Tag: restrictive covenant

Florida Series III: Parent Company’s Merger Doesn’t Impact Subsidiary’s Noncompete with M.D.

Collier HMA v. Menichello a medical noncompete dispute, considers whether a third party can enforce a noncompete after a merger.  Jettisoning the “changed corporate culture and mode of operation” test, the Florida appeals court applied basic principles of corporate law to determine whether a parent company’s merger necessarily meant its subsidiary merged too and couldn’t enforce a noncompete involving one of its staff doctors.

Halfway through a three-year employment contract between the plaintiff and doctor defendant, the plaintiff’s corporate parent was acquired by another entity.  The plaintiff-doctor employment contract contained a 12-month noncompete and specifically said it was not enforceable by third parties, successors or assignees of the parties.

After the acquisition, the doctor defendant quit and went to work for one of plaintiff’s competitors.  The plaintiff sued the doctor for violating the 12-month noncompete. The doctor defended by stating that the parent company’s merger with another entity made the plaintiff a successor under the law that could not enforce the restrictive covenant.  The trial court agreed and entered summary judgment for the doctor.  The employer appealed.

Held: Reversed.  Plaintiff employer can enforce the doctor’s noncompete.

Reasons:

Under Florida law, S. 542.335(1)(f), Florida Statutes (2012),  an employment contractual provision that authorizes a third-party beneficiary, assignee or successor to enforce a restrictive covenant is valid.

The statute is silent on the meaning of “successor” but case law defines it to mean “a corporation that, through amalgamation, consolidation or other assumption of interests, is vested with the rights and duties of an earlier corporation.”

Here, the plaintiff employer’s status did not change after its parent company’s merger.  Under the law, a parent corporation is a separate and distinct legal entity from its wholly-owned subsidiary.  As a corollary, a parent company cannot exercise rights of its subsidiary.

The subsidiary plaintiff here continued its existence after the merger as the same single member LLC and didn’t sell or transfer its assets to another entity.  Any change in company ownership several tiers up the corporate chain simply didn’t impact the doctor’s employment contract since plaintiff continued to operate and to employ the doctor.  As the lone signer of the employment contract that contained the noncompete, plaintiff could enforce it.

Afterwords:

The Court refused to apply the nebulous “culture and mode of operation” test which looks to the parties’ post-merger conduct (i.e., did the parties act as though the acquiring company was dictating the acquired company subsidiary’s actions?) to decide whether a third-party can enforce a noncompete.  Instead, the Court considered whether the plaintiff continued its operations (it did) in the wake of the parent company’s merger.

Under black-letter corporate law principles, the Court found that the plaintiff’s parent company’s merger had no impact on the plaintiff as “no other entity emerged from the transaction as a successor to [plaintiff].”  Summary judgment for the plaintiff reversed.

 

Neighbors’ Constant Hoops Shooting Not ‘Objectively Offensive’ Enough to Merit Nuisance Liability – IL 4th Dist.

The Illinois 4th District recently bounced two homeowners’ lawsuit against their next-door neighbors for installing a basketball court on the neighbors’ property.  Fed up with the neighbor kids’ incessant basketball playing, the plaintiffs in Bedows v. Hoffman, 2016 IL App (4th) 160146-U sued for injunctive relief and damages.

The plaintiffs’ complaint alleged the basketball court violated written restrictive covenants that governed all homes in the neighborhood and that the defendants’ all-day (and much of the night) use of the court created a common law nuisance.

The trial court dismissed the plaintiffs’ claims and the plaintiffs appealed.

Affirming dismissal, the appeals court examines the key interpretative rules for residential restrictive covenants and the applicable standard of pleadings and proof for a nuisance claim.

In Illinois, restrictive covenants are construed and enforced according to their plain and unambiguous language;

The court’s goal in construing a restrictive covenant is to honor the parties’ intent at the time the covenant was made;

Covenants affecting real property are strictly construed so they don’t extend beyond their express language: all doubts as to whether a restriction applies is decided in favor of a landowner’s free use of property without restrictions

(¶¶ 56-57)

The court was tasked with deciding if a basketball court was a “building” – the property covenants barred any building (other than a single-family residence) within 10 feet of a property line.

Finding that the defendants’ basketball court was not a “building,” the Court looked to both Black’s and Webster’s dictionaries for guidance.  Each dictionary stated that walls, roof and an enclosed space were essential building components.  And since the basketball court had none of these elements, it didn’t meet the restrictions’ “building” definition.

A nuisance is a “substantial invasion of another’s interest in the use and enjoyment of his or her land.”  The invasion must be substantial (either intentional or negligent) and objectively (not subjectively) unreasonable.  To be actionable, the claimed nuisance must be physically offensive to the senses.  But “hypersensitive” individuals are not protected by nuisance law.

In addition, when a claim involves an activity deemed an accepted part of everyday life in a given community, it is especially hard to make out a nuisance case unless the plaintiff pleads unique facts that show how the challenged activity goes above and beyond what is commonplace.

Excessive noise can serve as the basis for a nuisance claim but it must be on the order of several dogs barking at all hours of the night.  A neighbor’s subjective annoyance at noise emanating from adjoining property isn’t extreme enough to merit nuisance relief under the law. (¶¶ 84-87)

In dismissing the plaintiffs’ nuisance claim, the Court first found that playing basketball didn’t qualify as “noxious or offensive” conduct under the covenants.  (The covenants outlawed noxious or offensive resident conduct.)  The Court also held that the plaintiffs failed to allege how the defendants’ use of the basketball court was any different from basketball playing by other neighborhood kids as the plaintiffs could document only a single instance of the defendants’ playing basketball after 10 p.m.

The Court noted that the plaintiffs failed to allege how the defendants’ use of the basketball court was any different from other kids’ court use as plaintiffs documented only a single instance where defendants’ played basketball after 10 p.m.

The Court then rejected the plaintiffs’ other covenant-based claim based on the “Allowable Structure” covenant that allowed property owners to erect single-family dwellings only on their lots.  Since a basketball court didn’t fit the dictionary definition of a structure (“a construction, production or piece of work”, i.e.), the Allowable Structure stricture didn’t apply.

Afterwords

This case illustrates how courts generally don’t like to meddle in private landowner disputes.  While the court does give some clues as to what is actionable nuisance under the law, the challenged conduct must go beyond everyday activity like playing basketball in a residential subdivision.

 

 

‘Helpful’ Client List Not Secret Enough to Merit Trade Secret Injunction – IL Court

Customer lists are common topics of trade secrets litigation.  A typical fact pattern: Company A sues Ex-employee B who joined or started a competitor and is contacting company A’s clients.  Company A argues that its customer list is secret and only known by Ex-employee B through his prior association with Company A.

Whether such a claim has legal legs depends mainly on whether A’s customer list qualifies for trade secret protection and secondarily on whether the sued employee signed a noncompete or nondisclosure contract. (In my experience, that’s usually the case.)  If the court deems the list secret enough, the claim may win.  If the court says the opposite, the trade secrets claim loses.

Novamed v. Universal Quality Solutions, 2016 IL App (1st) 152673-U, is a recent Illinois case addressing the quality and quantity of proof a trade secrets plaintiff must offer at an injunction hearing to prevent a former employee from using his ex-employer’s customer data to compete with the employer.

The plaintiff pipette (a syringe used in medical labs) company sued to stop two former sales agents who joined one of plaintiff’s rivals.  Both salesmen signed restrictive covenants that prevented them from competing with plaintiff or contacting plaintiff’s customers for a 2.5 year period and that geographically spanned much of the Midwest.  The trial court denied plaintiff’s application for injunctive relief on the basis that the plaintiff failed to establish a protectable interest in its clients.

Result: Trial court’s judgment affirmed.  While plaintiff’s customer list is “helpful” in marketing plaintiff’s services, it does not rise to the level of a protectable trade secret.

Rules/Reasoning:

Despite offering testimony that its customer list was the culmination of over two-decades of arduous development, the court still decided in the ex-sales employees’ favor.  For a court to issue a preliminary injunction, Illinois requires the plaintiff to show: (1) it possesses a clear right or interest that needs protection; (2) no adequate remedy at law exists, (3) irreparable harm will result if the injunction is not granted, and (4) there is a likelihood of success on the merits of the case (plaintiff is likely to win, i.e.)

A restrictive covenant – be it a noncompete, nondisclosure or nonsolicitation clause – will be upheld if is a “reasonable restraint” and is supported by consideration.  To determine whether a restrictive covenant is enforceable, it must (1) be no greater than is required to protect a legitimate business interest of the employer, (2) not impose undue hardship on the employee, and (3) not be injurious to the public.  (¶ 35)

The legitimate business interest question (element (1) above) distills to a fact-based inquiry where the court looks at (a) whether the employee tried to use confidential information for his own benefit and (b) whether the employer has near-permanent relationships with its customers.

Here, there was no near-permanent relationship between the plaintiff and its clients.  Both defendants testified that many of plaintiff’s customers simultaneously use competing pipette vendors.  The court also noted that plaintiff did not have any contracts with its customers and had to continually solicit clients to do business with it.

The court then pointed out that a customer list generally is not considered confidential where it can be duplicated or pieced together by cross-referencing telephone directories, the Internet, where the customers use competitors at the same time and customer names are generally known in a given industry.  According to the Court, “[i]f the information can be [obtained] by calling the company and asking, it is not protectable confidential information.” (¶ 40)

Since the injunction hearing evidence showed that plaintiff’s pipettes were typically used by universities, hospitals and research labs, the universe of plaintiff’s existing and prospective customers was well-defined and known to competitors.

Next, the court rejected plaintiff’s argument that it had a protectable interest because of the training it invested into the defendants; making them highly skilled workers. The court credited evidence at the hearing that it only takes a few days to teach someone how to clean a pipette and all pipette businesses use the same servicing method.  These factors weighed against trade secret protection attaching to the plaintiff’s customers.

Lastly, the court found that regardless of whether defendants were highly skilled workers, preventing defendants from working would be an undue hardship in that they would have to move out of the Midwest to earn a livelihood in their chosen field.

Afterwords:

This case provides a useful summary of what a plaintiff must show to establish a protectable business interest in its clients.  If the plaintiff cannot show that the customer identities are near-permanent, that they invested time and money in highly skilled workers or that customer names are not discoverable through basic research efforts (phone directories, Google search, etc.), a trade secrets claim based on ex-employee’s use of plaintiff’s customer list will fail.