EMPLOYEES SHOULD FIGHT BACK

We talk with employees all the time who are faced with a claim by their ex-employer that they (the employee) are working in violation of a non-compete agreement, breached a fiduciary duty owed to the employer, wrongfully took trade secrets from the ex-employer, etc., etc.

Many times these allegations are just "puffing" by the ex-employer...an attempt to intimidate the ex-employee. One strategy to combat this abusive tactic is to really look closely to see if the employee can bring his/her own lawsuit against the ex-employer. In Virginia, the employee may have a claim against the former employer for defamation, intentional infliction of emotional distress, or tortious interference with contractual relations (with the new employer) and economic advantage.

A great example of how such abuses by the ex-employer can turn out favorably for the ex-employee is the $11 million dollar verdict awarded to an ex-employee in a federal case in Arizona for just this very type of conduct.

In the case, a division of medical giant McKesson Corp. took Phoenix medical equipment and pharma salesman Carmen Caccavale to court in 2004, claiming he had violated some trade practices. After working for seven years at McKesson, Caccavale had taken a job with Henry Schein, Inc., a medical supply firm. The judge dismissed McKesson’s suit in December. Caccavale had not signed a non-compete contract. “It was sort of a trade secret case,” according to the attorney who represented Caccavale. Caccavale and his new employer then counter-sued McKesson, saying the medical and health care supplies firm abused the legal process in going after its former salesman.

It didn't take the jury long to award Caccavale and his new employer $11 million in damages for McKesson's wrongful conduct.

The Lesson: If you ex-employer is abusing the legal process by filing unsubstantiated and worthless claims...FIGHT BACK!

VIRGINIA, A "RIGHT TO WORK STATE"

I was watching a great episode of Law & Order last night (I know - cliche) when a political ad came on for the Va. Governor's race. On candidate said his focus as governor would be to strengthen Virginia's "RIGHT TO WORK LAWS" and to get more jobs in the Commonwealth.

That is code for strengthen laws that protect EMPLOYERS and NOT employees.

Under the Virginia Code, Right to work really means you don't have to join a union, but if you want to, you can't be fired for it. The phrase however, is used all the time however, in reference to Virginia employment rights in general.

So what are your Employment rights in VA?

We have already discussed your right to join a union.

Any others? NOT MANY. Virginia law is very pro employer - that is what the candidate was getting at, strengthen the pro employer laws.

Under Federal law, you can't be fired because of your: race, color, religion, national origin, gender, or because you are pregnant or disabled.

You can be fired for basically any other reason.

So what did this commercial mean, that the Candidate wants to strengthen Virginia's "RIGHT TO WORK LAWS." It means nothing. If he had wanted to create a large scope of protected classes for which you cannot be fired (like sexual orientation, expression, etc) he would have said so.

Right to work DOES NOT protect you if you are fired, unless you were fired for joining the union. It does not create any rights or obligations upon termination. It is a legal phrase being misused to communicate that employees have rights in the Commonwealth.

I GOT FIRED....MY NON-COMPETE CANNOT APPLY TO ME!

We get this comment fairly regularly. Folks are treated unfairly by their employer, fired from their job, and then reminded as they walk out the door that they cannot go work for a competitor due to their non-compete contract.

Sounds unfair doesn't it? It is unfair. Is is also usually true.

In general, being fired, laid off, or furloughed has NOTHING to do with whether your non-compete is enforceable in Virginia. The agreement may be unenforceable because of it duration, geographical scope, or dozens of other reasons...the fact that you were fired has nothing to do with whether the non-compete agreement is valid.

BROKERS NON-COMPETES AND "PROTOCOL"

If you are a broker, I am confident you have a non-compete. I am also confident you know about the "protocol" signed by leading houses, such as ML, Citigroup etc.

What if you move from a protocol signatory firm to a non-signatory firm? Well, in my experience, the protocol firm will say you CANNOT take the client list and will threaten to sue. The good news is, some courts understand that industry standards mean more than one brokerage house and their veiled threats:

Breakaway Brokers See Protocol Protection
By Annie Gasparro
A DOW JONES NEWSWIRES COLUMN

"NEW YORK -- Brokers who flee wirehouses for an independent model may not have to fret about being legally pursued by their powerful former employers."

WAIT - I already disagree with Annie, the author. You do have to fret about being pursued. You always have to fret that - at least now you may have some peace, that the house won't be successful.

Ok, back to the article:

"Brokerage firms often seek temporary restraining orders to prevent brokers from taking clients with them when they leave. This threat can make some advisers hesitant to go independent, but a recent broker victory in Indiana could establish an industrywide protocol.

In this case, the judge ruled that even though neither company was a member of the Protocol for Broker Recruiting agreement, the standards still apply.

The protocol allows brokers to take client names, contact information and account types, but no account details. It was first signed by Citigroup Inc. (C), UBS AG (UBS) and Merrill Lynch & Co. in August 2004. Since then, more than 100 other brokerage firms and registered investment advisers have joined.

Because all major brokerages are members of the agreement, the court decided it should be the industry standard, said Paul Lieberman, lead counsel and associate director of litigation at Hamburger Law Firm. As long as advisers comply with those guidelines and the terms of their contracts, the brokerage giants should not be able to obtain restraining orders against them.

"I was pleasantly surprised to hear that in court," Lieberman said. "If the judge issues a [written] ruling" it is likely to set a precedent, he said. "We will certainly be using it in other cases like this."

In the case filed in the U.S. District Court for the Southern District of Indiana, a brokerage house alleged that the departing advisers breached client confidentiality, among other things. The Hamburger Law Firm successfully argued that the brokers were in compliance with their contracts and that the clients have a right to stay with the advisers when they move.

For brokers considering going independent but fearing legal action from their former employers, the ruling shed light on the process. Going independent is much riskier legally than jumping from one wirehouse to another, Lieberman said, because the brokers are more responsible for their own compliance and legal advice.

With the protection of the protocol agreement, indie advisers would be untouchable as long as they follow the terms themselves."

AGAIN - ANNIE, I disagree. They can still be sued and forced to defend themselves. This is not exactly "untouchable," but it is some good news.

CAN I ASK TO BE RELEASED FROM MY NON-COMPETE?

Can I ask to be released from my non-compete? In a word, yes.
Does your employer have to let you out of it? In a word, no way.

Often times we have clients call our office who may know they are stuck with a non-compete, but are hopeful their employer will let them out of the agreement.
Although we have seen employers release their employees, they are almost always motivated by a little cash money.

How much money you may ask? Well, it depends.

Are you a valued employee? How much do you make? How long have you been there? Do you know where you want to work next? How long is the agreement for? Is your boss a litigious fellow (meaning - likes to sue people)?

Every case is different - so I cannot share with you a formula for how much, but I have seen a trend in my own cases, of 10% annual salary as a buy out. So if you made $30,000 - maybe $3,000 for year of non-compete would be fair. If however, you are the mastermind behind a company - I doubt 10% will do the trick.

So what is the positive side to attempting a buy out? It might work and you may leave on good terms. Negative aspects of a buy out? It may not work and you have essentially told your employer you plan on breaching the agreement.

With everything in life - there is a risk. Sometimes however, a buyout will provide the release you need from your non-compete contract.

DOCTORS AND NON-COMPETES: CASE #9

The last case we will discuss in this series of Virginia court decisions on non-compete contracts and physicians comes from the Virginia Supreme Court. The case, Greenbrier Obstetrics and Gynecology v. Zenette Moore Leao,MD, was decided January 9, 2009.

Dr. Leao entered into a 3 year employment contract with Greenbrier, a professional corporation providing obstetric and gynecological services in southeast Virginia. The contract contained three important provisions:

1. Section 4.01(e) stated the agreement may
be terminated by either employer or employee without cause and without
any further obligations upon 60 days advance written notice.

2. A covenant not to compete which provided
that "for a period of 2 years following termination of employment...employee
shall not, directly or indirectly, own, manage, participate in, be employed
by, or maintain any interest in any medical practice which practices
obstetrical or gynecological medicine within a 20 mile radius of the current
office of the employer."

3. Section 3.05(f) provided, "Employee
and employer intend that this Covenant Not to Compete shall be severable from the other
provisions contained in this agreement, and employer shall not be barred from
enforcing employee's covenant by reason of its breach of any other provision of
this Agreement."

Dr. Leao worked for Greenbrier for 3 years but, due to medical reasons, had to terminate her employment and provided the required 60 days written notice. She then filed suit asking the court to determine the enforceability of the non-compete provision in her contract.

The Virginia Supreme Court ruled in Dr. Leao's favor and found the non-compete unenforceable for the following reasons:

1. Section 4.01(e) provided that, after proper notice of termination, neither party had "further obligations."

2. Section 3.05(f) was a severability clause and an attempt by the employer to protect its ability to enforce the non-compete even if it failed to live up to its obligations under the contract.

3. The Virginia Supreme Court, viewing the agreement as a whole, found these two sections to be an "unresolvable conflict." Accordingly, since Greenbrier drafted the agreement all ambiquities are construed against the drafter, Dr. Leao's notice of termination ended all further obligations of the parties...including the non-compete.

DOCTORS AND NON-COMPETES: CASE #7

The Roanoke Valley is again the location of the next important physician non-compete case in Virginia. The case, Carilion Healthcare v. William Ball, was decided by the Roanoke County Circuit Court in 2001. Carilion is western Virginia's 800 pound healthcare gorilla and began purchasing local medical practices in order to guarantee a stream of hospital patients.

Carilion and Dr. Ball entered into a Physician Employment Agreement ("PEA") and a Noncompetition Agreement in July of 1996. The PEA set forth the details of the employment relationship while the Noncompetition Agreement addressed the purchase of the assets of Ball's medical practice and the terms of the covenant not to compete. Ball remained employed with Carilion until the PEA expired on September 30, 2000. Carilion made an offer of continued employment to Dr. Ball, the reasonableness of which is not contested. Dr. Ball declined the offer and began practicing medicine independently of Carilion and litigation ensued.

The Noncompetition Agreement provided that Dr. Ball could not compete with Carilion for the provision of primary care medical services within 25 miles of the primary office for a two (2) year period following any termination of employment.

As I have discussed in previous blogs, non-competes are restraints in trade and are closely examined and strictly construed before the restriction can be enforced. Any ambiguity must be construed in favor of the employee. However, as in this case, Virginia courts are more likely to uphold and enforce non-compete contracts when they arise out of the sale of a business…the rationale being that a buyer and seller are on more equal footing that an employer and employee. To my thinking, the fact that Carilion purchased Dr. Ball’s professional practice was the main reason the court upheld the non-compete in this case.

DOCTORS AND NON-COMPETES:#6

The Circuit Court of Fredericksburg (VA) decided the next important Virginia case involving doctors and non-compete contracts. The case, decided in 1998, was Clara Belle Wheeler v. Fredericksburg Orthopedic Associates and Mid-Atlantic Health Alliance.

Dr. Wheeler (an orthopedic surgeon) and medical practices entered into a written employment agreement for a 12 month period. The agreement required Dr. Wheeler to become “board certified” in the field of orthopedic surgery. The agreement also contained a non-compete provision which prohibited Dr. Wheeler from practicing medicine within a 35 mile radius of the City of Fredericksburg for a period of 18 months if she left her employment.

After 12 months, the employment agreement was never renewed in writing…but both the medical practices and Dr. Wheeler kept working under the same terms and conditions. After failing her second attempt at passing her orthopedic boards, Dr. Wheeler was terminated by the medical practices. She then filed suit against the medical practices requesting the court to find her non-compete unenforceable.

Dr. Wheeler’s sub-specialty was in the field of orthopaedic microsurgery of the hand. There was no other physician in the Fredericksburg, Virginia, area who was engaged in that type of practice. When emergencies occurred which required a physician with Dr. Wheeler's sub-specialty in the Fredericksburg area and she was unavailable, those patients were transported to either Washington, D.C., Richmond, or Charlottesville, Virginia, cities more than fifty miles from Fredericksburg.

There were several significant issues in the case but two of the most important issues/findings by the judge were the following:

1. The medical practices fired Dr. Wheeler. In doing so, the medical practices, by their own actions, were deprived of Dr. Wheeler’s services, expertise, and net profit. The only damages the medical practices could claim would be their loss of profit through direct competition with Dr. Wheeler. Those damages would be difficult to prove since Dr. Wheeler engaged in a specialty of orthopedic surgery that was not practiced by any of the remaining members of the medical practices.

2. The public would suffer a harm if Dr. Wheeler was not allowed to practice her sub-speciality within 35 miles of Fredericksburg as patients would have to travel substantial distances to find a similarly skilled doctor.

The court granted a temporary injunction against the medical practices which prohibited their interference with Dr. Wheeler's efforts to practice medicine in Fredericksburg. Apparently, the case settled (presumably upon favorable terms for Dr. Wheeler) before any final rulings by the court.

My Take: First, if the doctor focuses her/his practice in a specific area of medicine not readily served in the geographical area...the non-compete mail fail due to public policy concerns. Secondly, how can an employer prove damages due to the actions of a fired/terminated physician?

DOCTORS AND NON-COMPETES: CASE#5

The next important decision by a Virginia court on the legality and enforceability of a physician's non-compete comes from my hometown of Roanoke, VA. The case was called Drs. Blum Newman, Blackstock & Associates, Optometrists v. Timothy Jessee, MD and was decided in 1997.



Dr. Jessee (the defendant), an optometrist resigned his employment of nine years with plaintiff's professional corporation and began practicing at a local Wal-Mart store. Plaintiff filed suit requesting injunctive relief and damages, claiming Dr. Jessee was in violation of his non-competition agreement. The agreement restricted Dr. Jessee from practicing optometry within a 25-mile radius of the plaintiff's nine offices for three years. As written, the non-compete agreement prevented Dr. Jessee from being employed as an optometrist in the Roanoke Valley for a period of three years. Dr. Jessee argued the contract was overbroad, ambiguous, punitive, and unenforceable.



The trial court, applying the "three-prong test" found the agreement to be reasonable and enforceable.



The most interesting part of the case dealt with the issue of "liquidated" damages. Apparently, the non-compete contract provided that Dr. Jessee would be indebted to the plaintiff corporation for a specific sum of money if he violated the non-compete (the opinion never discloses the amount of the liquidated damages set out in the contract). The court noted the general rule that:

When the damages resulting from the breach are susceptible of definite measurement or when the agreed amount would be grossly in excess of actual
damages, courts usually construe such an agreement to be unenforceable penalty.

In this case, were it necessary to fix damages, actual damages could be reasonably ascertained by use of normal accounting practices. For the reasons set forth…the Court finds that the liquidated damages portion of the contract is an unenforceable penalty clause. It is, however, severable.

My Take: Due to the abbreviated length of the judge's decision it is difficult to determine just what evidence was presented to the trial court so it is difficult to gain significant guidance from this decision. However, the fact the judge basically "threw out" the damages stipulated in the non-compete agreement is significant.

NORTH CAROLINA SIDES WITH EMPLOYEE

The employee worked as an account executive for an insurance broker. He signed a non-compete agreement which provided as follows:

For a period of two years following termination of employment, employee shall not:

(i) On behalf of himself, another insurance company and/or agency, directly or
indirectly, seek to induce, promote, facilitate, solicit, quote rates for, receive, write, bind, broker, transfer or accept replacement or renewal of insurance or otherwise provide insurance and/or insurance services on behalf of any person, firm or entity to whom the brokerage company has sold any product or service, or quoted any product or service, whether or not for compensation, in the one year prior to the time employee ceases to be employed by the brokerage company. Nor will employee induce or seek to induce the discontinuance or lapse of any insurance coverage or service provided or placed by the brokerage company in the one year prior to the time employee ceases to be employed. This restriction applies regardless of whether employee, directly or indirectly contacts the policyholder or prospect, or whether the policyholder or prospect contacts or seeks to contact the employee.

(ii) Employee covenants to refrain from performing or engaging in the activity prohibited ...(1) Charlotte, North Carolina, or (2) in any other city, town, borough, township, village or other place in the State of North Carolina or the State of South Carolina in which city, borough, township, village or other place [Defendant] is engaged in rendering its services or selling its products.

Pretty tuff non-compete...wouldn't you agree? The Court of Appeals in North Carolina found the scope so exhaustive as to be unenforceable. Most of the court's analysis dealt with the observation the non-compete reached not only current and former customers of the brokerage company, but also included any person or entity to whom the brokerage company had merely quoted a product or service.


The Court found the brokerage company's attempt to prevent the employee from obtaining clients where the brokerage company had failed to do so, was an impermissible restraint and rendered the agreement void. The decision is Hejl v. Hood Hargett & Associates.

DOCTORS AND NON-COMPETES: CASE #3

The next important decision by a Virginia court on the legality and enforceability of a non-compete contract arises from a 1996 decision in Loudon County, VA, Joseph Statkus v. Loudoun Anesthesia Associates, LLC.

In 1994, Dr. Statkus joined with four other physicians to form a company known as Loudoun Anesthesia Associates (LAA). LAA was formed for the purpose of providing specialized and exclusive medical services to the Loudoun Hospital Center (LHC) and to the Loudoun Health Services (LHS). Subsequent to the formation of the company, the physician members (licensed anesthesiologists) executed an Operating Agreement which contained the following non-compete provision:

That for a period of one (1) year following withdrawal from the Company, whether voluntary or involuntary and whether with or without cause, that Member will not directly or indirectly engage in a business similar to that conducted by the Company or in any other business competitive with the Company, but only so far as such competitive business is located in or actively solicits business in Loudoun County, Virginia . . .. The Members hereof expressly agree that the terms, duration, and geographic extent of this Covenant Not to Compete are reasonable.

The court found the non-compete language to be invalid and unenforceable because it represented an unreasonable restraint on the practice of anesthesiology and pain management by Dr. Statkus.

Why? Because the court found that LAA was the sole provider (pursuant to a separate contract) of anesthesia services to LHC and LHS. Also, pursuant to that separate contract, LHC and LHS could only retain the doctors at LAA for anesthesia services. Therefore, the non-compete between LAA and Dr. Statkus was unnecessary...he could not work for LHC or LHS because he was no longer a part of LAA.

Final Comment: Interestingly, the court did not place any significance on the recitation in the covenant that the parties "agreed that the terms, duration, and geographic extent of this Covenant Not to Compete are reasonable." Finding that such a recitation would have no more significance than a statement that the covenant is legally binding because questions of reasonableness or legal efficacy are ones for a court, and not for the parties, to decide.

DOCTORS AND NON-COMPETES: CASE #2

The next important court decision analyzing the legality of a physician's non-compete contract comes from the Circuit Court of Virginia Beach in the decision, A. J. Alexander v. Kandarp Shah, MD, PC, decided in 1995.

The plaintiff was employed by the defendant medical practice as a gastroenterologist, pursuant to a written employment contract. The parties employment contract provided that upon termination of the contract, the plaintiff agreed not to "engage in the practice of medicine" within a twenty-five mile radius of any of the employer's offices and any of the hospitals at which the employer practiced for a period of 2.5 years. The contract also provided the plaintiff would be free to practice within the prescribed area if he paid the defendant employer "liquidated damages" in the amount of $ 225,000.00.

The court found the contract failed the first prong of the three-part test used to determine the validity of a non-compete contract. That first prong requires the agreement not be broader than is required to protect an employer's legitimate business interest.

The court ruled that prohibiting the plaintiff from engaging in the "practice of medicine" within the proscribed geographical area went far beyond just the practice of his specialization in gastroenterology. Therefore, the prohibition was overly broad and unenforceable. The court also ruled that, since the non-compete language was unenforceable under Virgina law, it would not enforce the liquidated damages provision of the agreement.

My Take: The agreement would probably have been enforced if the agreement had prevented the plaintiff from working as a gastroenterologist within 25 miles for 2.5 years but courts are unwilling to rewrite (or "blue pencil") an agreement executed by the parties.