NORTH CAROLINA COURT REFUSES TO EXTEND NON-COMPETE TO NON-SIGNATORY, PUTATIVE OWNER OF BUSINESS

0
Posted by Eric Welsh on Tuesday, January 31st

Rejecting a novel attempt to extend the reach of a non-compete agreement to the putative owner of a business who had not personally signed that non-compete, the North Carolina Court of Appeals in Phelps Staffing v. S.C. Phelps, Inc., last month upheld the decision of the trial court which declined to find liability against the putative owner. 

The Phelps case involved the not so uncommon fact pattern of a sale of a business with the owner (or in this case, putative owner) forming a new company to compete in the same space as the old company after the close of the transaction, with the parties left to argue about whether the conduct violated any sale agreement.   In the Phelps case, S.C. Phelps (SCP) was sold through an asset purchase agreement to plaintiff Phelps Staffing, LLC.  As part of the transaction, the sole shareholder of SCP, Ms. Sheila Phelps, agreed to sign on her behalf and on behalf of SCP, a non-compete agreement.  Ms. Phelps’ husband, Charles Phelps, who was not an owner of SCP but was instrumental in acquiring new customers, refused to sign a non-compete agreement.  Ms. Phelps was allegedly disassociating herself from the business, so the non-compete was not an issue.  Mr. Phelps, on the other hand, had allegedly started his own company C.T. Phelps, Inc. (CTP), and evidently was keeping the option open of competing in the future.  Mr. Phelps received half of the proceeds from the sale, but did not personally sign the asset sale agreement. 

According to the opinion, following the sale of the business, Mr. Phelps informed his wife that he intended to reenter the contract labor staffing business and would do so through his new company, CTP.   Mr. Phelps contacted former customers of SCP and solicited them to do business with his new company.  Mr. Phelps also allegedly “flipped” some of the contract workers to his new company from SCP.   Ms. Phelps provided some marginal assistance to her husband in acquiring and installing accounting software on new computers.  Several months later, plaintiff Phelps Staffing, LLC filed suit against Mr. and Mrs. Phelps, SCP and CTP for breach of the non-compete and confidentiality provisions, trade secret misappropriation and unfair competition, among other claims.  Following summary judgment and later a bench trial, the trial court found in favor of Mr. and Mrs. Phelps on the non-compete claims.  The plaintiff appealed the decision.

On appeal, plaintiff argued that Mr. Phelps, although not a signatory to the non-compete agreement, was nonetheless subject to it as he was the “true owner” of SCP.  In support of this argument, the plaintiff apparently did not cite to and rely upon North Carolina authority.  Instead, plaintiff relied on a Montana case, Bolz v. Myers, 651 P.2d 606 (Mont. 1982). 

In Bolz, the plaintiff there, Dale Bolz,  purchased a hearing aid center, which was negotiated between Bolz and defendant Mason Myers.  Myers wife and son executed the purchase agreement, while Mason Myers did not.  The purchase agreement contained a non-compete agreement and in that case, the Montana Supreme Court found it binding on Mason Myers based in large part on the fact that Mason Myers was asked by Bolz and gave oral assurance to him that he had no intention of competing against Bolz after the sale.  In Phelps, the plaintiff argued that Bolz was factually on point.  The North Carolina Court of Appeals disagreed, finding the absence of any such oral assurance by Charles Phelps to be dispositive of the issue.

While there are several interesting aspects to this case — not the least of which is the fact that somehow all of “financial and accounting data sets” of the prior business (SCP) were somehow installed on the new computer at CTP yet no liability was found against defendants for unfair competition – perhaps the most interesting is the question of whether the Court of Appeals would have accepted and applied Bolz had the facts been slightly different.  The Court of Appeals did not just reject the proposition out of hand.  The Court of Appeals, while noting the opinion was not controlling, agreed with the plaintiff that there were factual similarities between Bolz and the present case, but then found the lack of oral assurance to be a key fact that distinguished the present case from Bolz.  

Perhaps the door has been left open just a bit for such an application in the future.  But if such an argument were to be considered, it would face great hurdles.  First, the facts would likely have to approach some manifest injustice to the plaintiff, arising almost to fraudulent conduct in deceiving the plaintiff to proceed with a sale of the business without obtaining a non-compete from one of the key persons at the seller.  Second, the plaintiff would have to overcome the fact that non-competes are disfavored in the law of this State.  Finally, the plaintiff would have to overcome N.C. Gen. Stat. 75-4, requiring non-competes be in writing, signed by the party to be bound, for it to be legally enforceable.  For some reason, the Court of Appeals did not discuss this provision.  Whether a Bolz type case could find a foothold here in North Carolina would seem to be a long shot but time will tell.

“SHAM LITIGATION” CLAIM CAN BE DECIDED ON THE PLEADINGS

0
Posted by Eric Welsh on Thursday, September 1st

In a recent decision, the North Carolina Business Court in Lorillard Tobacco Company v. R.J. Reynolds Tobacco Company, 2011 NCBC 30  (August 8, 2011) (”Lorillard“) has found that an unfair trade practice counterclaim, based on a “sham litigation” claim, can be subject to dismissal on the pleadings and need not await discovery to determine if the plaintiff’s claim was “objectively reasonable.”  

In this case, Lorillard sued Reynolds for breach of a settlement agreement, common law unfair competition and unfair and deceptive trade practices under Chapter 75-1.1.  Reynolds answered the complaint and asserted a Chapter 75-1.1 counterclaim on the basis “that Lorillard’s filing of its Complaint was an unfair trade practice.”  Reynolds asserted that Lorillard’s claim was filed in violation of a settlement agreement that prohibited the filing of such claims and was done for anticompetitive purposes.  Lorillard subsequently moved to dismiss this counterclaim.

In deciding this motion to dismiss, the Court started with the established principle in North Carolina that “a plaintiff who files an ‘objectively reasonable’ lawsuit cannot be held liable for an unfair trade practice under N.C. Gen. Stat. 75-1.1.”  Id. quoting Reichold Chems., Inc. v. Goel, 146 N.C. App. 137, 157, 555 S.E.2d 281, 293 (2001).  The central issue on this motion was whether the Court could decide whether Lorillard’s claim was “objectively reasonable” based on the pleadings, or whether, as Reynolds contended, the Court would need to await fact discovery before making that determination. 

After first reviewing the law on the protections afforded litigants under the Noerr-Pennington Doctrine — a legal doctrine that first arose under the federal Sherman Act that generally protects a litigant for liability in bringing a legal claim –  the Court then turned to a review of the law regarding the “sham litigation” exception to the Noerr-Pennington Doctrine.  Under this established exception, a claim is not protected from liability if it is (1) “objectively meritless” and (2) the court finds that the “litigant’s subjective motivation” was an unlawful intent to “interfere directly with the business relationship of a competitor.”   Lorillard quoting Prof’l Real Estate Investors, Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49, 113 S. Ct. 1920 (1993).   Significantly, the Court noted, while citing several federal court cases and Sunbelt Rentals, Inc. v. Head & Engquist Equip., LLC 2003 NCBC 4 333 (2003)*, that the inquiry into the subjective intent of the plaintiff in filing the claim “only follows a finding that the suit is objectively baseless and does not inform that initial objective determination.”  Accordingly, if the plaintiff’s action is not “objectively baseless,” then the exception to Noerr-Pennington does not apply and a claim for unfair trade practices associated with the filing of that claim must fail.

In the Lorillard case, Reynolds argued that the Court should not decide if the Plaintiff’s claim was “objectively reasonable” as a matter of law, but rather, should await discovery and further factual development regarding Lorillard’s claim.  The Court declined Reynold’s invitation and instead, relying on GoldToeMoertz, LLC v. Implus Footcare, LLC, No. 5:09-CV-0072, 2101 WL 3474792 (W.D.N.C. Aug. 31, 2010), found that the court need not in every case await fact discovery before deciding the objective reasonableness of a parties claim for purposes of deciding the applicability of the exception to Noerr-Pennington Doctrine.  The Court assumed that Reynolds was correct and that Lorillard had anticompetitive intent in bringing the claim.  But looking “through a lens of reasonable objectivity,” the Court concluded that Lorillard had a “reasoned basis” for its breach of contract claim.  According to the Court, “Lorillard’s subjective intent does not change that initial objective determination.”   While the Court was careful to note that its finding in no way indicated that Lorillard would ultimately prevail on its claim, the claim was not “utterly baseless.” 

The Business Court’s opinion is significant in several respects.  First, this case reflects one of the rare instances where a North Carolina state court has dismissed a “sham litigation” counterclaim on the pleadings.  Second, the case raises an important question.  If a plaintiff’s claim withstands a motion to dismiss, is the claim “objectively reasonable” such that a “sham litigation” counterclaim based on that claim must fail and be dismissed.  The Lorillard opinion would suggest this outcome.

 

____________

*  Parker Poe represented Sunbelt Rentals in this lawsuit.

WHEN THE SUM IS GREATER THAN THE PARTS: TRADE SECRET CLAIM — TAKEN AS A WHOLE — BARRED BY STATUTE OF LIMITATIONS

0
Posted by Eric Welsh on Wednesday, June 15th

A recent case out of Colorado raises interesting issues about the definition and scope of a trade secret and the potential for the statute of limitations barring an action for trade secret misappropriation when the misappropriation of a single trade secret occurs over a period of years.

In Cognat v. Ellsworth, No. 09SC963, the plaintiff, Timothy Cognat, brought suit against a number of defendants for trade secret misappropriation under Colorado law.  As alleged, Cognat had entered into a joint venture with Chet Ellsworth and disclosed to Ellsworth proprietary information described as “a methodology for identifying and extracting reserves of oil and natural gas in western Kentucky.” Cognat alleged that Ellsworth disclosed his proprietary information to one of the other defendants, Stephen Smith, who Ellsworth allegedly unilaterally brought into the joint venture in 2001.  Cognat threatened to bring suit at that time, but he was assured by Ellsworth and Smith that the differences between the parties would be resolved. Apparently, based on these assurances, Cognat refrained from suing. Cognat claimed though that the defendants downplayed their commercial success using Cognat’s trade secrets between 2001 and 2005 so that he would not need to be compensated. Later, in 2005, Cognat learned that the defendants had separately acquired leases in two parts of Kentucky for exploration allegedly using Cognat’s trade secrets.  Cognat filed his lawsuit against the defendants in December 2005.

The defendants moved for summary judgment, arguing that Cognat was aware of their alleged misappropriation prior to 2001 and his claim was therefore time barred by Colorado’s three year statute of limitations. Cognat opposed the motion, arguing that while he was aware of the defendants’ use of the trade secrets in 2001 or perhaps earlier, he was not aware of their later misappropriation in a different geographical section of Kentucky and therefore, a different trade secret was involved due to differences in geological and engineering techniques applicable to that geography. The trial court granted summary judgment for the defendants, finding the claim barred by the statute of limitations, which was affirmed by the court of appeals.

On appeal to the Colorado Supreme Court, the central issue for the Court was whether Cognat’s claim involved a single trade secret or two separate trade secrets. If Cognat’s claim involved only one trade secret, then under Colorado law, the claim would be barred. Colorado’s statute specifically requires that a claim for misappropriation be brought within three years after the misappropriation is discovered, or by the exercise of reasonable diligence should have been discovered. Importantly, the statute specifies that a “continuing misappropriation” constitutes a single claim.” Accordingly, under the Colorado statute, if a defendant repeatedly misappropriates the same trade secret over the course of years and such conduct is known by the plaintiff and yet no action is taken, then the misappropriation is deemed “continuing” and the claim is barred if brought outside of the three year limitations period.

In considering the matter, the Court discussed the difficulty of determining whether a claim involves a single or multiple trade secrets.

“Because the term ‘trade secret’ is defined, in pertinent part, to include the whole, as well as any portion or phase, of any valuable and secret scientific or technical information, the words of the statute themselves mandate that any particular part of such information be considered a trade secret, but they do not permit different portions or phases of one trade secret to be classified as different trade secrets. Because, however, virtually any two pieces of information can be conceived of as constituent elements of some greater whole, arbitrariness in the differentiation of designs, processes, procedures, formulas, or improvements can be avoided only by applying a level of abstraction appropriate to the purposes of Act.”

For the Court, while the Colorado statute raises a bit of a conundrum as to defining the trade secret, it also provides the answer. The issue of the scope of the trade secret will by necessity be determined by the court based on a review of “the totality of the circumstances, with reference to the purposes of the statute.” And, according to this Court, the statute requires some predisposition to treating a trade secret as a whole, rather than dividing it into parts:

“But both the specific provisions and overall structure of the Act militate against dividing into multiple trade secrets a single body of proprietary information disclosed to the same person, at substantially the same time, and in furtherance of the same commercial venture.”

Of course, the Colorado statute has significant differences from the trade secret statutes other states, including North Carolina.  For example, North Carolina’s statute does not include an explicit reference to “continuing misappropriation” with its statute of limitations.  Nor does the North Carolina statute define the trade secret as the “whole or any portion or phase” as the Colorado statute does.  Accordingly, many of these sticky issues in Cognat are not confronted under the North Carolina Trade Secrets Protection Act.

Putting to the side the interesting question of how one defines a trade secret, the Cognat case does remind us once again that the owner of a trade secret puts much in jeopardy by failing to take prompt legal action when misappropriation is discovered.  It is becoming all too common today that parties fail to take appropriate legal action to protect their rights based upon assurances that the other party will make amends in the future.  See Snooze You Lose:  Vigilance Required in Protecting Trade Secrets. Clearly, the lesson to be learned here is not to rely on such vague assurances.  The party misappropriating the trade secret must be confronted and the misappropriation must be stopped.  If not, the value of this intellectual property will likely be lost, a court will likely not step in and grant an injunction to prevent further harm and the statute of limitations will likely begin to run.

FOURTH CIRCUIT REVIVES TRADE SECRET CLAIM BASED ON SOFTWARE COMPILATION

0
Posted by Eric Welsh on Monday, March 28th

In an unpublished opinion from earlier this month, the Fourth Circuit Court of Appeals found sufficient evidence presented at the trial court level to support the plaintiff’s claim that its software was a compilation of information protected under Virginia’s Trade Secret Misappropriations Act.  Decision Insights, Inc. v. Sentia Group, Inc., No. 09-2300 (4th Cir. March 15, 2011).
In Decision Insights, the court was presented with the question of whether Decision Insights had presented sufficient evidence at the trial court level to support its claim that its software was a trade secret under Virginia law for the case to go to a jury.  In that case, Decision Insights alleged that it had developed a software called “Dynamic Expected Utility Model” (”EU Model”), which was an analytical tool used to prepare negotiating strategies. The software allegedly applied concepts from a number of disciplines, including mathematics, economics and political science, to predict the outcomes of political or business situations.  Decision Insights alleged that three of the individual defendants, who had been previously affiliated with Decision Insights, created a competing company and in the process developed software “almost identical” to Decision Insights’ EU Model.  Decision Insights alleged that the Defendants’ software “could not achieve results equal to [Decision Insights'] software unless all the parameters, variables, and sequencing associated with the programs are equal.”   Decision Insights alleged that the three individual defendants breached their non-disclosure agreements with Decision Insights and that all of the defendants misappropriated Decision Insights’ trade secrets under Virginia law.

At the trial court level, the defendants challenged the plaintiffs’ trade secret assertions.  The lower court, in ruling on a motion for summary judgment filed by the defendants, found that while the Plaintiff had shown the EU Model was unique, it had “failed to distinguish which aspects of its software, as a compilation, are publicly available or readily ascertainable and which are not.”  The district court granted the defendants’ motion and entered judgment in their favor.

On appeal, the Fourth Circuit reviewed district court’s decision as to the trade secret claim. The Fourth Circuit first noted that the Virginia statute recognizes “compilation of information” as being a trade secret, if not generally known or readily ascertainable by proper means, and specifically, that “computer source code as a compilation can qualify as a trade secret.” The Fourth Circuit then reviewed the evidence presented and concluded that the Plaintiff had presented sufficient evidence to establish the trade secret status of the “software compilation” for a jury to consider.  As observed by the Court:  “Although the EU Model uses certain mathematical formulas that are in the public domain, [Decision Insights] asserted that the combination and implementation of these formulas in [Decision Insights'] source code for the software constitutes a trade secret.”  The Fourth Circuit found sufficient evidence to support this trade secret claim and remanded the case to the District Court for further consideration of other issues, including whether the Plaintiff had met its burden to show that it had taken reasonable measures to protect the alleged trade secret, another element of a trade secret claim.

While interesting in a number of respects, the Fourth Circuit’s opinion reaffirms that “compilations of information,” even when some of that information may be in the public domain, can be a trade secret.  The North Carolina Court of Appeals has similarly found under the North Carolina Trade Secrets Protection Act that a compilation of business information can be a trade secret and protectable.  See Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, 174 N.C. App. 49, 620 S.E.2d 222 (N.C. App. 2005). In that case, Sunbelt alleged that the Defendants, through an orchestrated raid of its business, created a competing company by misappropriating Sunbelt’s trade secrets consisting of a “compilation of business information.” Following a bench trial, the North Carolina Business Court entered judgment in Sunbelt’s favor on the trade secret claim, among others, which was affirmed on appeal:  “Defendants argue plaintiff’s ‘compilation of broad generalized categories of ever-changing business information’ does not qualify as a trade secret.  We disagree.”  Id.    

These cases are instructive. Trade secrets are not always the Coca Cola formula.  Trade secrets can include customer lists, pricing data and even compilations of valuable business information, which may be in the public domain in part, but taken as a whole, have value and are unique.  As demonstrated by the Sunbelt and Decision Insights opinions, it is the totality of the information that merits protection under the trade secrets statutes and each case must be evaluated on their facts to see if the elements of the trade secret claim are met.

QUESTION POSED: IS THE TRADITIONAL ANALYSIS USED FOR DETERMINING THE VALIDITY OF NON-COMPETES IN NORTH CAROLINA OUTDATED?

0
Posted by Eric Welsh on Thursday, February 3rd

In a recently decided case by the North Carolina Court of Appeals (MJM Investigations, Inc. v. Sjostedt, 698 S.E.2d 202 (N.C. App. 2010)), the Court of Appeals, in an unpublished opinion, found a non-solicitation clause to be unenforceable under North Carolina law due to the clause’s use of vague terminology.  While the opinion provides a useful summary of the state of the law in North Carolina regarding the enforceability of non-compete agreements, the more interesting part of the case can be found in Judge Steelman’s concurring opinion.  In that concurrence, Judge Steelman raises an important issue of whether the law in North Carolina is outdated in reviewing the validity of non-compete agreements in our “increasingly integrated global economy.”  

MJM Investigations is an otherwise pedestrian case, involving the determination of the validity of a non-solicitation provision.  In that case, MJM Investigations sought to enforce two restrictive provisions — a non-compete and a non-solicitation provision — against Vetted International Ltd. (”Vetted”) and its founder Brian Sjostedt, who had provided services to MJM Investigations in the Middle East.  MJM brought a motion for a preliminary injunction against Vetted and Sjostedt, which the trial court granted in part.  The trial court found the non-solicitation provision to be valid, but struck the non-compete provision on the grounds that it failed “to confine itself to any geographic territory.”  On appeal, neither party challenged the court’s determination on the non-compete provision, but Sjostedt and Vetted challenged the trial court’s decision on the non-solicitation provision.  The Court of Appeals found the non-solicitation provision in that case to be lacking in specificity and invalid.  The Court of Appeals also illuminated the limitations posed on courts in connection with the blue-penciling of portions of restrictive covenants that are unenforceable. 

But for Judge Steelman, who agreed that the non-solicitation provision was vague and invalid, the case brought to light a different and more important issue regarding the proper approach to be taken in considering non-competes in a global economy. 

In interpreting a non-solicitation provision, North Carolina courts traditionally consider the time and geographic restrictions to determine whether the provision protects a legitimate business interest.  See Farr Assocs., Inc. v. Gaskin, 138 N.C. App. 276, 279, 530 S.E.2d 878 (2000).  If the time and geographic restrictions are too generous, then the provision can fail.  But, as Judge Steelman questions, in today’s global economy, does a rigid application of a geographic restriction still make sense?  North Carolina law on restrictive covenants was intended historically to protect specific local interests.  For example, if the employer’s business was limited to Gastonia, then the restrictive covenant would be similarly be limited to Gastonia.  Yet, today, commerce has changed and businesses in North Carolina are not limited to a single geographic area, especially with the use of the internet and e-commerce.  North Carolina based companies outsource work to operations located abroad.  North Carolina businesses have a reach well beyond the state line, and even beyond our country’s borders.  With this realization, should not the law be updated to keep pace with the globalization trend?  Judge Steelman apparently believes the time has come for the North Carolinas Supreme Court to consider this issue:

“The law of restrictive covenants should be re-evaluated by our Supreme Court in the context of changing economic conditions to allow restrictions upon competing business activity for a specific period of time, limited to a specific, narrow type of business, but with fewer geographic restrictions.”

Of course, North Carolina precedent does acknowledge the validity of covenants that restrict conduct beyond city or state boundaries.  Nationwide restrictions have been upheld by courts in North Carolina to protect legitimate interests of businesses.  See e.g. Philips Elecs. North America Corp. v. Hope, 09 CV 363, 2009 WL 1883921 (M.D.N.C. June 30, 2009); Harwell Enterprises Inc. v. Heim, 276 N.C. 475, 173 S.E.2d 316 (1970).  With this precedent in mind, is more needed by the Supreme Court in considering the effects of globalization on the question of the validity of restrictive covenants?   Should the Supreme Court answer Judge Steelman’s call in MJM Investigations?  In the context of the narrow question raised by Judge Steelman, the Supreme Court should avail itself of the next opportunity to consider this valid issue and determine whether the analysis of enforceability of restrictive covenants should be altered to recognize valid business interests in restricting business activity over a broader geographic territory, even globally.

DOJ DISCONNECTS “DO NOT CALL LIST” AS ANTITRUST VIOLATIONS

0
Posted by Eric Welsh on Monday, November 1st

Recently, the Department of Justice announced that it filed a lawsuit against Adobe Systems, Inc., Apple Inc., Google Inc., Intel Corporation, Intuit, Inc. and Pixar (the “Do Not Call Defendants”), alleging violations of Section 1 of the Sherman Act, 15 U.S.C. 1 related to their allegedly entering into agreements not to cold call each other’s employees.  U.S. v. Adobe Systems, Inc., et al., Case No. 1:10-cv-01629 (Sept. 24, 2010) [complaint].  The DOJ alleged that these “Do Not Call Lists,” constituted naked restraints under Section 1 and per se illegal.  The DOJ, that same day, disclosed that it had entered into a proposed settlement with these defendants, which remains pending for public comment.  The Defendants have denied liability. 

While the fact that the conduct alleged — entering into a flat out prohibition against calling another competitor’s employees to hire them — gave rise to concern at the DOJ may not be terribly newsworthy, the DOJ’s analysis of the situation in its Competitive Impact Statement (attached) is.

First, some background is necessary. The DOJ contended that the defendants, at various times starting in 2005, agreed not to call each other’s employees for employment.  With the exception of Intel, each of the Do Not Call Defendants was alleged to have created internal “do not call lists” related to the competitor’s employees.  These alleged agreements precluded the cold calling of the competitor’s employees, regardless of geographic location or position.  The DOJ, looking at precedent in its complaint in U.S. v. Ass’n of Family Practice Residency Doctors, No. 96-575 CV-W-2, Complaint at 6 (challenging guidelines used for residency programs for senior medical students) and the illegal agreement found U.S. v. Cooperative Theaters of Ohio, Inc., 845 F.2d 1367 (6th Cir. 1988) (finding agreement not to solicit another’s customers a per se violation of Section 1), found support for its claims brought against the “Do Not Call” Defendants.  The DOJ viewed there to be no difference in treatment under Section 1 between customer restraints and employment restraints, or output or input markets:

“Antitrust analysis of downstream, customer-related restraints is equally applicable to upstream monopoly restraints on employment opportunities.”

For the DOJ, the restraints placed on the employees of the Do Not Call Defendants was great.  Even though these alleged agreements did not prohibit hiring of the other’s employees, the agreements interfered with the employee’s movement to another company and the pricing for those services.  Competition for hiring employees in the computer industry was impacted.  As the DOJ stated in its impact statement:

“Defendants’ concerted behavior both reduced their ability to compete for employees and disrupted the normal price-setting mechanisms that apply in the labor setting. These no cold call agreements . . . are facially anticompetitive because they eliminated a significant form of competition to attract high tech employees, and, overall, substantially diminished competition to the detriment of the affected employees who were likely deprived of competitively important information and access to better job opportunities.”

Perhaps the most interesting part of the DOJ’s action here is its analysis of what conduct is not prohibited as a per se violation when restricting employment opportunities.  The DOJ stated that certain limited exceptions exist to a per se analysis if the challenged agreement is “ancillary to a legitimate procompetitive collaboration“.  What is considered “ancillary” is a very short list:

“To be considered “ancillary” under established antitrust law, however, the restraint must be a necessary or intrinsic part of the procompetitive collaboration. Restraints that are broader than reasonably necessary to achieve the efficiencies from a business collaboration are not ancillary and are properly treated as per se unlawful.”

In other words, agreements not to hire that are narrowly drawn to protect the interests of a legitimate joint venture are not per se unlawful but would be reviewed under a rule of reason approach.  This is the only exception noted by the DOJ to its per se treatment.

In this “No Call List” matter, the DOJ contended that the agreement was not tied to a specific collaboration and was overbroad, applying to all geographies, job functions, product groups and time periods.  The DOJ concluded that these agreements were not “ancillary” to any collaboration, even though there was some indication that there were some joint venture collaborations between the parties.  Simply put, the DOJ sees the situation as black and white: if it is not “ancillary to a legitimate collaborative effort” — i.e. a joint venture — it is a per se violation of Section 1.

The implications of this DOJ action remain unclear. Would DOJ’s analysis have differed if the defendants had entered into this type of agreement to protect their trade secret information?  Would DOJ view agreements between competitors, that are part of settlement agreements but restrain the hiring of competitor’s employees to protect those secrets, as per se violations or subject to a rule of reason analysis.  Precedent would suggest that such agreements should be subject to a rule of reason analysis, Weisfied v. Sun Chemical Corp., 210 F.R.D. 136 (D. N.J. 2002), but the DOJ’s analysis is categorical and does not lend itself, at least on the face of it, to that interpretation.

For now, we will just have to put this discussion “on hold.”

This blog contains general information that is intended to be used for educational purposes only, and should not be considered or relied upon as legal advice on any specific matter. You should never act upon general information on legal matters without seeking legal counsel regarding your particular situation.

Your use of this blog does not constitute an attorney-client relationship with our firm or its lawyers. This can only be established after a specific engagement has been expressly agreed to between a partner in our firm and a client through direct, person-to-person communication.

Anything you submit through the use of this blog will not be treated as confidential information and may be publicly displayed, distributed or otherwise used.

This blog is also subject to our general Terms of Use for this website.