the same issue posed by the websites of retailers who have no brick‑and‑mortar stores. Such a situation presents a closer question as to whether the ADA applies. For a website‑only business to come within the ADA, a court would have to find that a "place of public accommodation" does not have to include a physical place at all, but can, instead, be the virtual world in which website transactions occur.

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EMPLOYMENT DISCRIMINATION AND RETALIATION BY EMPLOYERS (January 2007)

For as long as federal law has prohibited discrimination in the workplace, it also has separately prohibited punishing, or retaliating against, an employee who opposes the prohibited discrimination. Employment discrimination can occur on the basis of factors such as race, sex, and religion. Usually, there is an anti‑retaliation provision found in the same laws that prohibit the underlying discrimination.

There are dozens of federal statutes with anti‑retaliation provisions. The policy of protecting those who object to what they perceive as unlawful discrimination is so ingrained in federal civil rights law that it has even been read into laws by implication, even though it was not there in black and white. In 2005, the United States Supreme Court ruled that Title IX, which prohibits sex discrimination in educational programs or activities receiving federal financial assistance, also implicitly prohibits retaliation against individuals who oppose conduct that allegedly violates Title IX.

Court Expands Retaliation Claims

In the 2006 term, the Court took the additional step of articulating an expansive standard for determining what types of employer conduct, when accompanied by a retaliatory motive, can support a cause of action for retaliation. The underlying case concerned a claim of sexual harassment, but the ruling has ramifications for all claims based on retaliation for opposing civil rights violations. As the 2006 case itself demonstrated, with the right set of facts it is possible for a plaintiff to be successful on a claim of retaliation, even though the underlying claim of discrimination has failed. The two types of wrongful conduct are independent of one another.

In this case, the plaintiff was the only woman working in the track maintenance department of a railroad. She asserted that she was subjected to sexual harassment by her supervisor, in the form of insulting and inappropriate remarks. Because the employer took prompt corrective action, including punishment of the harassing supervisor, it had no liability for the harassment claim itself.

However, even as the employer took its corrective action, it also reassigned the plaintiff from her job as a forklift operator to a harder, dirtier, and generally less desirable job. Later, the railroad also suspended the plaintiff for over a month without pay for alleged insubordination, although, in time, the railroad’s own grievance committee found no insubordination and awarded her back pay for the period of the suspension.

In a unanimous decision, the Court rejected requirements that some lower courts had imposed for showing prohibited retaliatory conduct, and allowed a jury verdict for the plaintiff on her retaliation claim to stand. Under the now‑abandoned tests, the conduct either had to amount to failing to hire, failing to promote, or termination, or it at least had to materially change the Aterms and conditions@ of employment. Instead, the Court adopted a rule by which any adverse retaliatory action may support a retaliation claim, as long as it is reasonably likely to dissuade employees from engaging in protected conduct.

Context Is Significant

As the Court put it succinctly, in determining when an employer action constitutes prohibited retaliation, context matters. In a hypothetical example mentioned by the Court, while a change in the schedule of many employees may have little impact, such a change as a form of retaliation may be so significant to the mother of school‑age children that it would deter her from complaining about discrimination at work. Similarly, an employer’s failure to invite an employee to lunch is normally not the stuff of retaliation, unless it was a weekly lunch meeting that was important to any employee’s advancement in the company.

A petty slight or minor annoyance is still not enough to support a claim for retaliation. That said, the risk of confusing such behavior with more significant adverse action is significant enough that employers are now well advised to give their managers the following straightforward direction: Do not do anything to punish someone for having opposed an employer practice that is alleged to be discriminatory.

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LANDLORD/TENANT -- Insurer May Sue Renter for Fire Damage (April 2006)

Unless there is a contract or lease that provides otherwise, a tenant generally is liable to a landlord for negligently damaging the landlord’s property, such as by accidentally starting a fire. But, depending on the language in the landlord’s fire insurance policy, the tenant could end up defending himself against a powerful insurance company rather than the landlord.

Many insurance policies provide for subrogation, meaning that if the insurer pays a claim from the landlord for losses due to a negligently started fire, the rights of the landlord against the wrongdoer are transferred to the insurance company. In effect, the insurance company steps into the shoes of the landlord.

This scenario played out in two recent cases that were consolidated because of their similarity. In one case, a person renting a single‑family home caused a fire by leaving a flammable item unattended on an electric stove. In the other case, an apartment tenant accidentally started a fire with candles left burning in the bedroom. In both instances, the insurers had subrogation clauses in the policies taken out by the landlords.

Without success, the tenants argued that they should be treated as co‑insureds, and therefore they should not be subject to a lawsuit by the insurers. The court ruled that tenants may well have an insurable interest in the leased premises, but they are on their own in terms of liability, unless a contract provides otherwise. The court reasoned that allowing an insurance company to sue a tenant avoids a double recovery by the landlord (from the insurer and the tenant), and it prevents culpable tenants from evading responsibility for their conduct.

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WHERE TO SUE? WEBSITES CAN AFFECT JURISDICTION (March 2006)

In a nation of 50 different systems of state courts and a highly interconnected national economy, the issue of when one state’s courts can assert jurisdiction over a nonresident person or business has always been fertile ground for litigation. State legislatures have addressed the matter with laws that are the civil counterparts to the notion that criminals cannot escape the Along arm of the law. But a long‑arm statutes, as they are known, do have their limits. Essentially, nonresidents can be sued in the courts of any state where they have had such contacts inside the state that it is reasonable to conclude that they have submitted themselves to the authority of the courts in that state. The principle is vague, but it has to be to cover the almost endless ways in which we conduct business.

In the business world, conventional arguments over the application of long‑arm statutes have involved questions such as whether a party sought to be sued had an office or personal representative in the forum state, or whether a contract was signed by the parties in that state. Those issues still arise, but in the information age, courts increasingly have had to adapt the rules to business conducted over the Internet. Just because a company’s website is accessible by customers in a given jurisdiction does not necessarily mean that the company can be sued there. The emerging rule of law is that the more that a customer can have online interactions with a business based elsewhere, the more likely it is that if things go wrong the business can be forced to play an "away game" in court.

Close, but No Cigar

Examples make the point better than statements of rules of law. A Vermont furniture store used a trucking company to deliver furniture to a customer in North Carolina. When the buyer was injured during unloading, he tried to sue the furniture company in a North Carolina court. In this case, the "long arm" was not long enough to reach the Vermont company. The furniture had been bought and paid for in Vermont. The only respect in which the store had any connection to North Carolina was that its website could be accessed there, like anywhere else. But it was a passive site, giving information about products, but not allowing purchases through the site.

When an Oklahoma resident bought a laptop computer from a Georgia company, then returned it for repairs, never to see the laptop again, he was unable to sue the company in Oklahoma. The customer had learned about the computer from the Georgia company’s website, but he had ordered it by telephone and had not used the website to make the transaction.

Caught by the "Long Arm of the Law"

At the other end of the spectrum are cases in which businesses could be sued in the states where their customers lived because the businesses had a more substantial online "presence" in those states. A dog breeder in Illinois could make a similar Oklahoma business defend a lawsuit in Illinois because the Oklahoma business operated an interactive website and also used chat rooms to reach potential customers all over the country.

A California customer of a hotel run by a Nevada casino was able to haul the casino into a California court to defend allegations that it had imposed an energy surcharge on customers without notice. The plaintiff alleged that nothing in the casino’s promotional activities, including its website, informed customers of the charge. It was important to the ruling that the casino used an interactive website where out‑of‑state customers could get quotes and book rooms. In addition, there was a close connection between the alleged wrong  - the misleading promotions - and the casino’s website that targeted millions of California residents.

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